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The Economists' Voice

The Economists' Voice: Top Economists Take On Today's Problems

Joseph E. Stiglitz
Aaron S. Edlin
J. Bradford DeLong
Copyright Date: 2008
Pages: 328
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  • Book Info
    The Economists' Voice
    Book Description:

    In this valuable resource, more than thirty of the world's top economists offer innovative policy ideas and insightful commentary on our most pressing economic issues, such as global warming, the global economy, government spending, Social Security, tax reform, real estate, and political and social policy, including an extensive look at the economics of capital punishment, welfare reform, and the recent presidential elections.

    Contributors are Nobel Prize winners, former presidential advisers, well-respected columnists, academics, and practitioners from across the political spectrum. Joseph E. Stiglitz takes a hard look at the high cost of the Iraq War; Nobel Laureates Kenneth Arrow, Thomas Schelling, and Stiglitz provide insight and advice on global warming; Paul Krugman demystifies Social Security; Bradford DeLong presents divergent views on the coming dollar crisis; Diana Farrell reconsiders the impact of U.S. offshoring; Michael J. Boskin distinguishes what is "sense" and what is "nonsense" in discussions of federal deficits and debt; and Ronald I. McKinnon points out the consequences of the deindustrialization of America.

    Additional essays question whether welfare reform was successful and explore the economic consequences of global warming and the rebuilding of New Orleans. They describe how a simple switch in auto insurance policy could benefit the environment; unravel the dangers of an unchecked housing bubble; and investigate the mishandling of the lending institutions Freddie Mac and Fannie Mae. Balancing empirical data with economic theory, The Economists' Voice proves that the unique perspective of the economist is a vital one for understanding today's world.

    To learn more about the electronic journals published by The Berkeley Electronic Press, please visit

    eISBN: 978-0-231-52786-6
    Subjects: Economics, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-2)
  3. Part I: Global Warming

    • [PART I Introduction]
      (pp. 3-4)

      The subject of global warming makes people hot under the collar. Is it happening? Almost surely, according to the scientific consensus. Is it man made? Again, almost surely. Yet people who don’t argue about other scientific consensuses do argue about this one.

      Even whether to call it “global warming” or “global climate change” generates agitated debate. Some people say “global climate change” is more accurate because some regions will cool and others warm. Others argue that such a neutral term is less likely to generate action and that “warming” is more apt because on average, the climate is expected to...

    • CHAPTER 1 Climate Change: The Uncertainties, the Certainties, and What They Imply About Action
      (pp. 5-12)
      Thomas C. Schelling

      First the uncertainties; then the certainties; then the urgencies; and finally, what do uncertainties imply about waiting for their resolution before acting?

      The uncertainties are many and great. How much carbon dioxide may join the atmosphere if nothing is done about it? That depends on projections of population, economic growth, energy technology, and possible feedbacks from warming that reduce albedo—ice and snow cover, for example.

      Next, how much average warming globally is to be expected from some specified increase in the concentration of carbon dioxide and other “green house” gases? For a quarter century the range of uncertainty has...

    • CHAPTER 2 Global Climate Change: A Challenge to Policy
      (pp. 13-21)
      Kenneth J. Arrow

      Last fall, the United Kingdom issued a major government report on global climate change directed by Sir Nicholas Stern, a top-flight economist. The Stern report amounts to a call to action: it argues that huge future costs of global warming can be avoided by incurring relatively modest costs today.

      Critics of the Stern report don’t think serious action to limit carbon dioxide (CO₂) emissions is justified because there remains substantial uncertainty about the extent of the costs of global climate change and because these costs will be incurred far in the future. They think that Stern improperly fails to discount...

    • CHAPTER 3 A New Agenda for Global Warming
      (pp. 22-27)
      Joseph E. Stiglitz

      Globalization has made the world increasingly interdependent and has increased the need to work together to solve common problems. But as I point out in my recent book, Making Globalization Work, it will do us little good to solve our common global economic problems if we do not do something about the most pressing common environmental problem: global warming.

      In Kyoto, nine years ago, the world took an important first step to curtail the greenhouse gas emissions that cause global warming. But in spite of Kyoto’s achievements, the United States, the world’s largest polluter (contributor to green house gas emissions),...

    • CHAPTER 4 A Meaningful Second Commitment Period for the Kyoto Protocol
      (pp. 28-36)
      Sheila M. Olmstead and Robert N. Stavins

      In 1997, more than 160 nations agreed on the text of the Kyoto Protocol to the United Nations Framework Convention on Climate Change. Shortly afterward, many economists—particularly American economists—began to condemn the protocol as excessively costly, environmentally ineffective, or politically. Indeed, we have written such critiques ourselves. Today, however, even if we have not come to praise the Kyoto Protocol, neither have we come to bury it. Rather, we ask how it can be modified for its second commitment period (2012–2016) so that it will provide a way forward that is scientifically sound, economically rational, and politically...

  4. Part II: The International Economy

    • [PART II Introduction]
      (pp. 37-38)

      There are some questions in international economics that divide economists into opposing camps and others on which the profession is near-unanimous, disagreeing only on the details. This section offers examples of both types of questions.

      In the first essay, J. Bradford DeLong sets out the two contrasting views among economists on the implications of the huge U.S. current account deficit. Macroeconomists who tend to focus on domestic markets, on the one hand, tend to believe that the trade deficit will correct itself without great consequence: a falling dollar will be a boon for exporters, which will stimulate growth and correct...

    • CHAPTER 5 Divergent Views on the Coming Dollar Crisis
      (pp. 39-42)
      J. Bradford DeLong

      America’s international finance economists and its domestically oriented macroeconomists have very different—indeed, opposed—views of the likely consequences of America’s huge current-account deficit. International finance economists see a financial crisis as likely, followed by a painful and perhaps prolonged recession in the United States. Domestically oriented macroeconomists, by contrast, see a forthcoming fall in the value of the dollar not as a crisis but as an opportunity to accelerate growth. Why the difference?

      Domestically oriented macroeconomists look at the situation roughly like this: at some point in the future, foreign central banks will become less willing to continue buying...

    • CHAPTER 6 U.S. Offshoring: Small Steps to Make It Win-Win
      (pp. 43-51)
      Diana Farrell

      Companies from the United States lead the world in offshoring white-collar jobs to low-wage countries. Today they employ more than 900,000 service workers overseas. But widespread concern about the effects on the U.S. job market has prompted policymakers to call for curbs on offshoring, and some states have already adopted such policies.

      Trying to protect jobs this way is a mistake. For one thing, fears of job losses caused by offshoring are greatly exaggerated. New research by the McKinsey Global Institute (MGI) shows the United States will likely lose to offshoring no more than 300,000 jobs each year, an insignificant...

    • CHAPTER 7 Advance Market Commitments: How to Stimulate Investment in Vaccines for Neglected Diseases
      (pp. 52-61)
      Owen Barder, Michael Kremer and Heidi Williams

      Malaria, tuberculosis, and strains of HIV common in Africa kill 5 million people each year, almost all of them in poor countries. Vaccines arguably offer the best hope for tackling these and other so-called neglected diseases concentrated in poor countries, yet, relative to the social need, there is a dearth of research and development (R&D) on such vaccines.

      In this article, we outline the economic rationale for the “Advance Market Commitment” proposal, which the G8 finance ministers decided to pilot in 2006. Under the proposal, donors commit to help finance the purchase of vaccines against neglected diseases, if and when...

    • CHAPTER 8 Should We Still Support Untrammeled International Capital Mobility? Or Are Capital Controls Less Evil Than We Once Believed?
      (pp. 62-70)
      J. Bradford DeLong

      Fifteen years ago, I found it easy to be in favor of international capital mobility—the free flow of investment financing from one country to another. Then, it was easy to preach for an end to the systems of controls on capital that hindered this flow.

      “Why not free up capital flows to encourage large-scale lending from the world’s rich countries to the world’s poor countries?” I and others asked. Such lending, we hoped, might cut a generation off the time it otherwise would have taken developing countries’ economies to catch up to the industrial structures and living standards of...

  5. Part III: Economics of the Iraq War

    • [PART III Introduction]
      (pp. 71-72)

      What has been the cost of the Iraq war? In its early days, the Bush administration focused on estimated budgetary costs of $100 billion to $200 billion. At the time, some thought these were overestimates. They are large enough numbers, but they have, in any case, turned out to be underestimates—especially when the wider costs to the economy on top of the burden of additional government spending are factored in.

      The following two essays take this wider economic perspective on the costs of the war, although each has a somewhat different focus. In the first essay, Scott Wallsten takes...

    • CHAPTER 9 The Economic Cost of the Iraq War
      (pp. 73-79)
      Scott Wallsten

      In 2002, lawrence Lindsey, then director of the White House National Economic Council, surprised the Bush administration by saying that a war in Iraq could cost $100 billion to $200 billion. His estimate, considered by some to be exaggerated, has turned out to be too low.

      Since the war in Iraq began, economists haven’t been heavily involved in the public debate regarding the conflict. That absence is a mistake.

      Choosing to go to war reflects a belief that the expected benefits of the conflict exceed the expected costs and that society’s scarce resources could not be better deployed elsewhere. Although...

    • CHAPTER 10 The High Cost of the Iraq War
      (pp. 80-84)
      Joseph E. Stiglitz

      The most important things in life, and life itself, are priceless. But that does not mean that issues involving the preservation of life (or a way of life), such as defense, should escape cool, hard economic analysis. They should not.

      Shortly before the current Iraq war, when Bush administration economist Larry Lindsey suggested that the costs might range between $100 billion and $200 billion, other officials quickly demurred. For example, Office of Management and Budget Director Mitch Daniels put the number at $60 billion. It is now clear that Lindsey’s numbers were a gross underestimate (Bumiller 2002).

      Concerned that the...

  6. Part IV: Fiscal Policy

    • [PART IV Introduction]
      (pp. 85-86)

      The claims and counterclaims about fiscal policy during the 2004 presidential election campaign offered Michael Boskin the chance, in the first of the two essays in this section, to clarify the terms of the debate. How much does it matter to the economy that the federal government moved from a large surplus to a large deficit in the years after 2000? Boskin sets out the different concepts of the budget balance and discusses how much deficits matter in the short, medium, and long terms.

      Large federal government deficits can be appropriate in some circumstances—such as in a recession, or...

    • CHAPTER 11 Sense and Nonsense About Federal Deficits and Debt
      (pp. 87-98)
      Michael J. Boskin

      Renewed attention is focusing on the federal government’s taxes and spending, deficit and debt. President George W. Bush credits his tax cuts with strengthening the recovery and wants to make them permanent. Senator John Kerry condemns the deficit and proposes to raise taxes on “the wealthy” (which includes many small businesses). Former Treasury secretary Robert Rubin frets over a fiscally induced economic collapse. However, Wall Street yawned when the deficit projections soared. Both Bush and Kerry pledge to cut the deficit in half over the next few years. Kerry would increase health-care and other spending, requiring still higher taxes to...

    • CHAPTER 12 Government Deficits and the Deindustrialization of America
      (pp. 99-106)
      Ronald I. McKinnon

      Deindustrialization in the United States is being accelerated by large federal fiscal deficits. Should we care? Absolutely.

      Manufacturing and manufacturing-associated education, in the form of learning by doing,¹ are most likely powerful sources of external benefits that accelerate economy-wide productivity growth. In addition, the loss of manufacturing jobs is a powerful source of anger against free trade—and the more free trade is restricted, the more the American economy is hurt.

      If current trends continue, Americans should not be surprised to find U.S. productivity growth slowing. As America becomes less productive, it will also predictably become more protectionist: a development...

  7. Part V: Social Security

    • [PART V Introduction]
      (pp. 107-108)

      Social security is without question a hot political issue, but the heat of the debate often exceeds the light shed. Economists are as partisan as anyone else on many aspects of the debate. But in this section, the first two contributions focus on setting out some of the key economic issues. Paul Krugman describes the key questions: What is the status of the Social Security trust fund? What is the potential impact of private Social Security accounts? And how should we think about the liabilities today’s Social Security payments leave for future generations of taxpayers?

      In the following essay, Don...

    • CHAPTER 13 Confusions About Social Security
      (pp. 109-119)
      Paul Krugman

      Since the bush administration has put Social Security privatization at the top of the agenda, I’ll be writing a lot about the subject in my New York Times column over the next few months. But it’s hard to do the subject justice in a series of 700-word snippets. So I thought it might be helpful to lay out the situation as I see it in an integrated piece.

      There are three main points of confusion in the Social Security debate (confusion that is deliberately created, for the most part, but never mind that for now). These are:

      The meaning of...

    • CHAPTER 14 The Many Definitions of Social Security Privatization
      (pp. 120-126)
      Don Fullerton and Michael Geruso

      In the past decade, debate over Social Security privatization has exploded in the United States. The Bush administration, think tanks, and academic economists have all pushed cases for privatizing the U.S. public pension system.

      When you look under the hood, though, “privatization” can mean a different thing to almost every advocate. Privatization usually means that workers get individual retirement accounts in their own names, as with a private defined contribution (DC) pension. But, does privatization necessarily entail all aspects of a private pension? Must contributions be voluntary and accounts privately managed? Must pensioners have choice over investments and receive payouts...

    • CHAPTER 15 The Virtues of Personal Accounts for Social Security
      (pp. 127-135)
      Edward P. Lazear

      Much of the rhetoric regarding the establishment of private accounts for retirement benefits has missed the main issues. Some proponents argue that recipients will earn higher returns from private accounts—likely true. Opponents counter that the higher returns come at the cost of greater risk—also likely true. Further, opponents argue that the current system is not too much worse than the market alternative and that transaction costs will eat up much of the additions—questionable and not especially relevant.

      Many of these arguments miss the mark. The Social Security system is not a mere intermediary as is a stock...

    • CHAPTER 16 Could Social Security Go Broke?
      (pp. 136-138)
      Barbara R. Bergmann

      The public wants Social Security to be fixed and the sooner the better. The public is anxious because it has been told that Social Security will run out of money around 2042, that it won’t be there for our young people, and that it will go bankrupt.

      This scare talk is profoundly misleading. The Social Security system cannot go bankrupt. Businesses or individuals can go bankrupt when they are legally obligated to make payments, do not have enough money coming in to cover those payments, and have no way to increase their inflow of money. A U.S. government program like...

  8. Part VI: Tax Reform

    • [PART VI Introduction]
      (pp. 139-140)

      The publication of the 2005 report of the President’s Advisory Panel on Tax Reform prompted many economists to think about the problems of the U.S. tax system. In the first essay in this section, Michael Boskin takes a broad-ranging look at the consequences of the tax system for economic growth. He argues that, looking across the industrialized countries of the Organization for Economic Co-operation and Development (OECD), a high burden of taxation and government spending is clearly bad for growth (although many citizens of France and Germany would disagree with his contention that their countries are “economic and social disasters”)....

    • CHAPTER 17 A Broader Perspective on the Tax Reform Debate
      (pp. 141-152)
      Michael J. Boskin

      With the recent release of the report of the President’s Advisory Panel on Federal Tax Reform, one might have expected a vigorous national debate on the level, structure, and growth of taxes and their effect on our economy and society. Unfortunately, the meager post-report discussion thus far has focused on narrow issues of limiting this deduction or that credit. So much more than that is at stake. The evolution of taxes and spending will be a primary determinant of whether America remains a successful dynamic economy, providing rising standards of living, low unemployment, and upward economic mobility or slides into...

    • CHAPTER 18 Tax Reform: Time for a Plan C?
      (pp. 153-160)
      Michael J. Graetz

      On november 1, 2005, the President’s Advisory Panel on Tax Reform unanimously recommended two alternative plans: a simplified income tax (SIT) and a growth and investment tax (GIT). The panel considered plan C—a partial replacement of individual and corporate income taxes with a value-added tax (VAT), but although the panel found the VAT possibility worthwhile, it could not reach unanimity. The panel rejected a fourth alternative: substitution of a retail sales tax for the corporate and individual income taxes.

      Fundamental tax reform to make the tax system genuinely better should be along the lines of the VAT proposal. In...

    • CHAPTER 19 Taxes on Investment Income Remain Too High and Lead to Multiple Distortions
      (pp. 161-169)
      Martin Feldstein

      Thanks to recent tax reforms, the marginal tax rates on saving in the United States today are significantly lower than in the past, which correspondingly reduces society’s losses from the drag that our tax system puts on saving and investment. That’s the good news. But there is bad news.

      The first piece of bad news is that tax rates on saving and investment remain much higher than they would be in any rational system of taxation. The second piece of bad news is that these taxes continue to seriously distort the economy: they cost us a lot. The third piece...

    • CHAPTER 20 Progressive Consumption Taxation as a Remedy for the U.S. Savings Shortfall
      (pp. 170-182)
      Robert H. Frank

      The american savings rate, always low by international standards, has fallen sharply in recent decades. One in five American adults now has net worth of zero or less, and more than half of all retirees experience significantly reduced living standards when they stop working.

      Why do we save so little, and is there anything we can or should do about it? I argue here that low U.S. savings rates are in large part a result of pressures to keep pace with community spending standards, pressures that have been exacerbated by rising income and wealth inequality. Replacing the income tax with...

  9. Part VII: Social Policy

    • [PART VII Introduction]
      (pp. 183-184)

      The essays in this section offer economists’ perspectives on a range of social issues. One central question is the effectiveness of government policy in tackling poverty. The welfare reform signed by President Bill Clinton in 1996 was a major policy initiative targeted at the situation of unemployed single mothers dependent on welfare. The reform was controversial and many critics—including Rebecca Blank, author of the first essay—were skeptical about the ability of states to get women into work and feared they would be left in dire poverty with their welfare checks cut off. Their fears proved unfounded in one...

    • CHAPTER 21 Was Welfare Reform Successful?
      (pp. 185-193)
      Rebecca M. Blank

      Welfare reform was passed by Congress and signed by President Bill Clinton in August 1996. Back then there were many skeptics: several senior members of President Clinton’s administration resigned in protest. Now, it is ten years and many research articles later. What do we know about the success or failure of these policy changes?

      The Clinton administration and state governors both pointed to the legions of people who went off the welfare rolls as a sign of success. But, what happened to these women and children once they left welfare? Did they find employment? Was their economic well-being higher or...

    • CHAPTER 22 Cutting the Safety Net One Strand at a Time
      (pp. 194-202)
      Janet Currie

      Ballooning federal deficits threaten all social spending in this country, but programs for vulnerable women and children may be most at risk. Unlike Social Security, many of these programs must be periodically reauthorized in order to continue to exist. Yet—as I explain—a number of pernicious myths may make Congress less inclined to reauthorize them than it should be.

      The first myth is that poor women and their children benefit from generous cash welfare payments. That is entirely wrong, for a number of reasons. First, even prior to welfare reform in 1996, most states set welfare benefits at levels...

    • CHAPTER 23 The Choose-Your-Charity Tax: A Way to Incentivize Greater Giving
      (pp. 203-208)
      Aaron S. Edlin

      Why don’t i—and others—give more to charity? And, how can that be changed?

      One reason that many people, such as me, do not give as much as they can afford is the seeming irrelevance of a single contribution. The problem with good causes is that the very thing that makes a charity a good cause is the enormity of the problem it is fighting. Yet because the problem is so vast, my gift is a drop in the bucket. The problem will still be there when I am done giving. The problem will be there if I do...

    • CHAPTER 24 Should the Government Rebuild New Orleans or Just Give Residents Checks?
      (pp. 209-216)
      Edward L. Glaeser

      In the wake of Hurricane Katrina, President George W. Bush declared that a “great city will rise again.” He promised, “Throughout the area hit by the hurricane, we will do what it takes—we will stay as long as it takes—to help citizens rebuild their communities and their lives” (2005).

      Lawmakers have stumbled over each other to suggest greater and greater public spending to rebuild New Orleans. While details remain to be settled, the current estimates are that federal spending will be close to $200 billion.

      Senator Edward Kennedy has proposed a $150 billion agency specifically dedicated to Gulf-area...

    • CHAPTER 25 Does College Still Pay?
      (pp. 217-225)
      Lisa Barrow and Cecilia Elena Rouse

      In the 1980s the value of a college education grew significantly. According to U.S. Census data, in 1979 those with a bachelor’s degree or higher earned roughly 45 percent more per hour than workers with only a high school diploma. By 1989 wages of college graduates were more than 70 percent higher than those of high school graduates.¹ This dramatic change revived arguments over the cause-and-effect relationship between education and higher income. In other words, was education driving income levels or was the education trend a byproduct of rising income levels? This debate spawned a very large literature tying increasing...

    • CHAPTER 26 How to Deal with Terrorism
      (pp. 226-234)
      Bruno S. Frey

      Deterrence and preemptive strikes are currently being used to fight terrorism, but they work badly, if at all, and in some cases are even counterproductive. As viable positive alternatives, the following three strategies are proposed:

      1. Reduce vulnerability by decentralizing society.

      2. Strengthen positive incentives to leave the terrorist camp.

      3. Divert media attention from terrorist groups.

      After the attacks of 9/11, the American president declared a “crusade” against terrorists. This crusade was, after some thinking changed into a “war against terrorism.” This war on terrorism is totally based on deterrence and preemptive strikes. Actual and prospective terrorists must be wiped out by...

  10. Part VIII: The Death Penalty

    • CHAPTER 27 The Economics of Capital Punishment
      (pp. 237-240)
      Richard A. Posner

      The recent execution by the State of California of the multiple murderer Stanley “Tookie” Williams has brought renewed controversy to the practice of capital punishment, a practice that has been abolished in about a third of the states and in most of the nations that the United States considers its peers; the European Union will not admit to membership a nation that retains capital punishment.

      From an economic standpoint, the principal considerations in evaluating the issue of retaining capital punishment are the incremental deterrent effect of executing murderers; the rate of false positives (that is, execution of the innocent); the...

    • CHAPTER 28 On the Economics of Capital Punishment
      (pp. 241-246)
      Gary S. Becker

      Richard posner provides a good discussion of the various issues related to capital punishment. I will concentrate my comments on deterrence, which is really the crucial issue in the acrimonious debate over capital punishment. I support the use of capital punishment for persons convicted of murder because, and only because, I believe it deters murders. If I did not believe that, I would be opposed, because revenge and the other possible motives that are mentioned and discussed by Posner should not be a basis for public policy.

      As Posner indicates, serious empirical research on capital punishment began with Isaac Ehrlich’s...

    • CHAPTER 29 The Death Penalty: No Evidence for Deterrence
      (pp. 247-256)
      John Donohue and Justin J. Wolfers

      Despite continuing controversy, executions continue apace in the United States. Late last year, we witnessed the thousandth U.S. execution since the Supreme Court reinstated capital punishment in 1977. The United States trails only China, Iran, and Vietnam in the number of executions, according to Amnesty International (2006).

      The debate over the death penalty has hung on several major issues. Here, we’ll concentrate on one: Does it act as a deterrent?

      The claim that it does, is for many people the main reason to support it. George W. Bush stated in the 2000 presidential debates, “I think the reason to support...

    • CHAPTER 30 Reply to Donohue and Wolfers on the Death Penalty and Deterrence
      (pp. 257-260)
      Paul H. Rubin

      While john donohue and Justin Wolfers are mainly concerned with criticizing Richard Posner and Gary Becker (who can take care of themselves), they also comment unfavorably on a paper of which I was a co-author (Dezhbakhsh, Rubin, and Shepherd 2003). Their comments are in some instances unfair or incorrect, and I want to briefly correct some of their misstatements. (It should be noted that Hashem Dezhbakhsh and I have prepared a lengthy reply to Donohue and Wolfers which is available online and which will be submitted to a peer-reviewed journal in the near future.)

      As they point out, an important...

    • CHAPTER 31 Letter: A Reply to Rubin on the Death Penalty
      (pp. 261-263)
      John Donohue and Justin J. Wolfers

      We would like to respond to the previous chapter, Paul Rubin’s “Reply to Donohue and Wolfers on the Death Penalty and Deterrence.” There, he defended the analysis he did with his co-authors (Dezhbakhsh, Rubin, and Shepherd 2003) that estimated that each execution deters eighteen homicides. His work is widely cited and is the basis for his recent congressional testimony about the deterrence value of capital punishment (Rubin 2006). We have critiqued this estimation and found it wanting in a number of respects. Rubin’s response to our critique suggests that it might be helpful to emphasize three points.

      First, in their...

    • CHAPTER 32 Reply: The Death Penalty Once More
      (pp. 264-266)
      Paul H. Rubin

      I would like to clear up the important misimpression that John Donohue and Justin Wolfers create in their earlier article implying that they have been unable to reproduce our results. To the contrary, and as they concede in their article in the Stanford Law Review: “Dezhbakhsh, Rubin, and Shepherd generously shared their data and code, and Joanna Shepherd assisted our efforts, enabling us to perfectly replicate all of their results” (Donohue and Wolfers 2005). Only when they misinterpreted our admittedly ambiguous description of our instrument did they get different results. However, we cleared up this ambiguity with them long ago,...

  11. Part IX: Real Estate

    • [PART IX Introduction]
      (pp. 267-268)

      The health of the housing market is a matter of pressing interest to homeowners. Their homes are important investments and the places they live, and most have borrowed large sums of money to finance their purchase. Moreover, a serious downturn in the housing market could spill over to the whole economy and cause a recession. The increases in house prices in recent years led many economists to question the sustainability of the housing boom and to ask what might happen when it comes to an end. Robert Shiller opens this section by considering very long-term data in home prices in...

    • CHAPTER 33 Long-Term Perspectives on the Current Boom in Home Prices
      (pp. 269-287)
      Robert J. Shiller

      Homeowners want to know: Is the current boom in home prices temporary? Is a crash possible? And if prices do fall, will they come back up fairly soon, or will they stay down for many years?

      Some have written reassuringly, downplaying concerns about possible price falls. Examples are Cynthia Angell and Norman Williams; Ben Bernanke; Charles Himmelberg, Christopher Mayer, and Todd Sinai; the Joint Center for Urban Studies; David Lereah; Frank Nothaft; and Jonathan McCarthy and Richard Peach. The general tone of reassurance in many of their articles appears unwarranted.

      Angell and Williams (2005), for example, concluded that “in over...

    • CHAPTER 34 The Menace of an Unchecked Housing Bubble
      (pp. 288-295)
      Dean Baker

      An unprecedented run-up in the stock market propelled the U.S. economy in the late nineties, and now an unprecedented run-up in house prices is propelling the current recovery. Like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, likely will face serious hardships.

      The basic facts on the housing market are straightforward: Quality-adjusted house prices ordinarily follow the overall rate of inflation. However, in the last eight years house prices have risen...

    • CHAPTER 35 What to Do About Fannie and Freddie?
      (pp. 296-304)
      Edward L. Glaeser and Dwight M. Jaffee

      In may 2006, the Office of Federal Housing Enterprise Oversight issued a blistering report on Fannie Mae (the Federal National Mortgage Association). The opening two bullet points in the executive summary are:

      Fannie Mae senior management promoted an image of the Enterprise as one of the lowest- risk financial institutions in the world and as “best in class” in terms of risk management, financial reporting, internal control, and corporate governance. The findings in this report show that risks at Fannie Mae were greatly understated and that the image was false.

      During the period covered by this report—1998 to mid-2004—...

  12. Index
    (pp. 305-320)