We’ve missed a couple of weeks in our regular roundup of new research from the National Bureau of Economic Research, so we’ve got an extra-large edition of “In the Papers.” As always, these papers aren’t peer-reviewed, so their conclusions are preliminary (and occasionally flat-out wrong). But they offer an early peek into some of the research that will shape economic thinking in the years ahead. Here are a few of the most interesting papers:
Author: Laurence M. Ball
What he found: Most developed countries have experienced long-term economic damage from the 2007-2009 recession. In the worst-hit countries, the gap between pre- and post-recession economic growth trends is continuing to grow.
Why it matters: Traditional economic theory holds that the effects of recessions are mostly temporary: Economic output slows during a downturn but then rebounds, ultimately returning to its prior path. This is because recessions reduce output, but they don’t reduce an country’s “productive capacity” or “economic potential”; recessions might cause factories to close and workers to lose their jobs, but the factories and workers are still there and will eventually be put back to work. But an alternative strain of research suggests that recessions can reduce potential as well, by leaving the long-term unemployed permanently out of the labor force, for example. In this paper, Ball looks at 23 developed countries and finds that nearly all have sustained this kind of long-term damage. On average, their potential output is 8.4 percent smaller than before the recession; in countries such as Greece and Ireland, potential is down by more than 30 percent and the gap is continuing to widen. Moreover, the decline in potential output is nearly as large as the decline in actual output, suggesting the long-term effects have been very large.
Key quote: “This paper finds that the recent recessions have had dire effects on economies’ productive capacity, as measured by OECD and IMF estimates of potential output. In most countries, the fall in potential relative to its pre-crisis trend has been almost as large as the fall in actual output. Consequently, the countries with the deepest recessions have also experienced the greatest long-term damage.”
Data he used: Macroeconomic data from the Organization for Economic Cooperation and Development (OECD)
Author: Joshua S. Gans
What he found: Piracy hasn’t led fewer people to write and record music, in part because most musicians don’t anticipate making much money when they get into the business.
Why it matters: The rise of digital music, both pirated and legal, has led to a steep decline in revenues for artists and the music business more generally. Yet there has been no parallel decline in the amount of music being written and recorded; by some measures, more people are making music now than in the pre-Napster era. Economists have offered various explanations for this seeming contradiction: that piracy has made it easier for consumers to discover and sample new music; that artists have other ways to make up lost revenue; and that artists haven’t lost out as much as publishers. Gans offers another potential explanation: that when people decide to go into the music business, they are driven more by fame than by fortune and therefore care little about piracy. It is only later, once they have become established and want to “sell out,” that musicians are affected by lost revenues. Gans emphasizes that his theory is based on a model, not on empirical evidence.
Key quote: “Artists may change as they become successful from a trade-off that emphasizes fame (and hence, low prices to increase their fan base) to one that emphasizes fortune (raising prices when they are older). Consequently, when they are starting out, time inconsistent artists, when choosing whether to enter or not, do not place weight on the notion that, in the future, they might sell out and so, in the face of expected piracy, are not concerned about the loss of music revenues that might result.”
Authors: David Cutler, Wei Huang, Adriana Lleras-Muney
What they found: The health and welfare benefits of education are greater for people graduating during bad economic times.
Why it matters: Economic research has consistently found that people with more education tend to be healthier and live longer than their less-educated counterparts. Research has also found that recessions tend to have negative consequences for people’s health and longevity, and that people who graduate from college during recessions suffer long-term income and health consequences. In this paper, the authors combine these strains of research and conclude that the protective effects of education are greater during recessions. That is, the negative health effects of recessions are smaller for better-educated people, and the benefits of education are greater for those who graduate during difficult economic times.
Key quote: “Our results suggest that policies that target youth unemployment might have particularly large payoffs over the long-term in reducing health and income disparities. An interesting avenue for future research would determine if policies targeted to the young can attenuate the negative long-term effects of recessions. The extent to which job training and other programs improve the labor market success of young uneducated individuals is hotly debated but it appears to be modest; our results suggest that evaluations of these programs should include health and health behaviors as outcomes. They also suggest that non-labor market programs could help disadvantaged youth in bad economic times by, for instance, improving mental health and preventing the development of poor health habits.”
Data they used: The Standard and Special Topic Eurobarometer Series, “the longest running regular cross-national and cross-temporal opinion poll program in Europe.”
Authors: Raymond Fisman, Pamela Jakiela, Shachar Kariv
What they found: Students who attended college during or in the aftermath of the recession are less willing to sacrifice efficiency for equality than students who attended before the recession began.
Why it matters: As noted in the previous paper, past research has found that students who graduate in a recession face long-term consequences in terms of earnings. It isn’t immediately obvious how that should affect the policy preferences of students who attended college in recent years. On the one hand, coming of age in the wake of the financial crisis might make them more concerned about equality and ensuring a safety net for those who struggle in the labor force; on the other, the prospects of lower income might make them less willing to share their earnings (or support policies that would have the same effect). In this paper, the authors find experimental evidence to support the latter outcome, at least among undergraduate students at the University of California, Berkeley. They look at how students behaved in a game that asks players to allocate resources in a simulated economy. After the recession, students became more likely to favor efficiency over equality.
Key quote: “We study the relationship between macroeconomic circumstances and distributional preferences, an important consideration for understanding, for example, political support for taxation and redistribution over the business cycle. We conducted experiments measuring distributional preferences during the ‘Great Recession’ and during the preceding economic boom. We find that subjects exposed to the economic downturn place greater emphasis on efficiency and display greater levels of indexical selfishness.”
Authors: Brian Jacob, Max Kapustin, Jens Ludwig
What they found: A housing voucher program in Chicago provided few long-term benefits for children in low-income families.
Why it matters: The goal of many U.S. anti-poverty programs isn’t just to address immediate needs such as food and shelter, but to break the “cycle of poverty” by providing families with the financial resources and stability needed to ensure their children’s longer-term success. But measuring the success of such programs is difficult because government benefits are rarely assigned at random. In this paper, the authors identify a rare exception: a 1997 housing voucher program in Chicago where vouchers were assigned to low-income households through random lottery. The authors find that the program provided the equivalent of a big boost in income (an average of $12,000 per year) but had little long-term impact on children in terms of education, health or criminal behavior. The effects were smaller than expected based on past studies.
Key quote: “Our estimates also imply that extra cash transfers beyond the current level provided in the U.S. are likely to have a smaller impact (per dollar) than the best-practice educational interventions explicitly designed to improve children’s human capital.”
Data they used: Administrative data from the 1997 Chicago Housing Authority Corp. voucher program, linked to other public data sources.
Authors: Sarah Cohodes, Samuel Kleiner, Michael F. Lovenheim, Daniel Grossman
What they found: Improving low-income children’s access to health insurance improves their chances of completing high school and of attending and completing college.
Why it matters: Health insurance for low-income children is one of the biggest and most expensive social programs in the U.S. More than half of all children in the U.S. are eligible for publicly funded health insurance through Medicaid. The effects of the program on children’s health has been extensively studied, but the impact on their educational attainment has gotten less attention. In this paper, the authors find that a 10 percentage-point increase in Medicaid eligibility among children reduces the high school dropout rate by 5 percent, increases college enrollment by up to 1.5 percent and increases the probability of earning a bachelor’s degree by about 3.5 percent. Eligibility has the biggest impact on school-age children.
Key quote: “Although the public health insurance expansions we study occurred in the past several decades, our results have several implications that are important for current public policy. First, they suggest that the long-run benefits of providing health insurance to low-income children may be much larger than the short-run gains.”
Data they used: American Community Survey and the Annual Social and Economic Supplement to the Current Population Survey.
Authors: Rafael La Porta, Andrei Shleifer
What they found: In developing countries, businesses outside the formal economy are small and inefficient, and operate independently of — rather than competing with — the larger companies that dominate the formal sector.
Why it matters: In many developing countries, informal businesses — generally defined as businesses that aren’t registered or licensed and don’t pay taxes — account for up to half of all economic activity. From one perspective, these companies represent a huge untapped resource: If only governments would reduce regulatory barriers, improve intellectual property protections and engage in other reforms, these entrepreneurially minded citizens could create successful formal businesses. From another perspective, these businesses are parasites, gaining an unfair advantage by avoiding taxes and regulations. In this paper, the authors take a third view: that the formal and informal economies in most developing countries operate almost entirely independently of one another. Informal businesses are mostly too small and inefficient to compete effectively with formal businesses, even if there weren’t regulatory barriers, and rarely transition into the formal economy. Moreover, the informal sector tends to shrink as countries develop.
Key quote: “The evidence we have presented is broadly consistent with the dual view of informality: informal firms stay permanently informal, they hire informal workers for cash, buy their inputs for cash, and sell their products for cash, they are extremely unproductive, and they are unlikely to benefit much from becoming formal. This approach generates the strong prediction that the cure for informality is economic growth. The evidence strongly supports this prediction: informality declines, although slowly, with development.”