Knowledge that Transforms

Timothy Geithner's memoir of the financial crisis of 2007–08—Stress Test: Reflections on Financial Crises—is an important historical document offering details of how policies were formed and implemented during the crisis, showing the political constraints, and offering lessons for future crises. Walter Bagehot's classic rule for fighting crises— that the central bank should lend against good collateral at a high rate—is passive and incomplete. Geithner argues for the use of overwhelming force to reestablish confidence. Also, although the Federal Reserve's new crisis lending programs needed to be anonymous so as not to reveal weak banks' identities—“stigma”—the stress tests during the crisis did reveal information that may have been useful in reestablishing confidence. (JEL B31, E44, E63, G01, G21, G28)

Paul Samuelson's Foundations of Economic Analysis played a major role in defining how economic theory was undertaken for many years after the Second World War. This paper fills out Samuelson's account of the book's origins and corrects some details, making clear his debt to E. B. Wilson and establishes that turning the thesis into a book was a long process. The contents of the book and its reception are then reviewed. ( JEL A22, B20, B31)

This paper reviews the NBER's "The Transition in Eastern Europe." This book's 18 essays examine privatization, stabilization, fiscal policies, the nascent private sector, bankruptcy, foreign trade, and investment, etc. Individual country performance occupies six studies. These essays, which are of high quality, provide a cross-section of the literature on transition. However, the book's stronger conclusions are not supported by strong evidence. Two conclusions, unemphasized by contributors, emerge. Expectations, which reflect the theories used to design standard reforms, are often unfulfilled during reforms. A plausible explanation for the misplaced expectations is the ahistorical approach of those theories.

THE savings rate (marginal or average) is regarded as a key performance indicator by development economists, and foreign aid practitioners admonish their clients to increase their savings ratio as a primary condition for achieving a satisfactory rate of economic growth. However, not only have questions been raised regarding the significance of the savings effort as an independent determinant of economic progress, but the formulation of policies designed to increase the savings propensity has suffered from a dearth of knowledge regarding the nature of the savings function in developing countries. A number of alternative savings hypotheses (derived mainly from the literature relating to developed economies) have been advanced, but the paucity of reliable data has made it difficult to test these hypotheses and obtain results which warrant a reasonable degree of confidence. The purpose of this article is: a) to review the theoretical and empirical literature on the savings function in developing countries; b) to assess critically the findings with respect to the major hypotheses; and c) to summarize the state of our knowledge on this important topic. We shall begin with a brief review of the nature of the data on savings in developing countries with which economic analysts must work.

Federal statistical agencies in the United States and analogous agencies elsewhere commonly report official economic statistics as point estimates, without accompanying measures of error. Users of the statistics may incorrectly view them as error free or may incorrectly conjecture error magnitudes. This paper discusses strategies to mitigate misinterpretation of official statistics by communicating uncertainty to the public. Sampling error can be measured using established statistical principles. The challenge is to satisfactorily measure the various forms of nonsampling error. I find it useful to distinguish transitory statistical uncertainty, permanent statistical uncertainty, and conceptual uncertainty. I illustrate how each arises as the Bureau of Economic Analysis periodically revises GDP estimates, the Census Bureau generates household income statistics from surveys with nonresponse, and the Bureau of Labor Statistics seasonally adjusts employment statistics. I anchor my discussion of communication of uncertainty in the contribution of Oskar Morgenstern (1963a), who argued forcefully for agency publication of error estimates for official economic statistics. (JEL B22, C82, E23)

Important progress has been made in economists' understanding of the Beveridge curve, from its measurement to its expression in canonical labor market models. Yet enduring puzzles remain. Chief among these are the empirical role of vacancies in the recruitment process; the amplitude, comovement, and persistence of cyclical unemployment–vacancy dynamics; and the sources of lateral shifts in the Beveridge curve. The synthesis of these themes identifies several priorities for ongoing research, including the role of entry costs into vacancy creation in shaping Beveridge dynamics; the cyclicality of search intensity, both off and on the job, and its relation to participation and job-to-job transitions; the theory and measurement of mismatch; and the sources of hysteresis in unemployment flows. (JEL E24, J63, J64)

This essay revisits the argument that the removal of worldwide immigration restrictions would induce a very large increase in world GDP. The recent books Exodus: How Migration is Changing Our World by Paul Collier and The Price of Rights: Regulating International Labor Migration by Martin Ruhs raise a number of questions about the underlying economic model. The essay shows how these concerns can greatly attenuate the predicted gains. (JEL F22, F66, J11, J18, J61)

I discuss the health transition in the United States, bringing new data to bear on health indicators, and investigating the changing relationship between health, income, and the environment. I argue that scientific advances played an outsize role and that health improvements were largest among the poor. Health improvements were not a precondition for modern economic growth. The gains to health are largest when the economy has moved from "brawn" to "brains" because this is when the wage returns to education are high, leading the healthy to obtain more education. More education may improve use of health knowledge, producing a virtuous cycle.

This survey summarizes the main research findings about teaching economics to undergraduates. After briefly reviewing the history of research on undergraduate economic education, it discusses the status of the economics major—numbers and trends, goals, coursework, outcomes, and the principles courses. Some economic theory is used to explain the likely effects of pedagogical decisions of faculty and the learning choices that students make. Major results from empirical research are reviewed from the professor perspective on such topics as teaching methods, online technology, class size, and textbooks. Studies of student learning are discussed in relation to study time, grades, attendance, math aptitude, and cheating. The last section discusses changes in the composition of faculty who teach undergraduate economics and effects from changes in instructional technology and then presents findings from the research about measuring teaching effectiveness and the value of teacher training. (JEL A22, I23, J44)

Environmental quality in many developing countries is poor and generates substantial health and productivity costs. However, the few existing measures of marginal willingness to pay (MWTP) for environmental quality improvements indicate low valuations by affected households. This paper argues that this seeming paradox is the central puzzle at the intersection of environmental and development economics: Given poor environmental quality and high health burdens in developing countries, why is MWTP seemingly so low? We develop a conceptual framework for understanding this puzzle and propose four potential explanations for why environmental quality is so poor: (1) due to low income levels, individuals value increases in income more than marginal improvements in environmental quality; (2) the marginal costs of environmental quality improvements are high; (3) political economy factors undermine efficient policymaking; and (4) market failures such as weak property rights and missing capital markets distort MWTP for environmental quality. We review the literature on each explanation and discuss how the framework applies to climate change, which is perhaps the most important issue at the intersection of environment and development economics. The paper concludes with a list of promising and unanswered research questions for the emerging sub-field of “envirodevonomics.” (JEL I15, O10, O44, Q50)