Knowledge that Transforms

One of the major social policy issues facing the United States in the first decade of the twenty-first century is the large number of Americans lacking health insurance. This article surveys the major economic issues around covering the uninsured. I review the facts on insurance coverage and the nature of the uninsured; explore explanations for why the United States has such a large, and growing, uninsured population; and discuss why we should care if individuals are uninsured. I then examine policy options to address the problem of the uninsured, beginning with a discussion of the key issues and available evidence and then turning to estimates from a micro-simulation model of the impact of alternative interventions to increase insurance coverage.

Forecasts guide decisions in all areas of economics and finance and their value can only be understood in relation to, and in the context of, such decisions. We discuss the central role of the loss function in helping determine the forecaster's objectives. Decision theory provides a framework for both the construction and evaluation of forecasts. This framework allows an understanding of the challenges that arise from the explosion in the sheer volume of predictor variables under consideration and the forecaster's ability to entertain an endless array of forecasting models and time-varying specifications, none of which may coincide with the “true” model. We show this along with reviewing methods for comparing the forecasting performance of pairs of models or evaluating the ability of the best of many models to beat a benchmark specification.

In this paper, we review the recent literature on global interpersonal income inequality. While all estimates agree that the level is very high, with a Gini of between 0.630 and 0.686 in the 1990s, there is no consensus regarding the direction of change. We discuss methodological issues, including the use of national accounts versus survey-based estimates of mean income (or consumption) and the choice of purchasing power parity exchange rates. Findings of a rise or fall in global income inequality are not robust across different estimation methods and datasets. Given the diversity of estimates and various sources of uncertainty, including gaps and errors in the underlying data, we conclude there is insufficient evidence to determine the direction of change in global interpersonal inequality in recent decades.

We review theoretical explanations for in-kind transfers in light of the limited empirical evidence. After reviewing the traditional paternalistic arguments, we consider explanations based on imperfect information and self-targeting. We then discuss the large literature on in-kind programs as a way of improving the efficiency of the tax system and a range of other possible explanations, including the “Samaritan's Dilemma,” pecuniary effects, credit constraints, asymmetric information amongst agents, and political economy considerations. Our reading of the evidence suggests that paternalism and interdependent preferences are leading overall explanations for the existence of in-kind transfer programs but that some of the other arguments may apply to specific cases. Political economy considerations must also be part of the story.

The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility, and discuss some nonhappiness research (behavioral, experimental, neurological) related to income comparisons. We last consider how relative income in the utility function can affect economic models of behavior in the domains of consumption, investment, economic growth, savings, taxation, labor supply, wages, and migration. Every pitifulest whipster that walks within a skin has had his head filled with the notion that he is, shall be, or by all human and divine laws ought to be, “happy.” Thomas Carlyle

We wish to acknowledge the help of three referees and of John Pencavel on several earlier drafts, as well as the assistance of the modelers, whose work is referred to in the paper. They corrected our lack of understanding of their work and provided many other helpful comments. Excellent research and bibliographical assistance have been provided by Debbie Fretz, Radwan Shaban, and Janet Stotsky. Helpful comments have been made by Charles Ballard, Michael Boskin, Lans Bovenberg, Sylvester Damus, Harvey Galper, Glenn Harrison, Gordon Lenjosek, Jack Mutti, Serena Ng, T. N. Srinivasan, Charles Stuart, and Eric Toder. The authors also acknowledgefinancial support from the National Bureau of Economic Research, the National Science Foundation, International Business Machines, and the Social Sciences and Humanities Research Council: Ottawa, Canada.

Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication—mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy.

In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter. Finally, we assess the implications of this research for economic reform.