Knowledge that Transforms

David Colander's update/reworking of his 1987 volume draws conclusions about graduate study in economics from interviews with students in selected leading U.S. programs. Although not formally statistical, the interviews support the conclusion that most of the core of graduate instruction (except macro) is handled very well. Colander's concern about the lack of attention to training teachers is well founded. His conclusion that fewer idiots savants are being trained than in the 1980s is overly optimistic, and his worry about stresses that graduate students express is misplaced.

America Works is a splendid book and Richard Freeman is to be congratulated on producing a work that sets out what is right and what is wrong with the U.S. labor market while being a joy to read. While I am generally sympathetic to both the analysis and the conclusions, there are a number of points of disagreement that I highlight in this review. In particular, I would add to his policy recommendations by taking a gamble and enacting a law that entitled all employees in the United States to four weeks paid holiday per year in addition to public holidays. This may transform summertime in the United States.

Ray Fair's Estimating How the Macroeconomy Works is the latest in a series of books by Fair that build, estimate, and apply his macroeconometric model to study the U.S. economy. In this book, Fair updates the model to incorporate the most recent data and uses it to analyze several important empirical questions, such as whether the U.S. economy moved into a new age of high productivity in the last half of the 1990s and the dynamics of prices, output, and unemployment. This review places his work in the context of the historical evolution of aggregate econometric models, compares it with the current developments in the estimation of dynamic stochastic general equilibrium models, and discusses some salient aspects of Fair's contributions.

This book collects essays, most of which were published earlier, into an advertisement for real business cycle (RBC) analysis. Half of the essays discuss the Great Depression; half discuss events of the 1980s and 1990s. They all use the general equilibrium model of economic growth to analyze short-run fluctuations in the rate of economic growth of various countries. I find that the use of closed economy models without frictions is not useful for the analysis of short-run variations in the rate of economic growth. Almost all of these essays end by claiming that variations in the rate of GDP growth were due to changes in the rate of total factor productivity (TFP) growth. They do not provide any explanation for fluctuations in the rate of TFP growth, leaving the reader no closer to understanding these periods of depression and slow growth. I discuss in turn the essays on the Great Depression, the essays on more recent fluctuations, and the definition of “great depressions” used in this volume.

The role of improved schooling, a central part of most development strategies, has become controversial because expansion of school attainment has not guaranteed improved economic conditions. This paper reviews the role of cognitive skills in promoting economic well-being, with a particular focus on the role of school quality and quantity. It concludes that there is strong evidence that the cognitive skills of the population—rather than mere school attainment—are powerfully related to individual earnings, to the distribution of income, and to economic growth. New empirical results show the importance of both minimal and high level skills, the complementarity of skills and the quality of economic institutions, and the robustness of the relationship between skills and growth. International comparisons incorporating expanded data on cognitive skills reveal much larger skill deficits in developing countries than generally derived from just school enrollment and attainment. The magnitude of change needed makes clear that closing the economic gap with developed countries will require major structural changes in schooling institutions.

The economics of information has identified an important role for government to correct situations where competition is not sufficient to reveal valuable information to consumers. Archon Fung, Mary Graham, and David Weil's Full Disclosure: The Perils and Promise of Transparency provides a thorough discussion of government-mandated disclosure policies. I use their book to frame an empirical assessment of whether these—and other information policies—have significantly reduced the costs to consumers created by imperfect information. My conclusion, which calls for more research, is that government information policies have amounted to weak solutions in search of a problem.

Large fluctuations in energy prices have been a distinguishing characteristic of the U.S. economy since the 1970s. Turmoil in the Middle East, rising energy prices in the United States, and evidence of global warming recently have reignited interest in the link between energy prices and economic performance. This paper addresses a number of the key issues in this debate: What are energy price shocks and where do they come from? How responsive is energy demand to changes in energy prices? How do consumer's expenditure patterns evolve in response to energy price shocks? How do energy price shocks affect U.S. real output, inflation, and stock prices? Why do energy price increases seem to cause recessions but energy price decreases do not seem to cause expansions? Why has there been a surge in the price of oil in recent years? Why has this new energy price shock not caused a recession so far? Have the effects of energy price shocks waned since the 1980s and, if so, why? As the paper demonstrates, it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets when answering these questions.

India's high growth over the last fifteen years has inspired several recent books and papers to examine the growth's source and sustainability—the two-volume study by Arvind Virmani being a case in point. This paper evaluates these recent works. It is argued that the cause of the take-off does not fit into any easy ideological category as suggested by Virmani. The current high growth has been achieved in several steps, with distinct factors of propulsion behind each step. There is reason to expect the growth to be sustainable, although destabilizing political tensions will arise from the increasing inequality. The paper also evaluates how India's growth relates to the global economy.

A Farewell to Alms advances striking claims about the economic history of the world. These include (1) the preindustrial world was in a Malthusian preventive check equilibrium, (2) living standards were unchanging and above subsistence for the last 100,000 years, (3) bad institutions were not the cause of economic backwardness, (4) successful economic growth was due to the spread of “middle class” values from the elite to the rest of society for “biological” reasons, (5) workers were the big gainers in the British Industrial Revolution, and (6) the absence of middle class values, for biological reasons, explains why most of the world is poor. The empirical support for these claims is examined, and all are questionable.

We review the recent but growing economic literature on the worldwide growth of obesity, relating the review to a recent anthology of articles—Obesity, Business and Public Policy. We discuss the competing explanations for the growth of obesity as well as the role of governments in attempting to limit it.