The Unassuming Economist

From Conversable Economist:

“Paul Volcker, who was chair of the Federal Reserve from August 1979 to August 1987.has died. He is generally credited, or in some cases blamed, for the set of monetary policies which both ended the inflationary period of the 1970s but also brought on the very deep double-dip recessions of 1980 and 1981-2. The New York Times obituary is here.

For an overview of those times and how Volcker perceived the choices he was facing, a useful starting point is “An Interview with Paul Volcker,” conducted by Martin Feldstein, which appeared in the Fall 2013 issue of the Journal of Economic Perspectives. Here’s a flavor:

It made a profound impression on me, if nobody else, that Arthur Burns titled his valedictory speech “The Anguish of Central Banking” (Burns 1979). That was a long lament about how, in the economic and political setting of the times, the Federal Reserve, and by extension presumably any central bank, could not exercise enough eserve, and by extension presumably any central bank, could not exercise enough restraint to keep inflation under control. It was a pretty sad story. If you were going to follow that line, you were going to give up, I  guess. I didn’t think you could give up.  If I was in that job, that was the challenge as the Chairman of the Federal Reserve. You inherit a certain challenge …

The favorite word at the time, which was very popular within the Federal Reserve, but I think popular in the academic community generally, was “gradualism.” I don’t quite remember them saying, “Don’t bring it down at all.”But instead, it was “Take it easy. It will be a job of, I don’t know, years, decades, whatever, and you can do it without hurting the economy.” I never thought that was realistic. The inflationary process itself brought so many dislocations, and stresses and strains that you were going to have a recession sooner or later.”

Continue reading here.

Chris Wellisz (WSJ) profiles Harvard’s Edward Glaeser for IMF’s Finance & Development magazine:

“Growing up in New York City in the 1970s, Edward Glaeser saw a great metropolis in decline. Crime was soaring. Garbage piled up on sidewalks as striking sanitation workers walked off the job. The city teetered on the edge of bankruptcy.

By the mid-1980s, it was clear that New York would bounce back. But it could still be a scary place; there was a triple homicide across the street from his school on the Upper West Side of Manhattan. Glaeser was nevertheless captivated by New York’s bustling street life and spent hours roaming its neighborhoods.

“It was both wonderful and terrifying, and it was hard not to be obsessed by it,” Glaeser recalls in an interview at his office at Harvard University. Today, that sense of wonder still permeates Glaeser’s work as an urban economist. He deploys the economist’s theoretical tool kit to explore questions inspired by his youth in New York. Why do some cities fail while others flourish? What accounts for sky-high housing costs in San Francisco? How does the growth of cities differ in rich and poor countries?

“I have always thought of myself as fundamentally a curious child,” Glaeser, 52, says. Rather than “pushing well-established literature forward,” he seeks to comprehend “something that I really don’t understand when I start out.”

While still a graduate student at the University of Chicago, Glaeser made his mark as a theorist of the benefits of agglomeration—the idea that dense and diverse cities are hothouses of innovation, energy, and creativity that fuel economic growth. In the years since, his work has ranged across a breathtaking variety of subjects, from rent control and real estate bubbles to property rights, civil disobedience, and carbon emissions.

“For a couple decades now, Ed has been the leading thinker about the economics of place,” says Lawrence Summers, a Harvard professor who served as director of the National Economic Council under US President Barack Obama. “And the economics of urban areas are increasingly being seen as central to broad economic concerns.”

Glaeser and Summers are collaborating on a study of the hardening divide between well educated, affluent coastal regions of the United States and islands of economic stagnation in what they call the “eastern heartland,” the interior states east of the Mississippi River. There, in cities like Flint, Michigan, the proportion of prime-age men who aren’t working has been rising—along with rates of opioid addiction, disability, and mortality.

How can policy help? Traditionally, economists have been skeptical of the value of place-based policies like enterprise zones that offer tax breaks to investors, saying it is better to help people, not places. People, they assumed, would move to where the jobs were. But labor mobility has declined in recent decades, partly because of high housing costs, partly because demand for relatively unskilled factory work has diminished.

Breaking with economic orthodoxy, Glaeser and Summers say that the federal government should tailor proemployment measures, such as reducing the payroll tax or increasing tax credits to low earners, to fit the needs of economically distressed areas such as West Virginia. They also make the case for boosting investment in education.

As a Chicago-trained economist, Glaeser is a strong believer in the magic of free markets and opposes measures that distort incentives. “I have always been against spatial redistribution, taking from rich areas and giving to poor areas,” he says. “That doesn’t mean that you want the same policies everywhere.” Urban economics seemed like a natural pursuit for Glaeser. His German-born father, Ludwig, was an architect who taught him how the built environment shapes people’s lives. His mother, Elizabeth, was an asset manager who introduced him to economics. Glaeser recalls how she used the example of competing cobblers to explain marginal cost pricing.

“I remember thinking what an amazing and fascinating thing it is to think about the impact of competition,” he says. He was 10 years old. In high school, Glaeser excelled at history and mathematics. As a Princeton University undergraduate, he considered majoring in political science before choosing economics, seeing it as a path to Wall Street. But dreams of a career in finance ended with the stock market crash of 1987, just as he started job interviews. So he opted for graduate school, because “it didn’t seem like I was cutting off many options,” he says.”

Continue reading here.

A F&D profile of Esther Duflo:

“IT IS A CAPITAL MISTAKE to theorize before one has data,” Sherlock Holmes remarks to his friend Dr. Watson in “A Scandal in Bohemia.” Development economist Esther Duflo would probably agree.

A slight, intense, 31-year-old with dark hair and eyes and the harried air of someone with too much to do in too little time, Duflo, a native of France, is part of a rising group of young economists who are questioning traditional development strategies. Her modest office at the Massachusetts Institute of Technology, where she is Castle Krob Development Associate Professor of Economics, is decorated with textiles from India and Indonesia, two of the developing countries in which she has done research.

Describing her methods, Duflo says that she works “in a very micro way. My projects always consider one simple, stripped-down question having to do with how people react within a certain context.” Typically, her question has to do with how a selected program in a developing country has affected the poor people it was designed to benefit. She amasses huge amounts of data in the field, in collaboration with local nongovernmental organizations (NGOs) and academics, and then subjects the data to rigorous econometric analysis to determine the program’s impact.

Although she considers her questions “simple,” her goal is anything but. Indeed, research carried out by Duflo and her peers is challenging some of the cherished assumptions on which many development policies are based. For example, in a study of Indonesia’s massive school construction program (the country built over 61,000 primary schools in 1974–78), Duflo found that, while workers who were educated in the new schools received higher wages, the wages of older workers in the same districts increased more slowly from year to year, apparently because the market was flooded with graduates from the new schools and capital formation did not keep up with the increase in human capital. These findings, she concluded, “are important because, contrary to what is often assumed (on the basis of the experience of Southeast Asian countries), acceleration in the rate of accumulation of human capital is not necessarily accompanied by economic growth.”

Studying real people in real environments is central to Duflo’s approach. In a paper she wrote in 2003, “Poor but Rational?” she speculates that there may be “more to learn about human behavior from the choices made by Kenyan farmers confronted with a real choice than from those made by American undergraduates in laboratory conditions.”

Continue reading here.

From a VOX post by James Poterba and Lawrence H. Summers:

“Martin Feldstein, who passed away in June 2019, was one of the most important applied economists of the last half-century. This column, by two of his students and close colleagues, celebrates his intellectual legacy, outlining his seminal contributions on a wide range of topics in public economics and beyond, his pioneering use of large data sets, and his influential voice in US public policy over many decades. As president of the National Bureau of Economic Research for nearly 30 years, Feldstein advanced the conduct and dissemination of economic research, and helped to create the modern economics profession.”

See my profile of Martin Feldstein here.

Marty Feldstein passed away at the age of 79. He was the first person I wrote a profile of when I joined the IMF’s public relations department in the 2000s. He was very pleasant and very patient during the interview, but got irritated when the photographer asked him to remove his glasses for the photograph. “The glasses stay on,” he said firmly. See the photograph and read my profile of Marty.