In 2013, a graduate student discovered a flaw in a spreadsheet, renewing the debate about austerity and debt. Emerging economies tanked, and Bitcoin boomed. In the U.S., unemployment fell and the Federal Reserve started to scale back its bond-buying program. Research focused on inequality and jobs gap between the highly skilled and everyone else. The Affordable Care Act began.
We asked scholars to identify the most important development or new research of the last year. This is what they came up with:
Janet Currie, professor of economics and public affairs at Princeton University:
Infant mortality in the U.S. fell 12 percent from 2005 to 2011, according to the Centers for Disease Control. This good news is startling given that inequality grew and unemployment skyrocketed over the same period. How did conditions improve for babies, when they were deteriorating for their parents?
One answer is the safety net. Medicaid pays for about 40 percent of births. Because almost all births are paid for by either public or private insurance, all infants have access to life-saving technologies.
A second strand of the safety net is the Special Supplemental Nutrition Program for Women, Infants and Children, known as WIC. The initial rollout of the program reduced low birth weight and prematurity among children born to less educated women and in counties with high poverty levels. Many studies have shown continuing benefits.
A third strand involves home-visit programs by nurses. Nurses drop in on high-risk, pregnant women before birth and for up to two years afterward. While there is no national initiative, 20 states have created their own programs.
Other trends have also been moving in the right direction. Starting with the Clean Air Act of 1970, the U.S. has reduced hazardous pollution. Pollution levels fell in the recession. From 2005 to 2010, carbon monoxide fell to 1.6 parts per million from 2.3 parts per million, which led to substantial improvements in health at birth.
The takeaway message is that conditions for babies have improved despite the economic dislocation of the recession because government successfully shielded them from the fallout and worked to improve their environment.
Led by Bitcoin, virtual currency had a breakout year. As the basics became more widely known, investors flocked into Bitcoin in March, with the market capitalization growing from $370 million to $1 billion in a month. Exchanges such as Bitstamp and U.S. on-ramps such as Coinbase Inc. gained traction; others, plagued by regulatory challenges, stopped working with U.S. banks (Mt. Gox) or closed (Bitfloor), leaving users unable to retrieve their funds. The Bitcoin-based drug market Silk Road was going strong until it was busted by federal authorities. At year’s end, U.S. retailer Overstock.com announced a plan to accept Bitcoins by next summer. New virtual currencies, including Ripple Labs Inc., appeared, and other virtual currencies, such as Litecoin, rode the wave of investor enthusiasm. Money from venture capitalists flowed into the virtual currency ecosystem.
In November, U.S. regulators held hearings, sending encouraging signals to virtual markets. At the same time, major Chinese companies began embracing Bitcoin, but the promise of that market was short-lived: The Chinese government backpedaled in December. Even though that move lead to a decline in Bitcoin values, the market cap ended the year in the $9 billion range.
To become more than a fad for technology enthusiasts, day traders and libertarians, virtual currency needs to find direct utility as a means of transaction. The fundamental technological innovation is the ability for two entities to transfer value securely, almost instantly, without a middleman, and with negligible fees. This opens up new possibilities, including cheaper international remittances of foreign-earned wages by workers from developing countries, micropayments for digital goods such as news and mobile apps, and the ability of the non-banked developing world to engage in global e-commerce for digital goods, virtual services or crafts.
Simon Johnson, professor of entrepreneurship at MIT’s Sloan School of Management:
A recent paper in the American Economic Review by David Autor, David Dorn and Gordon Hanson looks at the effects of increasing Chinese manufacturing exports on the U.S. Next year, we should expect debate over whether to expand U.S. free trade agreements across the Pacific and with Europe.
We know trade creates gains for the U.S. in some aggregate sense -- for example, reducing trade barriers creates opportunities to export and makes imported consumer goods cheaper. It also accelerates some job losses, including in manufacturing. Who loses, by how much, relative to what otherwise would have happened?
Using local U.S. labor markets, Autor, Dorn and Hanson examine the effect of the surge in Chinese imports from 1990 to 2007. They estimate that about one-quarter of the decline in manufacturing jobs was due to rising imports.
We should put this data in context by comparing it with the job shifts due to technological change, which has raised the premium for the highly skilled while reducing good income-earning opportunities for the less skilled.
The findings of Autor, Dorn and Hanson don’t signal the end of work for people with only a high school education but they indicate that recent increases in inequality are likely to continue. The long trend is this:
“Preparing a meal, driving a truck through city traffic or cleaning a hotel room present mind-bogglingly complex challenges for computers. But they are straightforward for humans, requiring primarily innate abilities like dexterity, sightedness and language recognition, as well as modest training. These workers can’t be replaced by robots, but their skills are not scarce, so they usually make low wages.”
At the same time, people in “professional, managerial, technical and creative occupations” have done well in part because computers make them more productive or allow them to reach larger audiences at low cost.
The bottom line is that polarization of the labor force over the past three decades is mostly due to technology. But increasing trade with low-income countries that export manufactured goods hasn’t helped, and the rise of China is a certain contributor to increased inequality in the U.S.
Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office:
There are dozens of candidates for the top economic development of 2013 -- the Federal Reserve’s “to taper or not to taper” drama; tax increases for the rich; Obamacare’s policies, politics and meltdowns; the huge expansion of the regulatory state; the new opportunities presented by a buoyant energy sector, or federal fiscal follies. All roads, however, lead to an economic recovery that refuses to take flight.
The facts are easily summarized. Compared with the typical postwar recovery, gross domestic product has been slow to recover, which has resulted in limited job growth and dismal income growth.
Every other major issue arises as a cause of the slow recovery (regulations, fiscal fights, tax increases, Obamacare), or a silver lining in bad economic times (energy or the housing recovery), or responses to poor growth (Fed policy). As the economy gradually regains full employment, focus will naturally shift to other policy and economic issues. But in 2013, the biggest development was the stubbornly subpar recovery.
James K. Galbraith, professor at the LBJ School of Public Affairs at the University of Texas at Austin:
The most important economics story of 2013 began with Thomas Herndon’s discovery of errors in a study by Carmen Reinhart and Ken Rogoff claiming a debt-to-GDP threshold for stagnation. Herndon’s work was only the beginning. As the year went on, all the main rationales for budget austerity, deficit hysteria and for cuts to Social Security, Medicare and Medicaid unraveled. As the year ends, the deficit hysterics are almost silent.
As always, circumstances played a role. Health-care costs are no longer exploding, a shift that defuses one of the big future-deficit scare stories. Long-term interest rates are up, but that is due to talk of tapering by the Fed and not to deficits or debt. Most important, by year-end, deficits were falling much more quickly than predicted. Today the big risk isn’t inflation, high interest rates and a collapsing dollar. It’s joblessness, despair and continued stagnation.
Suddenly economic inequality is on the agenda. The next big thing will be a higher minimum wage, with $12 an hour just over the horizon; California voters may get a chance to vote for that in November. Social Security has survived, intact, for another year. And as Michael Lind has written, it is even becoming possible (in some circles) to talk about expanding, instead of cutting, the coverage and benefits of that most-successful public program.
These glimmers of hope and common sense show that ideas can still be budged by events. In Europe, though, stubbornness prevails. A hardline coalition of the Christian Democratic Union and the Social Democratic Party has taken office in Germany. Soon it will confront the rise of a democratic, pro-European resistance, beginning in Greece. I’ll be watching that space for the next battle of the debt wars.
Dani Rodrik, professor of social science at the Institute for Advanced Study in Princeton, New Jersey:
This was the year when the emerging-market hype finally came crashing down. Some of it had to do with slowing growth rates, but the central reason was the effect on currencies of the Fed’s talk of tapering. As currencies from India to Brazil plummeted, the reality sank in that much of the recent growth these countries experienced was the product of favorable external developments, in particular, low interest rates in the U.S. and high commodity prices.
As for China, opinion is now split between those who thought its unsustainable investment rates could be reduced relatively painlessly and those who worried about a hard landing; neither side doubts China’s growth rate is on its way down.
Developing countries have generally improved their governance and now have better macroeconomic policies, but like advanced economies they suffer from structural problems. Recent growth has only benefited a relatively small segment of the global population, and the traditional engines of growth -- industrialization and diversification -- are sputtering. Financial globalization has turned into a generator of instability rather than a source for funding domestic investment.
This was also the year of mass protests in the emerging world, and that is no coincidence. Disaffected urban youth and middle classes will continue to pose a serious challenge to governments that have raised expectations above what they can deliver.
June O’Neill, director of the Center for the Study of Business and Government at Baruch College, former director of the Congressional Budget Office:
Health-care expenditures in the U.S. are now close to 18 percent of GDP, even though spending on major government programs slowed over the past few years (as a result of the recession and its toll on state and other spending).
We can only speculate what effect Obamacare will have on the huge health-care sector. What seems likely is an increased burden on the federal government. The Medicaid expansion will be funded by the federal government for the next few years for those states that have signed up. We still don’t know how many people will enroll for insurance in the exchanges. Nor do we know the incomes of those who will sign up and therefore the cost of the federal subsidies.
What’s even more uncertain is the extent to which those who sign up for insurance will pay the premiums they owe. We don’t have any good way of chasing down deadbeats.
The administration keeps sweetening the health-care law, adding provisions such as the “hardship exemption” that exempts people who lose their insurance as a result of the individual mandate. The economic effects of all this will come, in part, from fiscal pressure applied by widening deficits. Labor market effects are difficult to forecast. With cuts in salaries for doctors, the supply of the profession’s most skilled will likely decline while demand for them rises. When markets are suppressed, shortages are resolved with lines and crowding. Health care is no exception.
Laura Tyson, professor at Haas School of Business at the University of California, Berkeley, and former chairman of the National Economic Council:
This was the year that President Barack Obama chose Janet Yellen to be the next Fed chairman. As vice-chairman, she was an architect of the central bank’s unconventional policies during the last three years -- including its quantitative easing program and subsequent tapering -- and her selection indicates policy continuity. Yellen is a brilliant economist as well as an experienced central banker and policy maker who commands respect among central bankers. She will be able to build consensus among Federal Open Market Committee board members and is a terrific communicator as evidenced by her thoughtful and detailed speeches over the last several years.
There is no basis for the concern that Yellen will be too “dovish.” Like Ben Bernanke, she believes in the Fed’s dual mandate of full employment and inflation control. She is tough-minded, and her decisions will be driven by evidence not by ideology.
Yellen is unconventional in one important respect. She will be the first woman to assume the post of Fed chairman and the highest-ranking woman in an economic-policy making position in the U.S. Her appointment shatters another glass ceiling on the path to greater gender parity.
Glenn Hubbard, dean of Columbia University Graduate School of Business and former chairman of the Council of Economic Advisers:
As 2014 begins, we should avoid both a hangover from a party of financial regulation and harsh cures.
Complacency about aggregate risk, excessive and opaque leverage, fragile funding structures and too-big-to-fail financial institutions left us poorly prepared for the financial crisis. And, our regulatory focus on the health of individual institutions left us vulnerable to contagion across the financial system.
We learned that, in cleaning up the crisis, both monetary policy (lender of last resort) and fiscal policy (bank recapitalization) are important. But regulatory reform has been much less encouraging -- focusing on dogs that didn’t bark (the ban on proprietary trading by large banks), virtually ignoring dogs that did bark (the government-sponsored enterprises), and putting forward rules with potentially adverse consequences (the designation of Systemically Important Financial Institutions and substantially higher capital requirements for banks).
Two big questions arise for 2014: What should we do about “big banks”? And by how much should we increase bank capital requirements as a vaccine against the next crisis?
On the first, the treatment may be worse than the supposed disease. While I am sympathetic to proposals that eliminate too-big-to-fail, any alternative is less desirable; just “breaking up” big banks doesn’t eliminate problems of correlation in risks in the financial system. And “utility regulation” of big banks runs the risk of dulling financial innovation.
On the second, greatly higher capital requirements can have unpleasant side effects. Much higher levels of capital reduce lending to borrowers with few non-bank alternatives. And high bank capital requirements shifts activity to shadow banking, with its attendant risks.
Finally, a memo to the White House and Congress: Rather than join the tough gym of harsher regulation in 2014, let’s try good regulatory habits next year.
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