Why Do Monthly Job Loss Estimates Exclude the Farming Sector?

In April, nonfarm payroll employment declined by more than 500,000 jobs for the sixth month in a row. While the pace of nonfarm job losses slowed, the Bureau of Labor Statistics (BLS) report on the employment situation continues to paint a fairly grim picture. Employment in the farming sector was actually a bit higher in January 2009 (the most recent month for which data is available) than it was in January 2008. Why doesn't the BLS cover farms and ranches in its payroll survey? Might the omission of the farming sector from the BLS payroll survey cause the jobs report to be too gloomy?

According to the BLS, farms simply fall outside the scope of the payroll survey. When the BLS began studying payrolls and employment in 1915, it focused exclusively on the manufacturing sector. The need for more accurate employment estimates during the Great Depression led the BLS to develop more comprehensive estimates of wages and employment in nonfarm industries during the '30s. Historically, at least, one can imagine the relative difficulty of gathering timely employment information in the rural farming sector.

The lack of agriculture in the payroll survey, however, is almost certainly inconsequential. The absence of farms in the Bureau's payroll survey matters less to today's employment picture than it did during the early and mid 20th century. In 1930, 21.5 percent of the workforce worked in farming, and agricultural output represented nearly 8 percent of U.S. economic output. At the turn of the 21st century, less than 2 percent of the labor force worked in agriculture, a sector that now represents less than 1 percent of national economic output.

The small share of the population employed in agriculture makes it unlikely that the Bureau's payroll survey--with a sample covering about one-third of total nonfarm payroll employment--will distort the overall jobs picture by failing to account for farm sector employment. Even an agricultural boom in the midst of the current recession would do little to reverse the dismal national employment trends.

Although the BLS excludes agriculture from its payroll survey, it does capture farm employment indirectly through a survey of 60,000 households. The most widely reported unemployment rate comes from this household survey, which includes respondents from all economic sectors: manufacturing, services, agriculture, or the ranks of the self-employed.

The household survey categorizes a person as employed if they worked for pay at some point during the past week, whether she worked in a factory, on a ranch, in an office, or for herself. A person who does not have a job, but actively searched for one at some point in the preceding four weeks, is considered unemployed. Anyone who does not have a job and has not been looking in the past month is classified as "not in the labor force."

The unemployment rate is simply the ratio of unemployed workers to the labor force (the sum of employed and unemployed workers). As the ranks of the unemployed continued to swell during April, the unemployment rate rose from 8.5 percent to 8.9 percent, reflecting an increase in joblessness among all workers, including farm hands and the self-employed.

Discussion Questions

1. There are a number of jobless people who would like to work but have given up on their job search because they believe it to be futile. The BLS classifies these discouraged workers as 'not in the labor force' rather than unemployed because they did not search for a job in the preceding four weeks. Consulting this table, how does the number of discouraged workers in April 2009 compare to the number in April 2008? If the BLS were to count discouraged workers as unemployed (and, by extension, part of the labor force), what would happen to the unemployment rate?

2. How has the recession affected the ranks of discouraged workers? For more information, consult this recent BLS report.

3. The BLS tracks the number of people who work part time for economic reasons, also known as involuntary part-time workers. By counting anyone who worked for pay during the preceding week as employed, the household survey classifies a number of involuntary part-time workers as employed. In what way does the official unemployment rate miss the underemployment associated with involuntary part-time work? This table contains information on involuntary part-time workers. How has the recession impacted the number of people employed part-time for economic reasons? What happened to the number of involuntary part-time workers between March 2009 and April 2009?

4. Even as Americans eat a larger variety and quantity of foods than ever before, the share of economic output attributable to agriculture declines. How can you explain this development?

Paul Romer on the Financial Crisis

Aplia's founder, Paul Romer, recently wrote about the financial crisis on the Growth Blog. In his essay, Romer encourages a more open dialogue between the academics who build economic models and the policymakers who respond to unforeseen economic crises in real time. Read the post to find out more.

Discussion Questions
1. Think about the basic models you learned in introductory economics, like supply and demand. How do these models inform your understanding of the financial crisis? What aspects of the crisis do they leave unexplained?

2. How would you rate the performance of the Treasury and the Fed in handling the ongoing crisis? What would you do differently? How can we prevent similar crises from developing in the future?

Sacking Mugabe

The path to growth remains elusive for many of the world's economies. Prescribing effective growth policies is exceedingly difficult. The unique features in each of the world's economies defy formulaic approaches to growth—it's not necessarily clear that Japan's path will work for Cambodia. Economic history offers a bit more clarity when it comes to what won't work. Of the more recent episodes of economic collapse, Zimbabwe's is perhaps the starkest. The Mugabe regime's mismanagement of the Zimbabwean economy reads like a step-by-step guide to economic ruin.

In 2000, Zimbabwe's autocratic ruler, Robert Mugabe, implemented a clumsy and often violent land redistribution program. Mugabe forcefully seized white-owned farmland and gave it to black farmers unfamiliar with commercial farming practices. The absence of any cooperative knowledge transfer between white and black farmers led to a precipitous fall in agricultural output. The failure of the agricultural sector caused a severe contraction in overall economic output, creating massive unemployment. The collapsing economy sapped Mugabe's regime of the tax revenues necessary to pay soldiers and finance government outlays. An autocrat's reign is only as secure as his army is brutal—hungry, underpaid soldiers aren't much for intimidating political opponents or scaring the populace into submission. To maintain his government's outlays, Mugabe turned to borrowing. Of course, the loans would eventually need to be repaid. Lacking the tax base to repay the loans, the government resorted to the capstone of many economic disasters: printing money.

The results were predictable: hyperinflation reached roughly 4 million percent per year as of June 2008. At these levels of inflation, even the most mundane daily transactions involve considerable uncertainty and frustration. Mugabe's response to the hyperinflation that he himself initiated could not have been worse. The government imposed price ceilings, threatening to jail shop owners if they charged more than the official price. The price ceilings led to massive shortages of necessities like bread and milk. Many firms shut down production, escalating an already high unemployment rate.

You don't have to be an economist to recognize the first step to improving Zimbabwe’s economy: get rid of Mugabe. But removing Mugabe from power is easier said than done. Opposition presidential candidate Morgan Tsvangirai gave it an impressive go during this year's elections, but widespread violence against opposition supporters caused Tsvangirai to withdraw from the presidential run-off. At this point, Mugabe remains president.

Discussion Questions

1. Mugabe is 84 years old—why doesn't he just step down? Charlayne Hunter-Gault's article in The Root suggests that Mugabe has strong incentives to maintain his grip on power given the fate of other overthrown tyrants. Hunter-Gault raises an interesting dilemma for freedom-lovers all over the world: we want to get rid of brutal dictators, but the dictators may do everything they can to retain power precisely because they fear what we'll do to them once they're out of office. Should we offer Mugabe amnesty just to get him to step down?

2. In a recent Wall Street Journal editorial, former World Bank president and U.S. Deputy Secretary of Defense Paul Wolfowitz suggests a way to pressure Mugabe out of office. Wolfowitz calls on the international community to very publicly declare promises of aid and debt relief for Zimbabwe under the condition that Mugabe is removed from office. Do you think this strategy would succeed?

3. Mugabe's land redistribution program was catastrophic for Zimbabwe's economy, but as this NPR story points out, several neighboring countries attempted to benefit from the displacement of white farmers in Zimbabwe. How could the Zimbabwean government have balanced the goals of efficiency of the farming sector and equity for the black population that suffered a history of oppression by a ruling white minority?

Resource Management, Post-Apocalypse Style

So suppose—and I’m not trying to get you down here—that an asteroid were to hit the earth, wiping out 90% of known species. (Or, if you prefer, that a combination of deforestation and our fascination with only growing a few key crops achieves the same outcome.) How could we regain our current biodiversity?

In case these kinds of things keep you up at night, you can rest easier thanks to the Svalbard Global Seed Vault that opened yesterday in Arctic Norway. There’s a great blog post about it on the New York Times website. The vault is a step up from existing seed banks, which are threatened by political instability or a lack of funding.

The post points out, though, that a group called grain.org has criticized the seed vault. Read their criticism here.

Discussion Questions

1. The post asks, “How much of this intergovernmental work help[s] sustain farming diversity, as opposed to museum-style genetic diversity?” Another way of asking this is as follows: producing food requires land, labor, and capital. The seeds themselves are just part of the equation. What happens if farmers, after hundreds of years of not farming these crops, lose the skills associated with their use? What can be done to preserve knowledge of how to maintain a species that is no longer actively farmed?

2. The seed vault acts as a centralized mechanism, much like a kidney donor list, that describes who is entitled to the seeds in the vault and under what circumstances. How does that mechanism compare to a market mechanism? Is it true, as grain.org argues, that the wrong stakeholders are given priority in this system? What rights do (and should) farmers have, as opposed to governments?

What's a Fiscal Authority to Do?

The likelihood of slow growth or a recession in the United States has policymakers looking for ways to soften the blow. There are two basic ways the government can stabilize output: monetary policy (changes in the money supply and interest rates) or fiscal policy (changes in government taxation and spending). The U.S. monetary authority, the Federal Reserve (or Fed), responded to the threat of recession by lowering interest rates. Lower interest rates reduce the cost of borrowing, accommodating investment and consumption spending during downturns (with the added benefit of lowering the value of the dollar and thus boosting U.S. exports). The timing and magnitude of interest-rate changes are always tricky, but even if rate cuts don't avert a downturn altogether, they'll almost certainly reduce the depth and length of a recession.

But what, if anything, can the fiscal authority—Congress and the President—do to assist the economy? According to Fed chair Ben Bernanke, "Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary actions alone." (Read this New York Times article for more.) However, Bernanke is hedging a bit here. By saying that tax cuts or spending increases "could be helpful in principle," he implicitly acknowledges that such measures may be ineffective, or even harmful, in practice. The process of agreeing on and passing legislation limits the usefulness of fiscal policy for stabilizing mild fluctuations in economic output. By the time our representatives haggle over and pass legislation, the downturn may be over or the resulting policy may reflect political rather than economic considerations. For this reason and others, recent commentaries by Greg Mankiw and Robert J. Samuelson argue that we should leave the Fed to address mild ups and downs in the business cycle, reserving fiscal policy for deep or prolonged recessions.

Discussion Questions

1. Limitations of fiscal policy aside, Bernanke seems to understand that politicians seeking a track record to run on will often favor policy action over informed inaction. What advice does he give policymakers who are eager to implement fiscal policy?

2. Three specific types of "lag" may delay the beneficial effects of economic policies. The recognition lag is the time it takes us to figure out we're in an economic pickle. We often don't know that we're in a recession until months after it's started. The implementation lag is the time it takes policymakers to agree on and implement policies. The impact lag is the time it takes a policy to work its way through the economy and affect economic output and unemployment. For example, an increase in government spending on highway construction will show up as additional output over the entire life of the project, not all at once. How might these lag times differ between monetary and fiscal policy?

3. Plotting economic output over time reveals two basic observations: the smooth upward trend in output growth over the long haul, and the up-and-down wiggle of output in the short term. To paraphrase Aplia's founder Paul Romer, it's easy to lose sight of the trend for the wiggle. Policymakers can get so wrapped up in temporary economic tumults that they lose focus on the bigger picture. If we're headed for recession, odds are that it will be mild by historical standards and the Fed will have plenty of policy ammunition to soften its adverse effects. Meanwhile, small changes in the long-run rate of economic growth have large impacts on future living standards. Given that, what policies would you recommend the action-minded fiscal authority focus on to improve the long-term growth prospects of the U.S. economy?

For more on the appropriate role of fiscal policy, listen to Bloomberg’s interview with Stanford economist John Taylor.

Paul Romer on Economic Growth

Aplia founder Paul Romer was recently interviewed by Russell Roberts of George Mason University (you can find the podcast here). Some of the discussion revolved around Romer's entry on economic growth in the Concise Encyclopedia of Economics.

As Romer points out in both the interview and the encyclopedia entry, small differences in the growth rate of income per capita lead to extraordinary differences in living standards over time. A simple formula allows us to consider the growth of average income over time, where n is the number of years and the growth rate is stated in decimal form:

(Initial per Capita Income Level) x (1 + Growth Rate)ⁿ

In the interview, Romer contrasts growth rates of 2.1% and 2.6% per year. For example, if U.S. income per capita is initially $30,000 and grows at a long-term rate of 2.1% per year, then after a period of 100 years, income per person will be approximately $30,000 x (1.021)¹⁰⁰ = $240,000. How much higher would income per capita be after 100 years at a growth rate of 2.3% per year? What about 2.6%?

To achieve slightly faster income growth, an economy must be able to generate more new ideas and find applications for those ideas that result in more valuable products and services. As Romer points out, human history teaches us that economic growth springs from better ideas, not just from more output. Better ideas generate greater value per unit of input.

Discussion Questions

1. Consider the benefits of a simple idea Romer mentions in his encyclopedia article: the one-size-fits-all lid for coffee cups. How do you think this idea generated more value per unit of input for the coffee-cup manufacturer? What about the coffee shop?

2. According to Romer, "The knowledge needed to provide citizens of the poorest countries with a vastly improved standard of living already exists in the advanced countries." What types of policies serve as barriers to the flow of ideas into poor countries? What types of policies might allow poor countries to take advantage of existing ideas and, as a result, contribute more new ideas of their own?

3. Faster growth and higher living standards depend in part on the strength of the incentives we face to generate and apply new ideas. When people can benefit from an idea without paying for it, the incentive to develop new ideas will be weaker. On the other hand, once an idea is discovered, not allowing it to be shared can be inefficient or even immoral. How do intellectual property rights, such as patents and copyrights, strengthen the incentive to discover new ideas? How might intellectual property rights hinder economic growth? Congress is currently considering reforms to patent laws in the United States. (A recent PC World article highlights the difficulty of designing patent laws that give inventors an incentive to develop new ideas while at the same time encouraging the rapid diffusion of new ideas at minimal cost.)

4. What, according to Romer's piece, are meta-ideas? What meta-ideas have we used in the past to strengthen the incentives to develop new ideas?

Minding the Gap

In his latest Yahoo! Finance column, Charles Wheelan asks, "If we succeed in raising the incomes of the poor, does it matter if incomes at the top are rising even faster, making us a more unequal society overall?" In fact, many people care less about the absolute value of their earnings and consumption than they do about how much they earn and consume compared to their neighbors. Wheelan also points out that two very different approaches to income inequality can pose a similar threat to economic prosperity. One society's insistence on equalizing incomes can stifle economic growth, just as another's disregard for a rapidly widening gap between rich and poor can hamper growth as well. Read Wheelan's column to find out more.

Discussion Questions

1. According to Wheelan: "If the gap between rich and poor gets too large, and if those at the bottom feel they have no meaningful route to the riches at the top, then the fabric of society will fray, or even come unraveled entirely." Income inequality alone will not necessarily contribute to violence and disorder. What role does income mobility—the extent to which people move up and down the income scale—play? The New York Times has an interesting interactive graphic that offers a glimpse of income mobility in the United States.

2. "You have money spent on guarding stuff rather than making stuff." According to the World Bank study Wheelan cites, how does crime in Brazil impact economic growth? According to Wheelan, Brazil suffers not only from income inequality, but also from a lack of income mobility. How strong of a role do you think these factors play in Brazil's problems with violent crime? In what way does social disorder divert an economy's resources away from investment and the production of goods and services?

3. How do income redistribution schemes—taxing higher-income people and transferring the revenues to lower-income people—affect work and entrepreneurial incentives? What about economic growth?

4. What does a Gini coefficient measure? What does it mean to say that Brazil has a Gini coefficient of .58 and India has a Gini coefficient of .33? What do Gini coefficients tell us about the experience of the United States between 1970 and 2005?

5. Cornell economist Robert Frank asked Americans which world they'd rather live in: World A, where they earn $100,000 and everyone else earns $85,000; or World B, where they earn $110,000 (a 10% increase in purchasing power compared to World A) and everyone else earns $200,000. Which world did the majority of Americans prefer? Which would you prefer?

6. In thinking about economic policy, what question does philosopher John Rawls ask us to answer behind a veil of ignorance? In answering the question, would you think only about income inequality? What other factors might you consider?

Quality, Choice, and Growth

Two articles in the New York Times this week are nicely complementary. Each looks at long-term trends in the U.S. economy, and in particular what Americans have chosen to spend their money on as they became progressively richer over the past few generations. And each argues that quality improvements have been a major force in driving American consumption patterns.

In the first, David Leonhardt argues that Americans face a tradeoff between better health care and other consumption goods. While he states that the health care system is indeed in crisis, he doesn't worry that increases in health care spending outpace inflation. We get what we pay for, in his view; and although Americans now pay, on average, $5,500 more per year on health care than they did in the 1950's, that's a small price to pay for the increased quality of life we now enjoy.

Robert Frank makes a similar point in an article titled "The More We Make, the Better We Want." He points out that we could now afford the lifestyles of our grandparents with only a fraction of our current income, but we choose not to.

Both articles illustrate a central element that drives economic growth: the insatiability of human desires. When Adam Smith wrote The Wealth of Nations, it was an easy argument to suggest that scarcity is a defining principle of life -- for one thing, just getting enough calories to survive was a challenge for a majority of people. But in an era when obesity is a bigger problem for Americans than hunger, it's reasonable to ask why we continue to work so hard. In the words of Keynes (that Frank quotes), "A point may soon be reached, much sooner perhaps than we are all aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to noneconomic purposes." Clearly that point has come and gone, and yet here I am at work. Why?

Frank argues that the answer to this question lies in the understanding of what "basic needs" are. A theme running through much of his work is that people define their needs in relative terms, rather than absolute terms. Thus everyone might want a "good house in a safe neighborhood," but that might mean something very different in Los Angeles than it means in Baghdad. If the rest of society is driving a Camry, then, almost nobody is going to be happy driving a Model T.

Leonhardt argues that the answer to this question lies in the fact that technology--and in particular, medical technology--extends the boundary of what is possible. Living a healthy, full life means something very different in 2006 than it did in 1950, but taking advantage of modern medicine costs money.

1. Suppose you're in the market for a car, and you know that you want something like a Honda Civic. You come upon a brand new 1980 Honda Civic that had never been driven. You could save a lot of money by buying that car rather than a 2006 Civic. You work an hourly job and can choose how many hours you work. Suppose that if you bought a 2006 Civic and worked for 40 hours a week, you could afford to spend $400 per week on other goods. If you bought the 1980 Civic, you could either choose to still spend $400 on other goods and work fewer hours, or you could continue to work a full 40-hour week and spend more than $400 on other goods. Which of these options would you choose?

2. Suppose you meet a genie who offers you a choice: you can live in the 1950's and earn more than 90% of people, or live in the present and earn the average wage. Which would you choose? What if it were the year 1900? Or 1500? (Before you answer, you might want to pause and think a moment about indoor plumbing.)

3. Suppose a medical research project could extend life expectancy from 80 to 100 years. How much should we, as a society, be willing to pay for that project? What about one that extended life expectancy to 120 years? Or 140? Perhaps an easier question to answer might be: how much would you be willing to pay to extend your own life expectancy? What current consumption would you give up to live an additional year?

Real Wages and Productivity

The New York Times reports that real wages, as a percentage of GDP, have fallen to their lowest level in recorded history. The article contains a number of good nuggets that illustrate some basic points in economics.

First, we need to think about what we mean by "wages." A worker's nominal wages are the dollar value of her take-home pay, not including benefits. For example, if a worker earns $20 per hour before taxes, that is her nominal hourly wage. However, a worker's real wages are the wages adjusted for inflation. For example, if a worker's nominal wage rises by 2% and there is 3% inflation, we actually consider her real wages to have dropped by 1%--that is, the value of goods and services she could afford went down by 1%. (In fact, real wages did decrease in 2005: median weekly earnings increased from $631 to $651, an increase of 3.16%, but since inflation was at 3.4%, the $651 in 2005 was actually worth less than the $631 in 2004.)

However, the article doesn't say that real wages have decreased--indeed, with the exception of 2005, real wages have generally increased over the last few years. The article's main point is that as a percentage of GDP, real wages have been steadily declining. In other words, the growth rate of GDP has been steadily greater than the growth rate of wages and salaries.

But that's only part of the story, because wages are just part of workers' overall compensation packages. Health insurance is the other big component. Due to a historical anomaly, employers tend to pay for health insurance for their workers, rather than workers buying it on their own. Therefore, total compensation to workers can be thought of has having two components: wages, which the workers are free to spend as they wish, and a certain amount of money with which they are forced to buy health insurance. In recent years, the price of health insurance has grown at double-digit rates, far outpacing inflation, while wages, as a fraction of the overall compensation package, have been falling.

Note that the increase in health care spending might very well have had the same effect if workers received all of their compensation in cash, and then paid for health insurance out of their own pockets. Since health care is widely viewed as a necessity rather than a luxury, demand for it is relatively inelastic; therefore, as its price goes up, people might very well decrease their expenditures on other goods and services. In other words, the effect of an increase in the price of healthcare means a decrease in consumers' real income, and the fact that wages and salaries don't include benefits serves to highlight this effect.

However, even if we take into account both wages and benefits, overall compensation has still been falling in recent years as a fraction of GDP, while corporate profits have been increasing. Why? Workers have been more productive--that is, creating more output per hour of labor--which has meant higher revenues for firms. Those revenues accrue to different factors of production: wages to workers, rent to capital, and profits to shareholders. The article's main point is that the gains in worker productivity have not accrued to workers, but instead have gone largely to shareholders.

Describing how wages, benefits, and profits have changed over past years is the province of positive analysis. The article raises an important normative question as well: is it fair that wages have not kept pace with productivity? Or that the top 1% of earners received over 11% of all wage income, up from 6% three decades ago? These are important questions as well, but economic analysis is less helpful in answering them.

1. Suppose the U.S. government provided national health insurance for everyone. Do you think wages and salaries would still be falling? What about after-tax wages?

2. The divvying up of the economic pie appears to be a zero-sum game: there is a certain amount of economic surplus out there to be divided between profits and wages, and more of it has been going to profits. Jared Bernstein, a senior economist at the Economic Policy Institute, lays the blame for lower real wages on workers' lack of bargaining power. Would a greater rate of unionization help to achieve greater equity? Would it do so at the expense of efficiency? What about using government taxes and transfers to achieve greater redistribution of income from rich to poor households? Would economic policies aimed at a more equitable division of the economic pie mean a decrease in the size of the pie?

3. If labor markets were perfectly competitive, wages would increase directly with productivity. (For a simulation of how this works, see this demonstration of an interactive experiment based on the classical theory of the labor market.) What about the real labor market is a departure from this model?

Update: This has been a hot topic on the blogosphere. Greg Mankiw, Russell Roberts, and David Altig have posted comments on the article (and others' comments on it). More to follow, I'm sure, and we'll keep you updated.

On Economic Collapse

Early in the recent conflict between Israel and Lebanon, Kai Ryssdal, the anchor on the public radio program
"Marketplace," conducted two interviews: one with an Israeli civilian living in Haifa and another with a journalist living in Beirut. He didn't ask for their feelings and opinions about the war. Instead, he talked to them about the details of their everyday economic lives.

The parallels were striking. Each talked primarily about the supermarkets, or more particularly, what wasn't in the supermarkets. In Israel, there was no bread or milk, because the delivery drivers didn't want to risk being on the roads; in Lebanon, there were long lines for the little that remained. (Remember, too, that these interviews were early in the conflict--as the weeks went on, what little had stocked the shelves was long gone.)

Both interviewees talked about the dangers of travel on the roads. The Israeli military viewed Lebanese roads as strategic targets, and being on the open road in Israel left one vulnerable to rocket attacks.

When we learn about comparative advantage in economics, the theory is rosy. The market, after all, coordinates the efforts of complete strangers from many different countries to produce a product as seemingly simple as a pencil. Missing from most of these discussions are the assumptions underlying the free flow of international trade, including, most importantly, the assurance that the cargo and its transporter will arrive safely at their destination.

In other words, gains from trade can only be realized when the infrastructure is there to support it. It only takes a few days of shelling in the Middle East--or a few days without clean water and electricity in New Orleans--to remind us that the economic web we depend on can be quite fragile.

1. One of the arguments against free trade is that it is unreasonable to depend on foreign suppliers of essential goods like food and energy. Yet free trade also yields incredible benefits. How does an economist balance these two arguments? How would you go about finding the optimal level of domestic and foreign production? Why might the optimal choice for Israel be different than the optimal choice for, say, Singapore or the United States?

2. Economies of scale exist when a few large firms can produce a good or service at a much lower cost than many small firms. For example, massive farms have become the norm in the United States, where a century ago small farms dominated (but had much higher costs). How much of the food you eat comes from farms within 10 or 20 miles of your home? In the case of a major emergency, how long would it take for food shortages to become a major problem? Would the United States be better off if everyone still owned a farm--or are the gains from trade we've realized from specialization large enough to offset that change? How can you tell?

3. The interviewees talk about how expensive it is for Lebanese to evacuate Beirut, and how difficult it is to get cash from ATMs in Israel. Think about the implications of sustained political upheaval on economic growth. In some ways, war acts like a tax, making everything more expensive. Try drawing some supply and demand diagrams for various goods, and guess as to what happens to those markets in times of turmoil. What could the governments of Israel and Lebanon do, if anything, to help alleviate the economic suffering of their people?

Postwar Economics

You'd think that wartime devastation would bode ill for the economic prospects of Iraq's most war-torn cities. For example, you might expect that the Japanese cities of Hiroshima and Nagasaki, which were destroyed by nuclear weapons, would have experienced slower than usual economic growth in the decades following World War II.

Surprisingly, though, long-run economic growth is resilient to the damages of war. Edward Miguel and Gerard Roland, economists at UC Berkeley, examined bombing patterns in Vietnam and found that after a generation, the heavily bombed areas shared more or less identical economic indicators with areas subjected to far less or zero bombing.

So what, in particular, might we expect Iraq's postwar economy to look like in another generation? Austan Goolsbee proposes some answers to these questions in his latest New York Times column. Citing the Miguel-Roland study and others, Goolsbee suggests that the devastation of war, in and of itself, will have minimal bearing on Iraq's prospects for economic recovery. Instead, he argues that Iraq's artificial borders pose the biggest threat to prosperity because they force a contentious mix of ethnic and religious groups to live within the same national boundaries. Read Goolsbee's column to learn more about obstacles to economic recovery in post-war Iraq.

1. Miguel and Roland found no links between the intensity of wartime bombardment and long-term economic performance. What comparisons did they make in order to arrive at this conclusion?

2. The absence of a link between wartime devastation and economic stagnation does not suggest that war is "good" for the economy. Sure, spending during wartime and reconstruction can temporarily accelerate growth, but what are the opportunity costs of going to war or rebuilding afterwards? That is, what do nations forgo when they devote resources to war? Here's an archived entry about the costs of war.

3. Wartime destruction may not create long-term obstacles to economic prosperity, but history does raise some red flags about Iraq's borders. Consider the "Artificial States" hypothesis of economists Alberto Alesina, Janina Matuszeski, and William Easterly: National borders that (1) divide ethnic groups into separate countries or (2) appear unusually straight on the map typically enclose lots of internal ethnic and religious conflict. According to the column, what are the differences between natural and artificial borders? How are the post-war economic recoveries of Japan, Europe, and Vietnam consistent with the "Artificial States" hypothesis?

4. Although more straight-edged than some African nations, the British-drawn Iraqi borders surround a volatile mix of ethnic (Kurd and Arab) and religious (Sunni and Shia) divisions. According to Alesina, in what ways do ethnic (or religious) conflicts divert resources from the pursuit of economic prosperity? How is Iraq's mineral wealth likely to affect its internal ethnic and religious strife? Natural resources and governing institutions are two of the many determinants of economic growth. What does the "Artificial States" study suggest about the relative importance of each?

5. Given the evidence from the "Artificial States" study, what policies, if any, might moderate the internal strife of artificial states? Consider migration policies and the constitutional provision of authority among regional and national governments.