Winter 2012 Journal of Economic Perspectives

The Winter 2012 issue of my own Journal of Economic Perspectives is now up on the web. Courtesy of the American Economic Association, this issue and indeed back issues of the journal all the way back through 1994 are freely available on the web. I'll be blogging about some of these papers over the next week or so, but for now, here's the table of contents and and abstract for each article.

Symposium: Energy Challenges


"Is There an Energy Efficiency Gap?" by  Hunt Allcott and Michael Greenstone

Many analysts of the energy industry have long believed that energy efficiency offers an enormous "win-win" opportunity: through aggressive energy conservation policies, we can both save money and reduce negative externalities associated with energy use. In 1979, Daniel Yergin and the Harvard Business School Energy Project estimated that the United States could consume 30 or 40 percent less energy without reducing welfare. The central economic question around energy efficiency is whether there are investment inefficiencies that a policy could correct. First, we examine choices made by consumers and firms, testing whether they fail to make investments in energy efficiency that would increase utility or profits. Second, we focus on specific types of investment inefficiencies, testing for evidence consistent with each. Three key conclusions arise: First, the evidence presented in the long literature on the subject frequently does not meet modern standards for credibility. Second, when one tallies up the available empirical evidence from different contexts, it is difficult to substantiate claims of a pervasive Energy Efficiency Gap. Third, it is crucial that policies be targeted. Welfare gains will be larger from a policy that preferentially affects the decisions of those consumers subject to investment inefficiencies.
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"Creating a Smarter U.S. Electricity Grid," by Paul L. Joskow

This paper focuses on efforts to build what policymakers call the "smart grid," involving 1) improved remote monitoring and automatic and remote control of facilities in high-voltage electricity transmission networks; 2) improved remote monitoring, two-way communications, and automatic and remote control of local distribution networks; and 3) installation of "smart" metering and associated communications capabilities on customer premises so that customers can receive real-time price information and/or take advantage of opportunities to contract with their retail supplier to manage the consumer's electricity demands remotely in response to wholesale prices and network congestion. I examine the opportunities, challenges, and uncertainties associated with investments in "smart grid" technologies. I discuss some basic electricity supply and demand, pricing, and physical network attributes that are critical for understanding the opportunities and challenges associated with expanding deployment of smart grid technologies. Then I cover issues associated with the deployment of these technologies at the high voltage transmission, local distribution, and end-use metering levels.
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"Prospects for Nuclear Power," by Lucas W. Davis

Nuclear power has long been controversial because of concerns about nuclear accidents, storage of spent fuel, and how the spread of nuclear power might raise risks of the proliferation of nuclear weapons. These concerns are real and important. However, emphasizing these concerns implicitly suggests that unless these issues are taken into account, nuclear power would otherwise be cost effective compared to other forms of electricity generation. This implication is unwarranted. Throughout the history of nuclear power, a key challenge has been the high cost of construction for nuclear plants. Construction costs are high enough that it becomes difficult to make an economic argument for nuclear even before incorporating these external factors. This is particularly true in countries like the United States where recent technological advances have dramatically increased the availability of natural gas. The chairman of one of the largest U.S. nuclear companies recently said that his company would not break ground on a new nuclear plant until the price of natural gas was more than double today's level and carbon emissions cost $25 per ton. This comment summarizes the current economics of nuclear power pretty well. Yes, there is a certain confluence of factors that could make nuclear power a viable economic option. Otherwise, a nuclear power renaissance seems unlikely.
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"The Private and Public Economics of Renewable Electricity Generation," by Severin Borenstein

Generating electricity from renewable sources is more expensive than conventional approaches but reduces pollution externalities. Analyzing the tradeoff is much more challenging than often presumed because the value of electricity is extremely dependent on the time and location at which it is produced, which is not very controllable with some renewables, such as wind and solar. Likewise, the pollution benefits from renewable generation depend on what type of generation it displaces, which also depends on time and location. Without incorporating these factors, cost-benefit analyses of alternatives are likely to be misleading. Other common arguments for subsidizing renewable power—green jobs, energy security, and driving down fossil energy prices—are unlikely to substantially alter the analysis. The role of intellectual property spillovers is a strong argument for subsidizing energy science research, but less persuasive as an enhancement to the value of installing current renewable energy technologies.
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"Reducing Petroleum Consumption from Transportation," by Christopher R. Knittel

The United States consumes more petroleum-based liquid fuel per capita than any other OECD high-income country—30 percent more than the second-highest country (Canada) and 40 percent more than the third-highest (Luxembourg). The transportation sector accounts for 70 percent of U.S. oil consumption and 30 percent of U.S. greenhouse gas emissions. Taking the externalities associated with high U.S. gasoline consumption as largely given, I focus on understanding the policy tools that seek to reduce this consumption. I consider four main channels through which reductions in U.S. oil consumption might take place: 1) increased fuel economy of existing vehicles, 2) increased use of non-petroleum-based, low-carbon fuels, 3) alternatives to the internal combustion engine, and 4) reduced vehicle miles traveled. I then discuss how these policies for reducing petroleum consumption compare with the standard economics prescription for using a Pigouvian tax to deal with externalities. Taking into account that energy taxes are a political hot button in the United States, and also considering some evidence that consumers may not "correctly" value fuel economy, I offer some thoughts about the margins on which policy aimed at reducing petroleum consumption might usefully proceed.
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"How Will Energy Demand Develop in the Developing World?" by Catherine Wolfram, Orie Shelef and Paul Gertler

Over the next 25 to 30 years, nearly all of the growth in energy demand, fossil fuel use, associated local pollution, and greenhouse gas emissions is forecast to come from the developing world. This paper argues that the world's poor and near-poor will play a major role in driving medium-run growth in energy consumption. As the world economy expands and poor households' incomes rise, they are likely to get connected to the electricity grid, gain access to good roads, and purchase energy-using assets like appliances and vehicles for the first time. We argue that the current forecasts for energy demand in the developing world may be understated because they do not accurately capture growth in demand along the extensive margin, as low-income households buy their first durable appliances and vehicles. Within a country, the adoption of energy-using assets typically follows an S-shaped pattern: among the very poor, we see little increase in the number of households owning refrigerators, vehicles, air conditioners, and other assets as incomes go up; above a first threshold income level, we see rapid increases of ownership with income; and above a second threshold, increases in ownership level off. A large share of the world's population has yet to go through the first transition, suggesting there is likely to be a large increase in the demand for energy in the coming years.
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Symposium: Higher Education

"The For-Profit Postsecondary School Sector: Nimble Critters or Agile Predators?" by David J. Deming, Claudia Goldin and Lawrence F. Katz

Private for-profit institutions have been the fastest-growing part of the U.S. higher education sector. For-profit enrollment increased from 0.2 percent to 9.1 percent of total enrollment in degree-granting schools from 1970 to 2009, and for-profit institutions account for the majority of enrollments in non-degree-granting postsecondary schools. We describe the schools, students, and programs in the for-profit higher education sector, its phenomenal recent growth, and its relationship to the federal and state governments. Using the 2004 to 2009 Beginning Postsecondary Students (BPS) longitudinal survey, we assess outcomes of a recent cohort of first-time undergraduates who attended for-profits relative to comparable students who attended community colleges or other public or private non-profit institutions. We find that relative to these other institutions, for-profits educate a larger fraction of minority, disadvantaged, and older students, and they have greater success at retaining students in their first year and getting them to complete short programs at the certificate and AA levels. But we also find that for-profit students end up with higher unemployment and "idleness" rates and lower earnings six years after entering programs than do comparable students from other schools and that, not surprisingly, they have far greater default rates on their loans.
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"Student Loans: Do College Students Borrow Too Much--Or Not Enough?" by Christopher Avery and Sarah Turner

Total student loan debt rose to over $800 billion in June 2010, overtaking total credit card debt outstanding for the first time. By the time this article sees print, the continually updated Student Loan Debt Clock will show an accumulated total of roughly $1 trillion. Borrowing to finance educational expenditures has been increasing—more than quadrupling in real dollars since the early 1990s. The sheer magnitude of these figures has led to increased public commentary on the level of student borrowing. We move the discussion of student loans away from anecdote by establishing a framework for considering the use of student loans in the optimal financing of collegiate investments. From a financial perspective, enrolling in college is equivalent to signing up for a lottery with large expected gains—indeed, the figures presented here suggest that college is, on average, a better investment today than it was a generation ago—but it is also a lottery with significant probabilities of both larger positive, and smaller or even negative, returns. We look to available—albeit limited—evidence to assess which types of students are likely to be borrowing too much or too little.
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"American Higher Education in Transition," by Ronald G. Ehrenberg

American higher education is in transition along many dimensions: tuition levels, faculty composition, expenditure allocation, pedagogy, technology, and more. During the last three decades, at private four-year academic institutions, undergraduate tuition levels increased each year on average by 3.5 percent more than the rate of inflation; the comparable increases for public four-year and public two-year institutions were 5.1 percent and 3.5 percent, respectively. Academic institutions have also changed how they allocate their resources. The percentage of faculty nationwide that is full-time has declined, and the vast majority of part-time faculty members do not have Ph.D.s. The share of institutional expenditures going to faculty salaries and benefits in both public and private institutions has fallen relative to the share going to nonfaculty uses like student services, academic support, and institutional support. There are changing modes of instruction, together with different uses of technology, as institutions reexamine the prevailing "lecture/discussion" format. A number of schools are charging differential tuition across students. This paper discusses these various changes, how they are distributed across higher education sectors, and their implications. I conclude with some speculations about the future of American education.
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Articles

"Compensation for State and Local Government Workers," Maury Gittleman and Brooks Pierce

Are state and local government workers overcompensated? In this paper, we step back from the highly charged rhetoric and address this question with the two primary data sources for looking at compensation of state and local government workers: the Current Population Survey conducted by the Bureau of the Census for the Bureau of Labor Statistics, and the Employer Costs for Employee Compensation microdata collected as part of the National Compensation Survey of the Bureau of Labor Statistics. In both data sets, the workers being hired in the public sector have higher skill levels than those in the private sector, so the challenge is to compare across sectors in a way that adjusts suitably for this difference. After controlling for skill differences and incorporating employer costs for benefits packages, we find that, on average, public sector workers in state government have compensation costs 3-10 percent greater than those for workers in the private sector, while in local government the gap is 10-19 percent. We caution that this finding is somewhat dependent on the chosen sample and specification, that averages can obscure broader differences in distributions, and that a host of worker and job attributes are not available to us in these data. Nonetheless, the data suggest that public sector workers, especially local government ones, on average, receive greater remuneration than observably similar private sector workers. Overturning this result would require, we think, strong arguments for particular model specifications, or different data.
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"Recommendations for Further Reading," by Timothy Taylor
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