Freakonomics: A Rogue Economist Explores the Hidden Side of Everything.

By Steven D. Levitt and Stephen J. Dubner. 2005. New York, NY: Harper Collins. Pp 256, $25.95, hardcover, $29.95, (6) compact discs.

Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh -- Potential Growth of the U.S. Economy: Will the Productivity Resurgence Continue?

Rosemary D. Marcuss -- Information Technology and the Data Jungle

Andrew A. Samwick -- Saving for Retirement: Understanding the Importance of Heterogeneity

Beth Anne Wilson and Geoffrey N. Keim -- India and the Global Economy

Rolando F. Peláez -- Using Neural Nets to Forecast the Unemployment Rate

Dong W. Cho -- A Chain-Type Price Index for New Business Jet Aircraft

Thomas A. Hemphill -- Regulatory Reform and the U.S. Manufacturing Sector

Focus on Statistics: Housing Costs in the CPI: What are We Measuring

Book Reviews

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An initial reaction to the book’s title might be that this is another book poking fun at economists; however, beneath the semiserious approach are some excellent examples of economic analysis. The senior author, Steven Levitt, is a professor of economics at the University of Chicago and received the John Bates Clark medal that is awarded every two years by the American Economic Association to the best American economist under 40 years of age. His collaborator, Stephen Dubner, is an author and writer for The New York Times.

The underlying theme of the book is an analysis of how incentives and disincentives influence economic behavior. In the book, Levitt does not offer heavy theoretical analysis or econometric models but rather focuses on phrasing questions and then analyzing economic data to provide answers.

The topics are many and varied. One is whether and why real-estate agents behave differently in pricing the sales of their own homes compared to pricing clients’ homes. Another is whether the use of monetary penalties provides an incentive to parents to pick up their children on time at a day care center or whether the penalty, which is less than the cost of a baby sitter, will rather encourage parents to leave the children until it’s more convenient to get them. Using Chicago public school data, Leavitt searched for evidence of cheating by teachers in order to improve the test scores of their students, given that higher grades will be rewarded by teachers’ promotions and salary increases. He also analyzed the reasons behind a significant drop in the crime rate in the nation’s cities in the late 1960s, raising the question of whether the decrease could be attributed to more aggressive police work (the number of police increased while the crime rate decreased) or to an increase in the number of abortions, which may have reduced the number of potential criminals.

Another topic to which Leavitt has applied empirical tests is cheating in Japanese Sumo wrestling, where a small shift in ranking can have a significant impact on the rewards to the wrestler and the organization to which his team belongs. He also asks whether parents help or hinder the success of their children by the names they give them, because some names may imply ethnic origin and lead to discrimination. He compares a U.S. business organization with the organization of a business that sells crack cocaine on the Chicago streets, complete with a board of directors, officers, books of account, and an employee hierarchy. All of these questions are pursued by an extensive analysis of available data, and the results are at times surprising.

Underlying these analyses are illustrations of the use of incentives and also the necessity of asking the right questions in performing economic analysis. Recalling lessons we learned in elementary statistics, he cautions against confusing correlation and causality, i.e., A may be correlated with B, but it does not follow that A causes B; B may cause A, or both may be influenced by a third factor. Improvements in students’ examination scores may be caused by better teachers or may be caused by teachers inappropriately helping students achieve better grades.

A valuable asset of the book is the availability of CDs in which Dubner reads the text in an engaging manner. The use of the CDs was an experiment suggested by your book review editor to see whether listening to the audio version would be of assistance to someone with impaired vision. The results were an unqualified success, and the discs would also provide useful education during a freeway traffic jam or to while away idle hours. For those to whom learning is more of an aural than a visual experience, the CDs are very worthwhile.

An additional use of the books or recordings would be as a gift to noneconomists to make the subject of economics less intimidating. The book was particularly welcomed by my grandsons, who are struggling with heavy doses of mathematical analysis in introductory college economics courses. The book rekindled an interest in the subject, inasmuch as—unlike the presentations of formal results—it presented application of economics to the experiences of everyday life.

Reviewed by Edmund A. Mennis, Investment Management Consultant, Palos Verdes Estates, CA

Flying on One Engine: The Bloomberg Book of Master Market Economists: Fourteen Views on the World Economy

By Thomas R. Keene, ed. 2005. New York, NY: Bloomberg Press. Pp. 304, $39.95 hardcover.

Economic commentaries by the fourteen respected Wall Street economists contributing to this book already have met the market test: people pay to read them. It is clear why. The writers have good rhetorical skills. They provide guided tours of recent economic developments that, they argue, presage the shape of things to come. The arguments are effective because, as Steven Levitt said in Freakonomics, the economy is “a thicket of information about jobs and real estate and banking and investment.” So, an argument about the economy is good for the soul because it cuts through the thicket.

The essays share the focus of divining upcoming events, but they approach this focus in different ways. Some offer particular economic indicators. Some question conventional wisdom about the state of things or conventional interpretation of popular indicators. Some explain how things work. Some focus on long-term prospects. Most offer several of those.

In offering economic indicators, Richard Berner argues that investors should pay more attention to corporate profits and returns on investment. He describes why and how corporate operating leverage increased as a result of investment in labor-saving equipment during the technology boom of the 1990s. Moreover, he explains that the increase in corporate leverage over the 1990s made profits more sensitive to growth and, therefore, a better indicator than was previously the case.

David Malpass looks at credit spreads, industrial materials’ prices, and the yield curve as indicators of growth. He extracts from each an aspect of the relationship between monetary policy and the prospect for growth.

John Lipsky and James Glassman use the labor market as an indicator of economic activity. That means tracking compensation and hours in addition to the harder-to-read net job growth. They also explain how recent cyclically-induced variations in labor-force participation can result in misinterpretation of the headline employment rate.

Tim O’Neill makes the uncommon but persuasive case that trade patterns have become more regional and less global over the past 25 years, despite conventional wisdom that globalization is inexorable. Thomas Mayer argues that Europe faces more of the relative political and economic decline that has dogged it since the turn of the last century. His view might not qualify as unconventional; but his clear, succinct essay will convince the ambivalent.

William Dudley and Edward McKelvey describe the growing longer-term structural budget deficit that is fueled by the burgeoning retiree population drawing Medicare entitlements, far more than it is by their drawing Social Security benefits. They also provide a lucid explanation of the “vicious circle” in which the budget deficit adversely affects investment and productivity growth, which, in turn, reduces income-tax receipts and further boosts the deficit. They distinguish behavioralresponse links in the cycle from price-response links, and they define terms that are often used loosely in that discussion.

Like Mayer, Thomas Gallagher takes a long view. He evaluates the long-term political prospects for economic- growth-supporting policies and argues that the “return of big government” has dimmed the prospect for long-term deficit reduction. He adds that free trade is “an unnatural political act” for legislators, which will raise the stakes on the effectiveness of supranational organizations like the World Trade Organization and the International Monetary Fund.

It is frequently said that insights provided by economists are sapped by their inevitable disagreement with each other. Will fourteen feisty economic essays in one book nullify each other? This is a test of that proposition. Sometimes, the contributors do differ. For example, John Ryding argues that commodity price increases indicate inflationary pressures to come, but David Rosenberg disagrees. Rosenberg is convinced by historically-low rates of pass-through from commodity prices to producer and consumer prices.

For the most part, however, the writers do not disagree; and that is not surprising: habitual disagreement among economists is something of an unfair rap. Novelists differ for the same reasons economists do—there is a lot of territory out there to cover— but novelists are treated more kindly. And, sometimes apparent differences between economists are reflections of style, not content. The book provides a good example of that. Kathleen Stephansen and Dudley and McKelvey emphasize the same fiscalpolicy imperative—the structural budget deficit presents a chronic, growing problem that must be addressed right away, notwithstanding the short-term cost of the painful adjustments. Yet, Stephansen’s essay is an upbeat description of the domestic and international benefits of the expansive U.S. fiscal stimulus in recent years; while Dudley’s and McKelvey’s essay is entitled “The U.S. Fiscal Deficit: Not a Moment to Lose.”

There are a few things in the book that will frustrate readers. The essays were written at different times. The range seems to be from early 2004 to early 2005, although the exact dates are difficult to ascertain. That puts some short-term outlooks out-of-sync with others. Also, composing economic stories is everywhere bedeviled by disparity among the starting and ending dates for measuring trends and activity ranges. Lack of synchronization occasionally will confuse readers of these essays. In some essays, the effectiveness of graphs is impeded by different scales for common measures, quirky time periods, and the citation of secondary providers as data sources. In most cases, however, the graphs add substantially to the stories.

Flying on One Engine is well worth reading, even re-reading when a subject is found, yet again, to be less well-described elsewhere. The essays are best read with breaks in between—perhaps as subway reading rather than airplane reading— because their strength is their rigor, not their coherence. That each essay is likely to be read, despite the breaks, is a tribute to the authors, each of whom knows how to tell a good economic story. Rosemary D. Marcuss U.S. Bureau of Economic Analysis

Review by Rosemary D. Marcuss, U.S. Bureau of Economic Analysis