Poverty and income inequality

Peter E. Robertson, 30 March 2015

The Soviets matched the US only by spending up to 20% of GDP on the military during the Cold War. This column argues that, in stark contrast to this example, China has the potential to match the US in certain military spheres with similar burden on its economy. Using exchange rates comparisons significantly understates the Chinese military spending. A much more realistic assessment is obtained using PPP terms. If both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine would be more than 90% of the US one.

Morgan Kelly, Cormac Ó Gráda, 28 March 2015

The Little Ice Age is generally seen as a major event in European history. Analysing a variety of recent weather reconstructions, this column finds that European weather appears constant from the Middle Ages until 1900, and that events like the freezing of the Thames and the disappearance of English vineyards have simpler explanations than changing climate. It appears instead that the European Little Ice Age is a statistical artefact, where the standard climatological practice of smoothing what turn out to be white noise data prior to analysis gives the spurious appearance of irregular oscillation – a Slutsky Effect.

Daron Acemoglu, Asuman Ozdaglar, Alireza Tahbaz-Salehi, 27 March 2015

Understanding large economic downturns is one of macroeconomics’ central goals. This column argues that imbalances in input-output linkages can interact with firm-level shocks to produce output fluctuations that are much larger than the underlying shocks. The result can be large cycles arising from small, firm-level shocks. It is thus important to study the determinants of large economic downturns separately. Macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.

Ana-Maria Fuertes, Elena Kalotychou, Orkun Saka, 26 March 2015

Recent debt crises have brought the fragility of the Eurozone into focus. It has been argued that members are vulnerable to sudden changes in market sentiment. This column examines how debt markets reacted to an ECB announcement that it would serve as a lender of last resort, finding that recent debt crises have strong self-fulfilling dynamics.

Rena M. Conti, Ernst Berndt, David H. Howard, 25 March 2015

Total US prescription drug spending rose 13% in 2014, the biggest increase in a decade. Driving this trend is spending on branded specialty drugs, which rose an unprecedented 31%. This column discusses recent research into the relationship between inflation-adjusted launch prices and survival benefits and approval year for 58 anticancer drugs approved in the US between 1995 and 2013. The authors find that launch prices are going up by $8,500 per year, approximately 12% year over year.

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