The Stigler Center is dedicated to the study of the reciprocal effects between political life and economic life. This is not a very restrictive program, since there are few areas of society where neither economics nor the state intrudes. Perhaps most importantly, the Stigler Center contributes to the continuity and growth of "Chicago Economics," renowned worldwide for two attributes: (1) a tough-minded professional style that views economic theory not as an end but as a tool to assist in understanding the real world, and (2) a lively appreciation for the working of private markets.
The four papers that are summarized in this issue of Capital Ideas are prime examples of how the Stigler Center is fulfilling its mission. In each case, a careful application of economic analysis allows for both a better understanding of a critical issue facing society and an improved framework for thinking about the choices faced by policy makers dealing with the issue. Chicago-style economic analysis often leads to a surprising conclusion or an unexpected policy recommendation.
In "The Value of Life," Kevin Murphy, winner of a MacArthur "genius" Fellowship in 2005, and Robert Topel demonstrate that the increases in life expectancy in the United States over the past century have had a tremendous economic benefit. Although much hand wringing has accompanied the increases in U.S. health care expenditures over the past 30 years, Murphy and Topel conclude that the benefits from these recent increases have far outweighed the cost of the life-extending advances in medical treatment. Their findings suggest that any proposals to cap health care expenditures should be taken with a grain of salt.
Nobel laureate and GSB professor Gary Becker, along with coauthors Tomas Philipson and Rodrigo Soares, examines the increase in life expectancy from a cross-country perspective in the article "The Upside of Globalization." Becker and his coauthors find that life expectancy has increased faster in the developing world than in the developed world, meaning that medical advances have helped to narrow the gap in the quality of life between the richest and poorest people in the world. Cross-country measures of inequality that focus only on earned income completely disregard these medical advances. Thus, critics of globalization who cite an increasing gap between rich and poor are taking too narrow of a perspective and their arguments are wide of the mark.
Casey Mulligan, along with coauthor Andrei Shleifer, explains why more populous areas also tend to have more laws and regulations in the article "More People, More Problems." Mulligan explains that laws and regulations are only one way to deal with conflicts. Another approach would be essentially ad hoc, with society adjudicating disputes between individuals as they occur. Only when populations become large enough do the benefits of a uniform code of laws and regulations outweigh the fixed costs of setting up laws and regulations. Mulligan and Shleifer�s findings show that population is the key factor when determining the optimal size of a jurisdiction.
In the article on my research, "Is it Better to Forgive than to Receive?", I investigate an important but largely overlooked U.S. experience during the Great Depression to shed light on current debates concerning debt forgiveness. Often used during an economic crisis to avoid the paralysis of massive bankruptcies, across-the-board partial debt forgiveness can, in principle, help both debtors and creditors by reviving a moribund economy and increasing the likelihood that creditors will at least receive some payment from debtors.
Although this effect of removing a so-called debt overhang is often suggested in theory, I found empirical support for the proposition when I collected and analyzed data on the behavior of stock and bond prices around the time of a key Supreme Court decision that effectively relieved debtors of a substantial part of their obligations after the United States stopped using the gold standard. I draw out the parallels between the U.S. situation in the 1930s and Argentina during its recent financial crisis when policy makers engaged in an across-the-board debt reduction after breaking the link between the Argentine peso and the dollar. These findings also have important implications for the efficacy of relief for developing countries with high debt burdens and for bankruptcy reform.
These representative studies demonstrate another hallmark of Chicago Economics: a constant search for new applications of economics. That search is much in evidence at the Stigler Center, with some broad themes emerging from the work of the Center�s researchers.
Economic analysis of government institutions, policies, and regulations affecting the private economy has been central to the work of the Stigler Center since it was established in 1977. This work includes the impact of securities regulation, the link between pollution regulation and politics, the tradeoff between pollution regulation and economic activity, the measurement of regulation, the division between private and public enforcement of criminal law, the effects of public education on productivity, and the impact of corporate taxes on the formation of new corporations.
A related area that has drawn considerable interest from both policy makers and the Center�s research community is corporate governance. This line of research is in the best Chicago empirical tradition of discovering how governance systems and the regulation that shapes them actually work. That approach is represented by research in areas like the recent changes in corporate hierarchies, the effects of taxes on governance systems, how governance differs between regulated and unregulated industries, and the arrangements between venture capitalists and entrepreneurs. The increasing policy interest in the corporate governance area also has stimulated research at the Center on the Sarbanes-Oxley Act and on the issue of whether individuals or corporations should be sanctioned for corporate crimes.
Researchers associated with the Stigler Center have a longstanding interest in issues related to inequality that predates the recent upsurge of public discussion. Stigler Center scholars have examined numerous topics related to inequality including the recent changes in unemployment and wages, racial wage differentials, the welfare system and single-motherhood, the role of competition in education, and the impact of inequality on marriage.
Stigler Center scholars also have a keen interest in issues related to health and health care, as illustrated by the papers highlighted in this issue of Capital Ideas. This is an area of increasing government involvement all over the world, and there is much ongoing discussion of the appropriate extent of that involvement. Stigler Center scholars contribute to this discussion directly through their work on currently important policy areas such as medical advances, the regulation of new drug introductions and drug prices, and the development of vaccines. Center scholars also work on contentious policy issues such as the shortage of organ donations, the war on illegal drugs, and medical malpractice reform.
To carry out its mission, the Stigler Center supports research of faculty at the University of Chicago and of visitors from other academic institutions. The Center publishes a Working Paper series and promotes the dissemination of this research to a wider audience via lectures, debates, conferences, and policy forums. Distinguished lecturers that the Center has brought to campus include Nobel laureate Milton Friedman, former Secretary of State and Secretary of the Treasury (and former GSB dean) George P. Shultz, and former Prime Minister and now President of the Czech Republic Vaclav Klaus. Of late, the Center has sponsored a number of debates among GSB faculty on Social Security reform as well on the economic programs of the candidates in the 2004 election; a conference on the barriers to business creation in emerging markets, emphasizing the importance of property rights protection in fostering entrepreneurship (joint with the Ronald Coase Institute); a conference evaluating the consequences of the euro five years after its introduction (joint with the Federal Reserve Bank of Chicago); and a policy forum on corporate governance reform (joint with the American Enterprise Institute and the Brookings Institution).
Randall S. Kroszner
Professor of Economics; Director of the George J. StiglerCenter for the Study of the Economy and the State at the University of Chicago Graduate School of Business