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Working Group on National Security.

The NBER's Working Group on National Security, directed by NBER President Martin Feldstein of Harvard University, met in Cambridge on February 22. These papers were discussed:

Benjamin F. Jones, Northwestern University and NBER, and Benjamin A. Olken, Harvard University and NBER, "Hit or Miss? The Effects of Assassinations on Institutions and War"

Todd Sandier, University of Texas, and Walter Enders, University of Alabama,

"Economic Consequences of Terrorism on Developed and Developing Countries: An Overview"

Brent Neiman, Harvard University, and Phillip Swagel, U.S. Treasury Department, "The Impact of Post 9/11 Visa Policies on Travel to the United States"

Sandeep Baliga, Northwestern University, and Tomas Sjostrom, Rutgers University, "Strategic Ambiguity and Arms Proliferation"

Stephen I. Miran, Harvard University, "Budget Rules and Defense: Evidence from the EU"

Joseph Cullen, University of Arizona, and Price V. Fishback, University of Arizona and NBER, "Did Big Governments Largesse Help the Locals? The Implications of WWII Spending for Local Economic Activity, 1939-1958" (NBER Working Paper No. 12801)

Assassinations are a persistent feature of the political landscape. Using a new dataset of attempts on the lives of all world leaders from 1875 to 2004, Jones and Olken exploit the inherent randomness in the success or failure of those attempts to identify the effects of assassinations. They find that, on average, successful assassinations of autocrats produce sustained moves toward democracy. They also find that assassinations affect the duration and intensity of small-scale conflicts. These results suggest that individual leaders play key roles in shaping institutions and conflict, and that small sources of randomness, such as perturbations in the path of a single bullet, can have a pronounced effect on history.

The paper by Sandier and Enders has four purposes. First and most importantly, it takes stock of the literature on the economic consequences of terrorism and evaluates the methodology used to date. The literature dates back to the early 1990s, with most of the contributions coming after 9/11. Second, it distinguishes the macroeconomic influences of terrorism from the microeconomic sector- or industry-specific effects. Third, it contrasts terrorism's effects in developed countries with those in developing countries. Fourth, it indicates how researchers can better account for terrorism's economic consequences in developing countries. A basic message of the research is that rich diversified economies are well-equipped to suffer terrorism attacks with little consequences attributable to transference of activities, security responses, and monetary and fiscal policies. Small developing economies are more prone to terrorism.

Neiman and Swagel examine the impact of post-9/11 changes in visa and security policy on business and leisure travel to the United States. American businesses, tourism industry representatives, and politicians pointed to changes in visa policies as leading to a sharp decline in short-term visitors following the September 11 attacks. Several foreign governments likewise complained that visa requirements and other security measures were making it difficult for their citizens to travel to the United States. Using an empirical model that distinguishes the impact of visa policy from economic and country-specific factors, the researchers find that changes in visa policy are not associated with a decrease in travel to the United States. Rather, the reduction in entries was largest among travelers who were not required to obtain a visa.

Baliga and Sjostrom study the impact of strategic ambiguity on arms proliferation and the probability of conflict. Strategic ambiguity is a substitute for actually acquiring new weapons: ambiguity reduces the incentive for a small power to invest in a weapons program, which reduces the risk of arms proliferation. Therefore, strategic ambiguity tends to benefit a big power. On the other hand, strategic ambiguity may hurt the small power because it does not always protect it from an attack. Cheap-talk messages can be used to trigger inspections when they are most valuable to the big power. To preserve incentive compatibility, the "tough" messages that make inspections more likely must imply a greater risk of arms proliferation.

Miran investigates whether the debt limits imposed by the Stability & Growth Pact (SGP) affected defense spending, using three occasions on which changes in defense spending would be expected to occur: the 1999 adoption of the SGP, the 2001 War in Afghanistan, and the 2003 War in Iraq. He finds that deficit constraints have a negative and statistically significant association with defense spending, on the magnitude of 0.2-0.4 percent of GDP. Use of the 1990 Gulf War as a placebo treatment when the SGP did not exist suggests that the same group of countries react to similar circumstances in a different way in the presence of the SGP than they do in its absence.

Cullen and Fishback examine whether local economies that were the centers of federal spending on military mobilization experienced more rapid growth in consumer economic activity than other areas. They rely on combined information from a wide variety of sources that allows them to estimate a reduced-form relationship between retail sales per capita growth (1939-48, 1939-54, 1939-58) and federal war spending per capita from 1940 through 1945. The results show that the World War II spending had virtually no effect on the growth rates in consumption that they examined. This contrasts with Fishback, Horrace, and Kantor's (2005) findings of about half a dollar increase in retail sales in 1939 associated with a dollar of New Deal public works and relief spending during the 1930s. Several factors contributed to this relative lack of impact. World War II spending often required a conversion of plants designed for civilian good production into military factories and back again over the nine-year period. Substantially higher federal tax rates paid by the majority of households imposed much stronger fiscal drags on the benefits of the spending. Finally, less of the military spending was earmarked for wages and use of locally produced inputs, which reduced the direct stimulus to the local economy.
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Title Annotation:Program and Working Group Meetings
Publication:NBER Reporter
Date:Jan 1, 2007
Previous Article:Economic fluctuations and growth.
Next Article:Law and Economics.

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