Kimberly Beaton, Bank of Canada: Credit Constraints and Consumer Spending. Consumer spending falls (rises) in response to a reduction (increase) in credit availability. Large changes in credit availability are particularly important for consumers’ spending decisions. These periods tend to be associated with periods of high economic uncertainty. Credit availability should be taken into account when modeling and forecasting consumer spending.
Lillian Cheung et al, Hong Kong Bank: Deteriorating public finances and rising government debt: implications for monetary policy. The sharp rise in government debt in many major economies following the introduction of large fiscal stimulus measures during the global financial crisis of 2008-09 has triggered concerns over its impact on long-term interest rates and the potential negative consequences for future growth and inflation. This paper shows that in the long run, a one-percentage-point increase in the federal debt-to-GDP ratio raises the equilibrium 10-year real US Treasury yield by about six basis points.
Ravi Balakrishnan et al, IMF, WEO: What’s the Damage? Medium-Term Output Dynamics after Financial Crises. This chapter concentrate on medium-term developments following financial crises in advanced, emerging, and developing economies over the past 40 years. The path of output tends to be depressed substantially and persistently following banking crises, with no rebound on average to the precrisis trend over the medium term. Initial conditions have a strong influence on the size of the output loss. What happens to short-term output is also a good predictor of the medium-term outcome. The medium-term output loss is not inevitable. Some economies succeed in avoiding it, ultimately exceeding the precrisis trajectory.
Peter S. Goodman, NYT: U.S. Job Seekers Exceed Openings by Record Ratio. Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.
Lucian A. Bebchuk, Holger Spamann, Harvard University: Regulating Bankers' Pay. Equity-based awards, coupled with the capital structure of banks, tie executives’ compensation to a highly levered bet on the value of banks’ assets. Because bank executives expect to share in any gains that might flow to common shareholders, but are insulated from losses that the realization of risks could impose on preferred shareholders, bondholders, depositors, and taxpayers, executives have incentives to give insufficient weight to the downside of risky strategies. Corporate governance reforms aimed at aligning the design of executive pay arrangements with the interests of banks’ common shareholders cannot eliminate the problem.
Markus Jäger, VoxEU: Will the BRICs (read: China) really become the new global growth engine? Can the BRICs replace the much-touted US consumer as the world’s main growth engine? Jäger says the Chinese economy will continue to increase relative to all others, while the US share of global output will stagnate. But while China’s relative contribution to global growth will increase, it won’t be “driving” growth in the developed economies.
Robert J. Gordon, NBER: Misperceptions about the magnitude and timing of changes in american income inequality. The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Recent contributions in the inequality literature have raised questions about previous research on skill-biased technical change and the managerial power of CEOs. Directly supporting our theme of prior exaggeration of the rise of inequality is new research showing that price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor. Further, as much as two-thirds of the post-1980 increase in the college wage premium disappears when allowance is made for the faster rise in the cost of living in cities where the college educated congregate and for the lower quality of housing in those cities.
Dave E. Marcotte et al, NBER: A cure for crime? Psycho-pharmaceuticals and crime trends. We examine limited international data, as well as more detailed American data to assess the relationship between crime rates and rates of prescriptions of the main categories of psychotropic drugs, while controlling for other factors which may explain trends in crime rates. We find that increases in prescriptions for psychiatric drugs in general are associated with decreases in violent crime, with the largest impacts associated with new generation antidepressants and stimulants used to treat ADHD. Our estimates imply that
about 8.5 percent of the recent crime drop was due to expanded mental health treatment.
Monday, September 28, 2009
Friday, September 18, 2009
SEPTEMBER 21 2009
Jacob Gyntelberg et al, BIS: Overview: cautious optimism on gradual recovery. Generally, markets continued to show signs of normalising, as risk tolerance edged further upwards and risk premia receded. In interbank money markets, key spreads narrowed to levels not seen since the beginning of 2008, and in some cases even further. Improvements were also visible in creditmarkets, although important segments continued to rely on central bank support.
Economist View: After Krugman. What's Wrong with Macroeconomics? Some recent contributions.
John H. Cochrane, University of Chicago: How did Paul Krugman get it so Wrong? Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?” Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. If a scientist, he might be an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.
Robert E. Hall, Stanford University: By How Much Does GDP Rise If the Government Buys More Output? During World War II and the Korean War, real GDP grew by about half the amount of the increase in government purchases. With allowance for other factors holding back GDP growth during those wars, the multiplier linking government purchases to GDP may be in the range of 0.7 to 1.0. New Keynesian macro models have purchases multipliers in that range as well. . On the other hand, neoclassical models have a much lower multiplier, because they predict that consumption falls when purchases rise.
Anthony Faiola, Washington Post: World's Wealthy Pay a Price In Crisis. Hobbled by soaring debt and ballooning public spending amid the global financial crisis, the British government is joining others around the globe in tapping the wealthy to cover massive shortfalls. Observers say it is part of a far broader campaign in the wake of the Great Recession -- including curbs on bankers' pay and a rigorous global hunt for tax cheats from Switzerland to Singapore -- that is suddenly putting the world's wealthy on notice.
William Congdon et al, NBER: Behavioral Economics and Tax Policy. Behavioral economics is changing our understanding of how economic policy operates, including tax policy. In this paper, we consider how it changes our understanding of the welfare consequences of taxation, the relative desirability of using the tax system as a platform for policy implementation, and the role of taxes as an element of policy design.
Neil Gandal, VoxEU: Obesity and price sensitivity at the supermarket. Is increasing obesity due to changes in relative food prices? High-energy density foods are less expensive per calorie than fresh fruits and vegetables. Using data from Israel, this column shows that price sensitivity has a significant impact on obesity. In fact, price sensitivity may be more crucial than income.
Kelly D. Brownell, NEJM: The Public Health and Economic Benefits of Taxing Sugar-Sweetened Beverages. The US federal government, a number of states and cities, and some countries (e.g., Mexico) are considering levying taxes on sugar-sweetened beverages. The reasons to proceed are compelling. The science base linking the consumption of sugar-sweetened beverages to the risk of chronic diseases is clear. Escalating health care costs and the rising burden of diseases related to poor diet create an urgent need for solutions, thus justifying government's right to recoup costs. As with any public health intervention, the precise effect of a tax cannot be known until it is implemented and studied, but research to date suggests that a tax on sugar-sweetened beverages would have strong positive effects on reducing consumption. In addition, the tax has the potential to generate substantial revenue to prevent obesity and address other external costs resulting from the consumption of sugar-sweetened beverages, as well as to fund other health-related programs.
Robert N. Stavins et al, Harvard: Too Good to Be True? An Examination of Three Economic Assessments of California Climate Change Policy. California studies substantially underestimate the cost of meeting California’s 2020 target. They underestimate costs by omitting important components of the costs of emission reduction efforts, and by overestimating offsetting savings that some of those efforts yield through improved energy efficiency. In some cases, the studies focus on the costs of particular actions to reduce emissions, but fail to consider the effectiveness and costs of policies that would be necessary to bring about such actions.
Ran Abramitzky Leah Platt Boustan, Katherine Eriksson, Stanford University, UCLA: Europe’s tired, poor, huddled masses: Self-selection and economic outcomes in the age of mass migration. We construct a novel data set of Norway-to-US migrants and their brothers. Because brothers share a family environment, the earnings of brothers who remained in Norway provide our best estimate for what migrants’ earnings would have been had they not migrated. A naive comparison of all Norwegian-born men residing in Norway and the US produces returns to migration of 93 percent for those leaving rural areas and 42 percent for those leaving urban areas. Larger within-brother estimates of the returns to migration from urban areas suggest a process of negative selection.
The Economists Global frightening Debt Watch.
Tim Harford: The Economist’s Guide to Happiness. Spend less time with your children. Don’t underestimate the benefits of a divorce. Never serve dog food at a dinner party. These are some of the unexpected revelations to have emerged from an unlikely combination: happiness, and economists.
Economist View: After Krugman. What's Wrong with Macroeconomics? Some recent contributions.
John H. Cochrane, University of Chicago: How did Paul Krugman get it so Wrong? Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?” Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. If a scientist, he might be an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.
Robert E. Hall, Stanford University: By How Much Does GDP Rise If the Government Buys More Output? During World War II and the Korean War, real GDP grew by about half the amount of the increase in government purchases. With allowance for other factors holding back GDP growth during those wars, the multiplier linking government purchases to GDP may be in the range of 0.7 to 1.0. New Keynesian macro models have purchases multipliers in that range as well. . On the other hand, neoclassical models have a much lower multiplier, because they predict that consumption falls when purchases rise.
Anthony Faiola, Washington Post: World's Wealthy Pay a Price In Crisis. Hobbled by soaring debt and ballooning public spending amid the global financial crisis, the British government is joining others around the globe in tapping the wealthy to cover massive shortfalls. Observers say it is part of a far broader campaign in the wake of the Great Recession -- including curbs on bankers' pay and a rigorous global hunt for tax cheats from Switzerland to Singapore -- that is suddenly putting the world's wealthy on notice.
William Congdon et al, NBER: Behavioral Economics and Tax Policy. Behavioral economics is changing our understanding of how economic policy operates, including tax policy. In this paper, we consider how it changes our understanding of the welfare consequences of taxation, the relative desirability of using the tax system as a platform for policy implementation, and the role of taxes as an element of policy design.
Neil Gandal, VoxEU: Obesity and price sensitivity at the supermarket. Is increasing obesity due to changes in relative food prices? High-energy density foods are less expensive per calorie than fresh fruits and vegetables. Using data from Israel, this column shows that price sensitivity has a significant impact on obesity. In fact, price sensitivity may be more crucial than income.
Kelly D. Brownell, NEJM: The Public Health and Economic Benefits of Taxing Sugar-Sweetened Beverages. The US federal government, a number of states and cities, and some countries (e.g., Mexico) are considering levying taxes on sugar-sweetened beverages. The reasons to proceed are compelling. The science base linking the consumption of sugar-sweetened beverages to the risk of chronic diseases is clear. Escalating health care costs and the rising burden of diseases related to poor diet create an urgent need for solutions, thus justifying government's right to recoup costs. As with any public health intervention, the precise effect of a tax cannot be known until it is implemented and studied, but research to date suggests that a tax on sugar-sweetened beverages would have strong positive effects on reducing consumption. In addition, the tax has the potential to generate substantial revenue to prevent obesity and address other external costs resulting from the consumption of sugar-sweetened beverages, as well as to fund other health-related programs.
Robert N. Stavins et al, Harvard: Too Good to Be True? An Examination of Three Economic Assessments of California Climate Change Policy. California studies substantially underestimate the cost of meeting California’s 2020 target. They underestimate costs by omitting important components of the costs of emission reduction efforts, and by overestimating offsetting savings that some of those efforts yield through improved energy efficiency. In some cases, the studies focus on the costs of particular actions to reduce emissions, but fail to consider the effectiveness and costs of policies that would be necessary to bring about such actions.
Ran Abramitzky Leah Platt Boustan, Katherine Eriksson, Stanford University, UCLA: Europe’s tired, poor, huddled masses: Self-selection and economic outcomes in the age of mass migration. We construct a novel data set of Norway-to-US migrants and their brothers. Because brothers share a family environment, the earnings of brothers who remained in Norway provide our best estimate for what migrants’ earnings would have been had they not migrated. A naive comparison of all Norwegian-born men residing in Norway and the US produces returns to migration of 93 percent for those leaving rural areas and 42 percent for those leaving urban areas. Larger within-brother estimates of the returns to migration from urban areas suggest a process of negative selection.
The Economists Global frightening Debt Watch.
Tim Harford: The Economist’s Guide to Happiness. Spend less time with your children. Don’t underestimate the benefits of a divorce. Never serve dog food at a dinner party. These are some of the unexpected revelations to have emerged from an unlikely combination: happiness, and economists.
Friday, September 11, 2009
SEPTEMBER 11 2009
Alan Blinder, Foreign Affairs: The Fed's Political Problem. As the financial crisis continues, the U.S. Congress is considering a bill that would jeopardize the independence of the Federal Reserve. This is a shame. Monetary policy should be protected from congressional politics.
J. James Reade, Ulrich Volz, VoxEU: Should Sweden join the Eurozone? The global financial crisis has revived euro deliberations in Sweden. This column argues that Sweden ought to join the eurozone. It says that Swedish monetary independence is an illusion, as Swedish money market rates are driven by the policies of the ECB. Sweden would gain more by taking a seat at the ECB table than remaining a passive bystander.
John C. Williams, Fed San Francisco: Heeding Daedalus: Optimal Inflation and the Zero Lower Bound. If recent events are a harbinger of a significantly more adverse macroeconomic climate than experienced over the previous two decades, then a 2 percent steady-state inflation rate may be insufficiently high to stop the ZLB from having significant deleterious effects on the macroeconomy if the central bank follows the standard Taylor Rule. In such an adverse environment, stronger systematic countercyclical fiscal policy and/or alternative monetary policy strategies designed to mitigate the effects of the ZLB are needed for a 2 percent inflation target to provide a sufficient buffer.
Christina Romer et al, White House: The economic impact of the American recovery and reinvestment act of 2009. Estimates of the impact of the ARRA made by comparing actual economic performance to the predictions of a plausible, statistical baseline suggest that the Recovery Act added roughly 2.3 percentage points to real GDP growth in the second quarter and is likely to add even more to growth in the third quarter.
Gary Becker, Becker-Posner Blog: Productivity, Unemployment, and the End of the Recession. Productivity advances will lead the world out of the recession, and after a while toward a decent rate of growth in world GDP. These advances will occur even if the financial sector is not fully recovered from its crisis. As productivity advances continue at robust levels, that will stimulate the demand for labor, and begin to reduce unemployment and produce sizable rates of growth in employment.
John Cochrane, AQR: Nightmare Scenario. A long-term federal budget problem triggers a flight from the dollar, which has already fallen in value, a rise in long-term interest rates, followed by inevitable inflation. In turn high marginal rates can lower long-term growth, which makes eventual deficits worse. Phasing out health insurance subsidies as income rises amounts to such a high tax rate, and distorts people’s incentive to work.
Paola Giuliano, Antonio Spilimbergo, NBER: Growing up in a recession: Beliefs and the macroeconomy. We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. We show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.
Marika Santoro, CBO: Will the Demand for Assets Fall When the Baby Boomers Retire? Although the retirement of the baby boomers is not likely to cause a large decline in aggregate demand for assets, several economic studies suggest that the retirement and aging of baby boomers could cause a temporary decrease in asset prices. That prediction of a temporary decrease is based on the studies’ theoretical prediction that the retirement of baby boomers will cause the demand for assets to fall more rapidly than the installed stock of capital will be reduced, causing asset prices to fall while the capital stock adjusts. Empirical evidence, however, has not revealed much connection between demographic trends and the changes observed in financial markets.
J. James Reade, Ulrich Volz, VoxEU: Should Sweden join the Eurozone? The global financial crisis has revived euro deliberations in Sweden. This column argues that Sweden ought to join the eurozone. It says that Swedish monetary independence is an illusion, as Swedish money market rates are driven by the policies of the ECB. Sweden would gain more by taking a seat at the ECB table than remaining a passive bystander.
John C. Williams, Fed San Francisco: Heeding Daedalus: Optimal Inflation and the Zero Lower Bound. If recent events are a harbinger of a significantly more adverse macroeconomic climate than experienced over the previous two decades, then a 2 percent steady-state inflation rate may be insufficiently high to stop the ZLB from having significant deleterious effects on the macroeconomy if the central bank follows the standard Taylor Rule. In such an adverse environment, stronger systematic countercyclical fiscal policy and/or alternative monetary policy strategies designed to mitigate the effects of the ZLB are needed for a 2 percent inflation target to provide a sufficient buffer.
Christina Romer et al, White House: The economic impact of the American recovery and reinvestment act of 2009. Estimates of the impact of the ARRA made by comparing actual economic performance to the predictions of a plausible, statistical baseline suggest that the Recovery Act added roughly 2.3 percentage points to real GDP growth in the second quarter and is likely to add even more to growth in the third quarter.
Gary Becker, Becker-Posner Blog: Productivity, Unemployment, and the End of the Recession. Productivity advances will lead the world out of the recession, and after a while toward a decent rate of growth in world GDP. These advances will occur even if the financial sector is not fully recovered from its crisis. As productivity advances continue at robust levels, that will stimulate the demand for labor, and begin to reduce unemployment and produce sizable rates of growth in employment.
John Cochrane, AQR: Nightmare Scenario. A long-term federal budget problem triggers a flight from the dollar, which has already fallen in value, a rise in long-term interest rates, followed by inevitable inflation. In turn high marginal rates can lower long-term growth, which makes eventual deficits worse. Phasing out health insurance subsidies as income rises amounts to such a high tax rate, and distorts people’s incentive to work.
Paola Giuliano, Antonio Spilimbergo, NBER: Growing up in a recession: Beliefs and the macroeconomy. We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. We show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.
Marika Santoro, CBO: Will the Demand for Assets Fall When the Baby Boomers Retire? Although the retirement of the baby boomers is not likely to cause a large decline in aggregate demand for assets, several economic studies suggest that the retirement and aging of baby boomers could cause a temporary decrease in asset prices. That prediction of a temporary decrease is based on the studies’ theoretical prediction that the retirement of baby boomers will cause the demand for assets to fall more rapidly than the installed stock of capital will be reduced, causing asset prices to fall while the capital stock adjusts. Empirical evidence, however, has not revealed much connection between demographic trends and the changes observed in financial markets.
SEPTEMBER 4 2009
Paul Krugman, NYT: How Did Economists Get It So Wrong? It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. Last year, everything came apart. Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.
Kenneth Rogoff, Koreatimes: From Financial Crisis to Debt Crisis? We are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation. Even the U.S., for example, significantly inflated down its debt in the 1970s. The rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years. Most worrisome is America's huge dependence on foreign borrowing, particularly from China ― an imbalance that likely planted the seeds of the current crisis. The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening.
Murat Tasci, Kyle Fee, Fed Cleveland: The Incidence and Duration of Unemployment over the Business Cycle. Longer durations as a result of lower outflows may reflect a permanent mismatch of skills among the unemployed. Workers who are out of a job for a long time lose skills, and their human capital in general deteriorates. To the extent that this is true, we might expect to have an unemployment rate that stays relatively higher even after the recession. As a matter of fact, looking at every recessionary episode in the post-World War II era, we do see a positive relationship between the fraction of the unemployment increase that is due to a decline in outflows and the magnitude of the decline in unemployment during the recovery. The current downturn might end up being one of the most severe recessions we have experienced in the labor market. Similarly, it is likely to be become one of the longest contractions in employment, hence longer unemployment durations might just be due to the duration of the recession.
Jonathan Hersh, Hans-Joachim Voth, VoxEU: Coffee, consumer choice, and the consequences of Columbus. There is a broad consensus that living standards stagnated for millennia before the Industrial Revolution. This column attributes that conclusion to a measurement error in real wage indices. The introduction of new goods such as coffee, sugar, and tea to England in the 1700s and 1800s dramatically raised living standards – perhaps more than 15%.
Kenneth Rogoff, Koreatimes: From Financial Crisis to Debt Crisis? We are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation. Even the U.S., for example, significantly inflated down its debt in the 1970s. The rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years. Most worrisome is America's huge dependence on foreign borrowing, particularly from China ― an imbalance that likely planted the seeds of the current crisis. The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening.
Murat Tasci, Kyle Fee, Fed Cleveland: The Incidence and Duration of Unemployment over the Business Cycle. Longer durations as a result of lower outflows may reflect a permanent mismatch of skills among the unemployed. Workers who are out of a job for a long time lose skills, and their human capital in general deteriorates. To the extent that this is true, we might expect to have an unemployment rate that stays relatively higher even after the recession. As a matter of fact, looking at every recessionary episode in the post-World War II era, we do see a positive relationship between the fraction of the unemployment increase that is due to a decline in outflows and the magnitude of the decline in unemployment during the recovery. The current downturn might end up being one of the most severe recessions we have experienced in the labor market. Similarly, it is likely to be become one of the longest contractions in employment, hence longer unemployment durations might just be due to the duration of the recession.
Jonathan Hersh, Hans-Joachim Voth, VoxEU: Coffee, consumer choice, and the consequences of Columbus. There is a broad consensus that living standards stagnated for millennia before the Industrial Revolution. This column attributes that conclusion to a measurement error in real wage indices. The introduction of new goods such as coffee, sugar, and tea to England in the 1700s and 1800s dramatically raised living standards – perhaps more than 15%.
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