NOVEMBER 13 2009

Mark A. Wynne and Erasmus K. Kersting, Dallas Fed: Trade, Globalization and the Financial Crisis. Indexing to the peaks in global industrial production in both episodes, global trade fell 32 percent during the first year of the Great Recession, compared with 15 percent during the first year of the Great Depression. As the financial crisis unfolded, U.S. imports fell by more than could be justified by the changes in the fundamentals. We see a similar situation with U.S. exports, using foreign income and the value of the dollar as the fundamental drivers of export growth in a statistical model. The drying up of trade finance may be responsible for trade flows declining by more than fundamentals warrant. We’re still a long way from having a good understanding of the vital role trade financing plays in lubricating the wheels of international commerce, but concerns about deglobalization are in many ways overblown.

Gauti B. Eggertsson, NY Fed: What Fiscal Policy Is Effective at Zero Interest Rates? Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes.

Paul Krugman, NYT Blog: Depression multipliers. There are two problems with estimating multipliers relevant to our current situation. First, you need to look at what happens under liquidity-trap conditions — and except in Japan,these haven’t prevailed anywhere since the 1930s. The second is that in the United States, fiscal policy was never forceful enough to provide a useful natural experiment. Barry Eichengreen and Kevin O’Rourke use a broad international cross-section to overcome this problem. This works because a number of countries had major military buildups during the 1930s — fiscal expansions that can be regarded as exogenous to the economic situation. What do E&R find? Initial fiscal multipliers of 2 or more, although they shrink over time.

Douglas Elmendorf, CBO: Entitlement Spending and the Long-Term Budget Outlook. Federal debt held by the public will equal about 60 percent of GDP by the end of this fiscal year, the highest level since the early 1950s. As a result, further large deficits and increases in the debt will raise serious economic risks. US policy is on an unsustainable path to an extent that cannot be solved by minor tinkering. The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.

Michael Kumhof, Douglas Laxton, IMF: Fiscal Deficits and Current Account Deficits. The effectiveness of recent fiscal stimulus packages significantly depends on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, fiscal deficits can have worrisome implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50 percent of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75 percent for a large economy such as the United States, and almost 100 percent for a small open economy.

William Cohen, Vanity Fair: Endless Summers. Throughout his dazzling but controversial career—top World Bank economist, Treasury secretary, Harvard University president, and now head of the White House National Economic Council—Larry Summers has been his own worst enemy. Tim Geithner, the Treasury secretary: “Larry has not had the jobs he’s had because he’s misunderstood. He’s had them because some of the best leaders in our country understand quite well how much he has to offer.”

Edward L. Glaeser, Harvard: With tax break, a big carbon footprint. The tax code encourages Americans to live in big, energy-guzzling homes, instead of thrifty apartments, and Congress seems intent on further unbalancing the federal budget to egg on home buyers. The stimulus package ”home buyers tax credit” ($8,000) continues the long-standing federal push toward far-flung McMansions and away from dense, apartment living. President Obama could do the country, and the planet, a service by either refusing to sign the extension of the credit or by insisting that it be accompanied by offsetting reductions in the home mortgage interest deduction.

Ann Huff Stevens, Jessamyn Schaller, NBER: Short-run Effects of Parental Job Loss on Children's Academic Achievement. We find that a parental job loss increases the probability of children’s grade retention by 0.8 percentage points, or around 15 percent. After conditioning on child fixed effects, there is no evidence of significantly increased grade retention prior to the job loss, suggesting a causal link between the parental employment shock and children’s academic difficulties. This is in contrast to earlier work that has found only limited evidence of short-run effects of displacement on children’s academic outcomes. These effects are concentrated among children whose parents have a high school education or less.

Will Dobbie, Roland G. Fryer, NBER: Are High Quality Schools Enough to Close the Achievement Gap? Harlem Children's Zone (HCZ), which combines community investments with reform minded charter schools, is one of the most ambitious social experiments to alleviate poverty of our time. We provide the first empirical test of the causal impact of HCZ on educational outcomes, with an eye toward informing the long-standing debate whether schools alone can eliminate the achievement gap or whether the issues that poor children bring to school are too much for educators alone to overcome. Harlem Children's Zone is effective at increasing the achievement of the poorest minority children. Taken at face value, the effects in middle school are enough to close the black-white achievement gap in mathematics and reduce it by nearly half in English Language Arts.

Michèle Belot (Oxford), Jonathan James (Essex): Healthy school meals and Educational Outcomes. This paper provides quasi-experimental evidence exploiting a campaign lead in the UK in 2004 (“Feed Me Better” by Jamie Oliver), which introduced drastic changes in the meals offered in the schools of one Borough – Greenwich, shifting from low-budget processed meals towards healthier options. We find evidence that educational outcomes did improve significantly in English and Science. We also find that the campaign lead to a 15% fall in authorised absences – which are most likely linked to illness and health.

David O. Meltzer, Zhuo Chen, NBER: The impact of minimum wage rates on body weight in the United States. To examine this, we use data from the Behavioral Risk Factor Surveillance System from 1984-2006 to test whether variation in the real minimum wage was associated with changes in body mass index. We find that a $1 decrease in the real minimum wage was associated with a 0.06 increase in BMI. This relationship was significant across gender and income groups and largest among the highest percentiles of the BMI distribution. Real minimum wage decreases can explain 10% of the change in BMI since 1970.

Jan-Emmanuel De Neve, James H. Fowler, LSE: The MAOA Gene Predicts Credit Card Debt. This paper presents the first evidence of a specific gene predicting real world economic behavior. Using data from the National Longitudinal Study of Adolescent Health, we show that individuals with a polymorphism of the MAOA gene that has lower transcriptional efficiency are significantly more likely to report having credit card debt. Having one or both MAOA alleles of the low efficiency type raises the average likelihood of having credit card debt by 7.8% and 15.9% respectively.

Larry Hardesty, MIT: What computer science can teach economics. Many economists assume that, while the Nash equilibrium for a particular market may be hard to find, once found, it will accurately describe the market’s behavior. Constantinos Daskalakis, an assistant professor in MIT’s Computer Science and Artificial Intelligence Laboratory, has showed that some common game-theoretical problems are so hard to calculate that all the computers in the world couldn’t find the Nash equilibrium in the lifetime of the universe. Daskalakis is suggesting that they can’t accurately represent what happens in the real world.