NOVEMBER 27 2009

Martin Feldstein: Can the Euro Zone Survive Economic Recovery? The economic recovery that the euro zone anticipates in 2010 could bring with it new tensions. Indeed, in the extreme, some countries could find themselves considering whether to leave the single currency altogether.

Paul Krugman, NYT Blog: No exit. The latest forecast are out. The Fed expects unemployment to come down only very gradually — over 9 percent at the end of 2010, over 8 percent at the end of 2011, around 7 percent at the end of 2012. Inflation, meanwhile is expected to remain consistently below the Fed’s target. Which raises the question, why is anyone talking about an “exit strategy”? On the Fed’s own forecasts, the economy will remain seriously depressed three years from now.

Martin Ellison, Thomas J. Sargent, VoxEU: Bad forecasters can be good policymakers. The Federal Reserve Open Market Committee has been criticised for making forecasts that are inferior to Federal Reserve staff forecasts. This column argues that FOMC forecasts are worst-case scenarios used to inform policy decisions, rather than best estimates of future events. It says that FOMC forecasts are a rational response to doubts about the staff’s model.

Charles Steindel, NY Fed: Implications of the Financial Crisis for Potential Growth: Past, Present, and Future. The scale of the recent collapse in asset values and the magnitude of the recession suggest that activities connected to the increase in values over the 2002-07 period―notably, expansion of the financial markets, homebuilding, and real estate―were overstated. If this is true, aggregate U.S. economic growth would have been overstated, implying that previous rates of potential gross domestic product (GDP) growth may also have been overstated and that the trajectory of potential GDP may be slower going forward. Slowing growth in the finance, homebuilding, and real estate sectors could hold back aggregate growth. A detailed examination of these sectors’ direct contributions to GDP, however, suggests that overstatements of past growth would likely not have made a large difference in recorded GDP growth. Slower growth in these sectors would have, at most, a moderate direct effect on aggregate economic activity. The recent experience’s longer term effects on GDP would seem to stem largely from factors other than the retrenchment in these sectors."

Martin Wolf, FT Blog: Tax the windfall banking bonuses. Windfall taxes are a ghastly idea. But banks are making exceptional profits because they are beneficiaries of unlimited state insurance. Profits being made today are also in large part the fruit of the free money provided by the central bank. I now find the idea of a windfall tax on banks appealing.

John H. Bishop, Cornell: The Case for a Job-Creation Tax Credit. Employers would have to expand their payrolls on net to qualify for the credit, in order to prevent companies from simply firing and rehiring people. They would then receive a 15 percent rebate on any increase in their 2010 wage bill over their 2009 level. Firms would also receive a 10 percent rebate for the increase of their 2011 wage bill over the 2009 wage bill.

Douglas J. Elliott, Martin Neil Baily, Brookings: Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble. We believe there were many factors that led to the financial crisis and which explain its intensity. These causes reflect mistakes, bad incentives, and flawed structures across the board: in the financial markets, among regulators and government officials, and in our larger society. We believe it would be a tragic error to operate under the assumption that the massive blow to our economy from which we are slowly recovering was the result simply of a huge housing bubble. The danger of this belief is that it provides arguments for inaction on many of the problems that we see continuing to exist in our financial markets and institutions and their regulation. If we are correct, the chances of another major blow‐up in the next decade or two are much higher than one would assume when judging the crisis as effectively just a housing bubble of mammoth proportions.

Daron Acemoglu, MIT: What Makes a Nation Rich? Could it be that people in hot places are inherently lazy, or that Protestant work ethic is the true driver of economic success? Or perhaps the richest countries are those that were former British colonies? Or maybe it's as simple as tracing which nations have the largest populations of European descent? Jeffrey Sachs attributes the relative success of nations to geography and weather. Jared Diamond, the famous ecologist and best-selling author, thinks the origin of world inequality stems from the historical endowment of plant and animal species and the advancement of technology. The problem with all of these theories is that while they superficially fit some specific cases, others radically disprove them. They all offer some insight into certain aspects of poverty, but they all ignore incentives. People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. That's what determines the haves from the have-nots.

Thomas Dee, Brian Jacob, NBER: The Impact of No Child Left Behind on Student Achievement. The impact of NCLB is identified using a comparative interrupted time series analysis that relies on comparisons of the test-score changes across states that already had school-accountability policies in place prior to NCLB and those that did not. Our results indicate that NCLB generated statistically significant increases in the average math performance of 4th graders (effect size = 0.22 by 2007) as well as improvements at the lower and top percentiles. There is also evidence of improvements in 8th grade math achievement, particularly among traditionally low-achieving groups and at the lower percentiles. However, we find no evidence that NCLB increased reading achievement in either 4th or 8th grade.

Mark J. Perry's Blog for Economics and Finance: U.S. Share of World GDP Remarkably Constant. U.S. share of world GDP has been relatively constant for the last 40 years, and is actually slightly higher in 2009 (26.7%) that it was in 1975 (26.3%). It's also interesting that the EU15's share of world GDP has declined from about 36% of world output in 1969 to only 27% in 2009.

Rebecca Smith, WSJ: Nothing to Sneeze At: Doctors' Neckties Seen as Flu Risk. Hospitals Propose Bans, but Old-Schoolers Resist Loosening Up; a Germ-Free Design.

Luiz de Mello, Pires, Ricardo, American Association Of Wine Economists: Message On The Bottle: Colours And Shapes Of Wine Labels. Wine consumers rely mainly on the label on the bottle to infer the quality of its content. There are strong preferences for selected colour-shape combinations in label design. Surprisingly, colour alone does not elicit as strong preferences as certain shapes do, at least when they are assessed irrespectively of the shapes featured in the label. Other combinations, on the other hand, are very resilient, especially those that contain colour hues, such as brown, yellow, black and green, in labels with salient rectangular and hexagonal patterns.

Center for Science in the Public Interest: Two Thumbs Down’ for Movie Theater Popcorn. It's hard to picture someone mindlessly ingesting three McDonald's Quarter Pounders with 12 pats of butter while watching a movie. But according to new laboratory analyses that food is nutritionally comparable to what you’d find in a medium popcorn and soda combo at Regal, the country’s biggest movie theater chain: 1,610 calories and three days’ worth—60 grams—of saturated fat. "Regal and AMC are our nominees for Best Supporting Actor in the Obesity Epidemic."