Joshua Aizenman, Nancy Marion, Dartmouth: Using Inflation to Erode the U.S. Public. Projections indicate that the U.S. Federal debt held by the public as a share of GDP may be in the 70- 100 percent range within ten years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade. Yet there are some important differences –shorter debt maturities today reduce the temptation to inflate, while the larger share held by foreigners increases it. This paper suggests that when economic growth is stalled, the U.S. debt overhang may trigger an increase in inflation of about 5 percent for several years. This additional inflation would significantly reduce the debt ratio, even with some shortening of debt maturities.
Tim Duy's Fed Watch: Structural and Cyclical. Cyclical and structural forces are at play. But be wary about confusing the two; I fear this to be a particular problem for policymakers. Economic growth is likely to lead to complacency, but such complacency would be ill-advised when the decade's record on nonfarm payrolls leaves the job-generating capacity of the US economy in doubt.
Caroline Baum, Bloomberg: Jobs Lost in Great Recession May Be Gone Forever. There is support in the data for the idea that many of the lost jobs aren’t coming back. In November, a record 55.1 percent of job losses were categorized as permanent, according to the Bureau of Labor Statistics. The average duration of unemployment reached a post-World War II high of 28.5 weeks. And 38.3 percent of the unemployed have been out of work for 27 weeks or more, also a record.
Paul Krugman, NYT: Bernanke’s Unfinished Mission. My back of the envelope calculation says that we need to add around 18 million jobs over the next five years, or 300,000 jobs a month. Someone has to take responsibility for creating a lot of additional jobs. And at this point, that someone almost has to be the Federal Reserve. Joseph Gagnon, a former Fed staffer, basing his analysis on the prior work of Mr. Bernanke, urges the Fed to expand credit by buying a further $2 trillion in assets. High sustained unemployment is a recipe for immense human suffering. If we don’t get unemployment down soon, we’ll be paying the price for a generation. So it’s time for the Fed to lose that complacency, shrug off that fatalism and start lending a hand to job creation.
M S Mohanty, Fabrizio Zampolli, BIS: Government size and macroeconomic stability. This article examines the potential role of government size in explaining differences in output volatility across OECD countries in the context of the latest recession. There is some evidence to suggest that government size as measured by the share of expenditure in GDP has a modest negative association with output volatility. Moreover, this link seems to have weakened further since the mid-1980s. Factors such as trade openness and exposure to terms-of-trade shocks as well as volatility of inflation appear important. Interestingly, the same set of factors seems to matter in explaining the severity of recession in OECD countries.
Moritz Schularick, Alan Taylor, VoxEU: Credit booms go wrong. Are credit bubbles dangerous? This column presents long-run historical data showing that, over the past 140 years, episodes of financial instability were often the result of "credit booms gone wrong". Recent years witnessed an unprecedented expansion in the role of credit in the macroeconomy. It is a mishap of history that – just as credit matters more than ever before – the reigning doctrine gives it no role in central bank policies.
James MacGee, Cleveland Fed: Why Didn’t Canada’s Housing Market Go Bust? Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust.
Jon Hilsenrath, WSJ Blog: Academics Spar With Populists Over Fed Audits. A group of academic economists — including several Nobel Prize winners, leaders of respected economic journals and former Fed officials — is dialing up its call for lawmakers to drop plans to subject the Federal Reserve to more scrutiny by the Government Accountability Office, an investigative arm of Congress. In a letter to leaders on the Senate Banking Committee and House Financial Services Committee, the economists say the Ron Paul bill would do “serious harm to the economy.” They warn increased congressional oversight would harm the Fed’s independence and ability to fight inflation.
Lucian Bebchuk, Alma Cohen, Holger Spamann, Harvard: Bankers had cashed in before the music stopped. According to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives. Many – in the media, academia and the financial sector – have used this account to dismiss the view that pay structures caused excessive risk-taking and that reforming such structures is important. That standard narrative, however, turns out to be incorrect.
Atila Abdulkadiroglu el al, NBER: Accountability and Flexibility in Public Schools: Evidence from Boston's Charters and Pilots. Estimates using student assignment lotteries show large and significant test score gains for charter lottery winners in middle and high school. The large positive lottery-based estimates for charter schools are similar to estimates constructed using statistical controls in the same sample, but larger than those using statistical controls in a wider sample of schools.
Alex Bryson, Bernd Frick, Rob Simmons, VoxEU: Wage returns to scarce talent: The case of professional football players. The study of sports is beginning to tell us more and more about the operation of labour markets and incentives. This column looks at football to verify that wages reflect marginal productivity. It shows that two-footedness – the rare ability to use both feet to pass, tackle, and shoot – commands a large wage premium.
Catherine Rampell, Economix NYT: Money Fights Predict Divorce Rates. You know it in your gut, and you’ve seen it in the splintered marriages around you. Finance-related tensions — however you define them — raise the risk of divorce. A new study, by Jeffrey Dew at Utah State University, attempts to quantify that risk. His finding: Couples who reported disagreeing about finance once a week were over 30 percent more likely to get divorced than couples who reported disagreeing about finances a few times a month.
Pierre-André Chiappori, Sonia Oreffice, Climent Quintana-Domeque, IZA: Fatter Attraction: Anthropometric and Socioeconomic Characteristics in the Marriage Market. We construct a matching model on the marriage market along more than one characteristic, where individuals have preferences over physical attractiveness and market and household productivity of potential. Men and women assess each other through an index combining these various attributes. We estimate the trade-offs among these characteristics, finding evidence of compensation between anthropometric and socioeconomic characteristics. An additional unit of husband’s (wife’s) BMI can be compensated by a 0.3%-increase (0.15%-increase) in husband’s (wife’s) average (predicted) wage. Interestingly, these findings suggest that female physical attractiveness plays a larger role in men’s assessment of a woman than male physical attractiveness does for women.
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