DECEMBER 4 2009

Foreign Policy magazine: Bernanke: Top of Foreign Policy’s 100 Global Thinkers List. Federal Reserve Chairman Ben Bernanke ranks No. 1 in Foreign Policy magazine’s list of top 100 Global Thinkers for preventing Depression 2.0, putting him one notch above President Barack Obama. “The Zen-like chairman of the U.S. Federal Reserve might not have topped the list solely for turning his superb academic career into a blueprint for action, for single-handedly reinventing the role of a central bank, or for preventing the collapse of the U.S. economy. But to have done all of these within the span of a few months is certainly one of the greatest intellectual feats of recent years,” the periodical says.” Nouriel Roubini comes in no. 4 and behavioural economists and White House advisors Cass Sunstein and Richard Thaler no. 8 (pointer WSJ Blog).

Paul De Grauwe, CEPS: The Dilemma of the Dollar Economic Policy. The decline of the dollar against major currencies such as the euro and the Japanese yen has been spectacular. The long-term decline of the dollar appears to be quite surprising especially considering that at least since the early 1990s the US has been seen to produce superior economic results, i.e. a higher productivity growth than most of Europe and Japan with more or less the same rates of inflation. A fast-growing world economy is in need of lots of liquidity. World liquidity must be provided by the world currency, the dollar. The worldwide demand for dollars increases at yearly rates that by far exceed the 5% money supply growth rate that will keep prices in the US approximately stable. The market bets that the US will choose the first way out of the dilemma, i.e. that the US will abandon its commitment to price stability. It is a reasonable bet because the massive supply of dollars is also an extremely attractive privilege for the US authorities, which allows them to finance budget deficits at conditions that no other country can obtain.

Roel Beetsma , Massimo Giuliodori, VoxEU: The macroeconomic costs and benefits of the Economic and Monetary Union. Currency unions strip national governments of a macroeconomic policy instrument. What do they get in return? This column says the European Economic and Monetary Union has eliminated incentives for competitive devaluations and enhanced inflation credibility. But monetary union may necessitate fiscal coordination and discipline.

CBO: Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output as of September 2009. CBO has estimated the law’s impact on employment and economic output using evidence about how previous similar policies have affected the economy and various mathematical models that represent the workings of the economy. On that basis, CBO estimates that in the third quarter of calendar year 2009, an additional 600,000 to 1.6 million people were employed in the United States, and real (inflation-adjusted) gross domestic product (GDP) was 1.2 percent to 3.2 percent higher, than would have been the case in the absence of ARRA.

Gary Becker, Becker-Posner Blog: How to Increase Employment. A frequent suggestion by economists and others is to give employers subsidies for each unemployed person that they hire, but I believe this approach has many problems of implementation. My favorite approach it to try to stimulate the economy by cutting income taxes, especially corporate income taxes and other taxes on capital, both physical and human capital. Such tax cuts will stimulate investments in the economy, and in this way increase the demand for workers.

Bruce D. Meyer, Tax Policy and the Economy, Volume 24, NBER: Chapter 6 The Effects of the EITC and Recent Reforms. The income distribution features of the EITC are quite good. The credit targets resources at those below the poverty line, particularly families with children. It raises more than 4.0 million people above the poverty line and 1.4 million people above half the poverty line. The empirical evidence on labor supply and marriage indicates that the incentives of the EITC are remarkably favorable given the resources transferred. Studies of the effects of the EITC on employment imply that the credit has sharply increased the fraction of single mothers that work.

Jaime de Melo, Jean-Marie Grether, Nicole A. Mathys, VoxEU: Trade, pollution, and the environment: New international evidence. The “pollution haven” view asserts that globalisation draws industries to countries with lax environmental regulation. This column present evidence that that the major polluting industries are not very footloose and that changes in emissions through the relocation of activities are relatively small. The growth of trade itself, however, is likely to contribute to growing emissions associated with transport.

Thomas Klier and Joshua Linn, Chicago Fed: The Price of Gasoline and The Demand for Fuel Economy: Evidence from Monthly New Vehicles Sales Data. This paper uses a unique data set of monthly new vehicle sales by detailed model from 1978-2007. We find a significant demand response, as nearly half of the decline in market share of U.S. manufacturers from 2002-2007 was due to the increase in the price of gasoline. On the other hand, an increase in the gasoline tax would only modestly affect average fuel economy (pointer DB).

Colin Ellis, BoE: Do supermarket prices change from week to week? This paper uses weekly scanner data supplied by Nielsen. Prices change very frequently in supermarkets, with 40% of prices changing each week, and even controlling for ‘temporary’ changes, a quarter of prices change each week. Focusing on monthly observations, rather than weekly ones, overstates the implied stickiness of prices. The range of price changes is very wide, with some very large price cuts and price rises; but despite this, a significant number of price changes are very small. There appears to be little link between the frequency and magnitude of price changes. Prices and volumes move together from week to week. Consumers are fairly price sensitive: volumes change by more than prices (pointer DB).

Andrews, Dan, Jencks, Christopher, Leigh, Andrew, Harvard: Do Rising Top Incomes Lift All Boats? Pooling data for 1905 to 2000, we find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed for between 22 and 85 years. After 1960, however, a one percentage point rise in the top decile's income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year. This relationship is not driven by changes in either educational attainment or top tax rates. If the increase in inequality is permanent, the increase in growth appears to be permanent, but it takes 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of total income.

UK Centre for Measurement of Government Activity Public Service Output: Input and Productivity: Education. The third ONS education productivity article show that productivity was the same in 2008 as in 1996. From 2000 to 2005 productivity fell by 6.8 per cent, an annual average fall of 1.4 per cent. This resulted from a steady rise in the number of pupils attending school, once adjusted for quality, being outstripped by a sharp rise in inputs, mainly through the employment of more school support staff. The failure of higher spending to greatly improve results isn’t a local failure. Erik Hanushek has shown that it’s happened around the world (pointer Stumbling and mumbling blog).

Niall Ferguson, Newsweek: An Empire at Risk. As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon’s present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028. Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP. This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America’s debt crisis.

Bethany McLean, Vanity Fair: The Bank Job. In this extensive essay, McLean dig deep in the culture of Goldman Sachs. Insiders and outsiders alike have long struggled to define Goldman Sachs’s secret sauce. It’s a blend of impossibly hard work, intense competitiveness, and something that closely approximates teamwork. One of the biggest disconnects on Wall Street today is between the way Goldman Sachs sees itself (they’re the smartest) and the way everyone else sees Goldman (they’re the smartest, greediest, and most dangerous). Further proof of the Goldman’s worldview: the huge amount of money its people will earn this year ($16.7 billion has already been set aside for compensation, which could translate into an average of $700,000 per Goldman employee). You get rage. Ultimately, the big question is this: Do Goldman’s profits signify that good times are coming for the rest of the country? CEO Blankfein professes no doubt. “I’m charged with managing and preserving the franchise for the good of shareholders, and while I don’t want to sound highfalutin, it is also for the good of America,” he says. “I’m up-front about that. I think a strong Goldman Sachs is good for the country.”

Gautam Naik, WSJ: What's on Jim Fallon's Mind? A Family Secret That Has Been Murder to Figure Out. Nature Plays a Prank on a Scientist Looking for Traits of a Killer in His Clan, on the search for a biological basis of violent behavior. To his surprise, Dr. Fallon found that the analysis of his own brain showed he had inherited certain high-risk forms of MAOA and other various aggression-and violence-related genes. "I'm the one who looks most like a serial killer." (pointer Freakonomics Blog).