Justin Wolfers, Freakonomics Blog: What Is an Economic Recovery? Levels, Changes, and Changes-in-Changes. There’s some debate about whether the economy has begun to recover. The consensus among professional forecasters is that the trough occurred sometime in the second half of 2009. But it doesn’t feel that way — which is why the latest Gallup survey is so interesting. Gallup researchers asked regular people how long until they expect the recovery to begin, and nearly half think we are three years or longer away. The public, it seems, is interested in the level of the business cycle, and the unemployment rate is a useful metric for this discussion. Yet the language that professional economists use is much more about changes in the state of the cycle.
William T. Gavin, St Louise Fed: Are Low Interest Rates Good for Consumers? Households’ cost of borrowing has remained high (see chart) even as the average rate of return on funds held in M2 has fallen to around 1/3 percent. Therefore, because interest rates on savings are so low, households have “saved” by paying down credit card and mortgage debt. Over the past year households have reduced credit card debt by 3.5 percent. It is true that credit card debt was reduced slightly at the ends of some previous recessions, but that was not the case in 2001 and the current reduction is the largest since the Fed began collecting such data (in the early 1950s). House holds have also reduced mortgage debt by almost 2 percent, the first time since the series began that we have seen an actual year over- year decline in mortgage debt.
Martin S. Feldstein, NBER: U.S. Growth in the Decade Ahead. This paper examines the likely growth of U.S. GDP in the decade beginning in 2010. I analyze the two components of the rise in GDP over this ten year period: (1) the recovery from the substantially depressed level of economic activity at the start of the decade; and (2) the rise in potential GDP that will result from the expansion of the labor force, the growth of the capital stock, and the increase of multifactor productivity. I calculate a likely growth rate of 2.6 percent a year. If the trade deficit is reduced by three percent of GDP, the rise in exports and decline in imports will reduce output available for U.S. consumption and investment by about 0.3 percent a year. If the real trade-weighted value of the dollar declines by 25 percent over the decade and the full effect of that dollar decline is reflected in the prices of imports, the increased cost of imports would reduce the growth of our real incomes by about 0.4 percent a year.
Enrique Martínez-García, Janet Koech, Dallas Fed: A Historical Look at the Labor Market During Recessions. Unemployment rate rising faster in USA than in any post-WWII recession. The percent decline in civilian employment wasn’t much different from previous recessions until October 2008, when it began to deteriorate rapidly, falling outside the historical range within a few months. The current recession differs from previous episodes in the evolution of the civilian labor force, with labor force growth slowing.
James J. Heckman, Bas Jacobs, IZA: Policies to Create and Destroy Human Capital in Europe. Investments in the human capital of children should expand relative to investment in older workers. Later remediation of skill deficits acquired in early years is often ineffective. Active labor market and training policies should therefore be reformulated. Skill formation is impaired when the returns to skill formation are low due to low skill use and insufficient skill maintenance later on in life. High marginal tax rates and generous benefit systems reduce labor force participation rates and hours worked and thereby lower the utilization rate of human capital. Tax-benefit systems should be reconsidered as they increasingly redistribute resources from outsiders to insiders in labor markets which is both distortionary and inequitable. Early retirement and pension schemes should be made actuarially fairer as they entail strong incentives to retire early and human capital is thus written off too quickly.
Enrica Detragiache, Giang Ho, IMF: Responding to Banking Crises: Lessons from Cross-Country Evidence. A common legacy of banking crises is a large increase in government debt, as fiscal resources are used to shore up the banking system. Do crisis response strategies that commit more fiscal resources lower the economic costs of crises? Based on evidence from a sample of 40 banking crises we find that the answer is negative. In fact, policies that are riskier for the government budget are associated with worse, not better, post-crisis performance. We also show that parliamentary political systems are more prone to adopt bank rescue measures that are costly for the government budget.
Maxim Pinkovskiy, Xavier Sala-i-Martin, VoxEU: Parametric estimations of the world distribution of income. World poverty is falling. This column presents new estimates of the world’s income distribution and suggests that world poverty is disappearing faster than previously thought. From 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa. Barring a catastrophe, there will never be more than a billion people in poverty in the future history of the world.
Peter Temin, NBER: The Great Recession and the Great Depression. This paper discusses parallels between our current recession and the Great Depression for the intelligent general public. It stresses the role of economic models and ideas in public policy and argues that gold-standard mentality still holds sway today. The parallels are greatest in the generation of the crises, and they also illuminate the policy choices being made today. We have escaped a repeat of the Depression, but we appear to have lost the opportunity for significant financial reform.
Gary Becker, Becker Posner Blog: The Revolution in the Economic Empowerment of Women. Public policies to help children of poorer women, including children of many unmarried women, may be justified since these women tend to under invest in their children because they have limited incomes and often low education levels. But such interventions would not justify the Scandinavian approach of generously subsidizing all women, including well off women, to take paid leaves when they have children. Despite all their job guarantees after they return to work from childcare leaves, private sector opportunities for Scandinavian women, and women in several other European countries, are limited. For example, about three-quarters of employed women in Sweden work for the government compared to one-quarter of employed men, and women comprise a much larger fraction of senior managers of American companies than of Swedish companies.
N. Gregory Mankiw, Matthew Weinzierl, NBER: The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution. Should the income tax include a credit for short taxpayers and a surcharge for tall ones? The standard Utilitarian framework for tax analysis answers this question in the affirmative. Moreover, a plausible parameterization using data on height and wages implies a substantial height tax: a tall person earning $50,000 should pay $4,500 more in tax than a short person. One interpretation is that personal attributes correlated with wages should be considered more widely for determining taxes. Alternatively, if policies such as a height tax are rejected, then the standard Utilitarian framework must fail to capture intuitive notions of distributive justice.
Friday, January 29, 2010
Friday, January 22, 2010
JANUARY 22 2010
N. Gregory Mankiw, NYT: Bernanke and the Beast. Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era.
Zheng Liu, Glenn Rudebusch, San Francisco Fed: Inflation: Mind the Gap. Monetary policymakers have long debated the usefulness of the Phillips curve, which relates inflation to measures of economic slack. Since the recession started in late 2007, evidence suggests that, consistent with the Phillips curve, a high level of unemployment has contributed to a decline in inflation.
Mathias Dolls, Clemens Fuest, Andreas Peichl, CESIFO: Automatic Stabilizers and Economic Crisis: US vs. Europe. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 48 per cent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of 26 to 35 per cent in the EU and 19 per cent in the US. There is large heterogeneity within the EU. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view. However, we find that active fiscal policy is lower in more open economies.
Martin Feldstein, WSJ: Missing the Target. Unlike previous recessions, the current downturn was not caused by Federal Reserve tightening and therefore couldn't be reversed by lowering interest rates. President Obama was correct to conclude that boosting economic activity required a fiscal stimulus. Unfortunately, despite the talented team of economists in the administration, most of the president's economic policies have done little to help the problem. And indeed, many of these policies have created even more problems than they solved.
Susan Yang, CBO: Policies for Increasing Economic Growth and Employment in 2010 and 2011. Further policy action, if properly designed, would promote economic growth and increase employment in 2010 and 2011. The policies analyzed vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects. Policies that could be implemented relatively quickly or targeted toward people whose consumption tends to be restricted by their income, such as reducing payroll taxes for firms that increase payroll or increasing aid to the unemployed, would have the largest effects on output and employment per dollar of budgetary cost in 2010 and 2011. By contrast, policies that would temporarily increase the aftertax income of people with relatively high income, such as an across-the-board reduction in income taxes or an increase in the exemption amount for the AMT, would have smaller effects because such tax cuts would probably not affect the recipients’ spending significantly.
Gerard Lyons, McKinsey: The ticking time bomb and the dollar. There is a ticking time bomb under the dollar. It could explode at any time. Although it is not in anyone’s interest for this to happen, that may not be enough to prevent it. One lesson of recent years is that just because something does not happen immediately does not mean it will not happen at all. The message is that economic fundamentals matter and if something appears unsustainable or out of line with reality, then it probably is.
Nouriel Roubini, Project Syndicate: The Risky Rich. Rating-agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the United Kingdom, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe. If the US does use the inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the US dollar would rise significantly. America’s foreign creditors would not accept a sharp reduction in their dollar assets’ real value that debasement of the dollar via inflation and devaluation would entail. A disorderly rush to the exit could lead to a dollar collapse, a spike in long-term interest rates, and a severe double dip recession.
John Cassidy, New Yorker: Interview with James Heckman. The Chicago School incorporates many different ideas. I think the part of the Chicago School that has been justified is the claim that people react to incentives, and that incentives are important. Nothing in what has happened invalidates that idea. People did react to incentives—clearly they did. It turned out that the incentives they were reacting to weren’t socially beneficial, but they definitely reacted to them. The other part of the Chicago School, which Stiglitz and Krugman have criticized, is the efficient-market hypothesis. That is something completely different.
John Micklewright, Gyula Nagy, IoE: The effect of monitoring unemployment insurance recipients on unemployment duration: evidence from a field experiment. Programme administration is a relatively neglected issue in the analysis of disincentive effects of unemployment benefit systems. We investigate this issue with a field experiment in Hungary involving random assignment of benefit claimants to treatment and control groups. Treatment increases the monitoring of claims - claimants make more frequent visits to the employment office and face questioning about their search behaviour. Treatment has quite a large effect on durations on benefit of women aged 30 and over, while we find no effect for younger women or men.
Jason Lindo,University of Oregon: Parental Job Loss and Infant Health. I use detailed work and fertility histories from the Panel Study of Income Dynamics to estimate the impact of parents' job displacements on children's birth weights. These data allow for an identification strategy that essentially compares the outcomes of children born after a displacement to the outcomes of their siblings born before using mother fixed effects. I find that husbands' job losses have significant negative effects on infant health. They reduce birth weights by approximately four percent with the impact concentrated on the lower half of the birth weight distribution.
Theodore H. Moran, Peterson Institute: Is China Using its Checkbook to Lock up Natural Resources Around the World? Backed by the Chinese government, Chinese companies have been acquiring equity stakes in natural resource companies, extending loans to mining and petroleum investors, and writing long-term procurement contracts for oil and minerals. These activities have aroused concern that China might be locking up natural resource supplies, gaining preferential access to available output, and extending control over the world’s extractive industries. My scorecard of China’s procurement arrangements shows a few instances (3 of the largest 16) in which Chinese natural resource companies take an equity stake to create a “special relationship” with a major producer. But the predominant pattern (13 of the largest 16) is to take equity stakes and/or write long-term procurement contracts with the competitive fringe.
Matthew E. Kahn, Siqi Zheng, VoxEU: The greenness of China: Household carbon dioxide emissions and urban development. China’s economic growth has profound environmental implications. This column estimates the household carbon emissions of China’s major cities. Even in China’s most polluting city, per household emissions are just one-fifth of those in San Diego, the greenest city in the US.
Justin Fox, Time: Jared Diamond's Haiti story. Haiti's despicable "Papa Doc" Duvalier was succeeded by his only slightly less despicable son. The result: The Dominican Republic, while still poor, is much richer than Haiti—and it still has trees. This is the tale Diamond tells, and he recounts it in compelling detail. It's a convincing case of what economists call "path dependence." There were several forks in the developmental road over the centuries, and the poor Haitians kept choosing or getting shoved down the wrong path.
Anna Dreber, Emma von Essen, Eva Ranehill, SIFR: Outrunning the Gender Gap – Boys and Girls Compete Equally. Recent studies find that women are less competitive than men. This gender difference in competitiveness has been suggested as a possible explanation for why men occupy the majority of top positions in many sectors. In this study we explore competitiveness in children. A related field experiment on Israeli children shows that only boys react to competition by running faster when competing in a race and that only girls react to the gender of their opponent. Here we test if these results carry over to 7-10 year old Swedish children. Sweden is typically ranked among the most gender equal countries in the world, thus culture could explain a potential difference in our results to those on Israeli children. We also introduce two more “female” sports: skipping rope and dancing, in order to study if reaction to competition is task dependent. Our results extend previous findings in two ways. First, we find no gender difference in reaction to competition in running. In our study, both boys and girls compete. We also find no gender differences in reaction to competition in skipping rope and dancing. Second, we find no clear effect on competitiveness of the opponent’s gender, neither on girls or boys, in any of the tasks. Our findings suggest that the existence of a gender gap in competitiveness among children may be partly cultural, and that the gap found in previous studies on adults may be caused by factors that emerge later in life. It remains to be explored whether these later factors are biological or cultural.,
Christopher S. Carpenter, Mark F. Stehr, NBER: Intended and Unintended Effects of Youth Bicycle Helmet Laws. Over 20 states have adopted laws requiring youths to wear a helmet when riding a bicycle. We confirm previous research indicating that these laws reduced fatalities and increased helmet use, but we also show that the laws significantly reduced youth bicycling. We find this result in standard two-way fixed effects models of parental reports of youth bicycling, as well as in triple difference models of self-reported bicycling among high school youths that explicitly account for bicycling by youths just above the helmet law age threshold.
Zheng Liu, Glenn Rudebusch, San Francisco Fed: Inflation: Mind the Gap. Monetary policymakers have long debated the usefulness of the Phillips curve, which relates inflation to measures of economic slack. Since the recession started in late 2007, evidence suggests that, consistent with the Phillips curve, a high level of unemployment has contributed to a decline in inflation.
Mathias Dolls, Clemens Fuest, Andreas Peichl, CESIFO: Automatic Stabilizers and Economic Crisis: US vs. Europe. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 48 per cent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of 26 to 35 per cent in the EU and 19 per cent in the US. There is large heterogeneity within the EU. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view. However, we find that active fiscal policy is lower in more open economies.
Martin Feldstein, WSJ: Missing the Target. Unlike previous recessions, the current downturn was not caused by Federal Reserve tightening and therefore couldn't be reversed by lowering interest rates. President Obama was correct to conclude that boosting economic activity required a fiscal stimulus. Unfortunately, despite the talented team of economists in the administration, most of the president's economic policies have done little to help the problem. And indeed, many of these policies have created even more problems than they solved.
Susan Yang, CBO: Policies for Increasing Economic Growth and Employment in 2010 and 2011. Further policy action, if properly designed, would promote economic growth and increase employment in 2010 and 2011. The policies analyzed vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects. Policies that could be implemented relatively quickly or targeted toward people whose consumption tends to be restricted by their income, such as reducing payroll taxes for firms that increase payroll or increasing aid to the unemployed, would have the largest effects on output and employment per dollar of budgetary cost in 2010 and 2011. By contrast, policies that would temporarily increase the aftertax income of people with relatively high income, such as an across-the-board reduction in income taxes or an increase in the exemption amount for the AMT, would have smaller effects because such tax cuts would probably not affect the recipients’ spending significantly.
Gerard Lyons, McKinsey: The ticking time bomb and the dollar. There is a ticking time bomb under the dollar. It could explode at any time. Although it is not in anyone’s interest for this to happen, that may not be enough to prevent it. One lesson of recent years is that just because something does not happen immediately does not mean it will not happen at all. The message is that economic fundamentals matter and if something appears unsustainable or out of line with reality, then it probably is.
Nouriel Roubini, Project Syndicate: The Risky Rich. Rating-agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the United Kingdom, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe. If the US does use the inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the US dollar would rise significantly. America’s foreign creditors would not accept a sharp reduction in their dollar assets’ real value that debasement of the dollar via inflation and devaluation would entail. A disorderly rush to the exit could lead to a dollar collapse, a spike in long-term interest rates, and a severe double dip recession.
John Cassidy, New Yorker: Interview with James Heckman. The Chicago School incorporates many different ideas. I think the part of the Chicago School that has been justified is the claim that people react to incentives, and that incentives are important. Nothing in what has happened invalidates that idea. People did react to incentives—clearly they did. It turned out that the incentives they were reacting to weren’t socially beneficial, but they definitely reacted to them. The other part of the Chicago School, which Stiglitz and Krugman have criticized, is the efficient-market hypothesis. That is something completely different.
John Micklewright, Gyula Nagy, IoE: The effect of monitoring unemployment insurance recipients on unemployment duration: evidence from a field experiment. Programme administration is a relatively neglected issue in the analysis of disincentive effects of unemployment benefit systems. We investigate this issue with a field experiment in Hungary involving random assignment of benefit claimants to treatment and control groups. Treatment increases the monitoring of claims - claimants make more frequent visits to the employment office and face questioning about their search behaviour. Treatment has quite a large effect on durations on benefit of women aged 30 and over, while we find no effect for younger women or men.
Jason Lindo,University of Oregon: Parental Job Loss and Infant Health. I use detailed work and fertility histories from the Panel Study of Income Dynamics to estimate the impact of parents' job displacements on children's birth weights. These data allow for an identification strategy that essentially compares the outcomes of children born after a displacement to the outcomes of their siblings born before using mother fixed effects. I find that husbands' job losses have significant negative effects on infant health. They reduce birth weights by approximately four percent with the impact concentrated on the lower half of the birth weight distribution.
Theodore H. Moran, Peterson Institute: Is China Using its Checkbook to Lock up Natural Resources Around the World? Backed by the Chinese government, Chinese companies have been acquiring equity stakes in natural resource companies, extending loans to mining and petroleum investors, and writing long-term procurement contracts for oil and minerals. These activities have aroused concern that China might be locking up natural resource supplies, gaining preferential access to available output, and extending control over the world’s extractive industries. My scorecard of China’s procurement arrangements shows a few instances (3 of the largest 16) in which Chinese natural resource companies take an equity stake to create a “special relationship” with a major producer. But the predominant pattern (13 of the largest 16) is to take equity stakes and/or write long-term procurement contracts with the competitive fringe.
Matthew E. Kahn, Siqi Zheng, VoxEU: The greenness of China: Household carbon dioxide emissions and urban development. China’s economic growth has profound environmental implications. This column estimates the household carbon emissions of China’s major cities. Even in China’s most polluting city, per household emissions are just one-fifth of those in San Diego, the greenest city in the US.
Justin Fox, Time: Jared Diamond's Haiti story. Haiti's despicable "Papa Doc" Duvalier was succeeded by his only slightly less despicable son. The result: The Dominican Republic, while still poor, is much richer than Haiti—and it still has trees. This is the tale Diamond tells, and he recounts it in compelling detail. It's a convincing case of what economists call "path dependence." There were several forks in the developmental road over the centuries, and the poor Haitians kept choosing or getting shoved down the wrong path.
Anna Dreber, Emma von Essen, Eva Ranehill, SIFR: Outrunning the Gender Gap – Boys and Girls Compete Equally. Recent studies find that women are less competitive than men. This gender difference in competitiveness has been suggested as a possible explanation for why men occupy the majority of top positions in many sectors. In this study we explore competitiveness in children. A related field experiment on Israeli children shows that only boys react to competition by running faster when competing in a race and that only girls react to the gender of their opponent. Here we test if these results carry over to 7-10 year old Swedish children. Sweden is typically ranked among the most gender equal countries in the world, thus culture could explain a potential difference in our results to those on Israeli children. We also introduce two more “female” sports: skipping rope and dancing, in order to study if reaction to competition is task dependent. Our results extend previous findings in two ways. First, we find no gender difference in reaction to competition in running. In our study, both boys and girls compete. We also find no gender differences in reaction to competition in skipping rope and dancing. Second, we find no clear effect on competitiveness of the opponent’s gender, neither on girls or boys, in any of the tasks. Our findings suggest that the existence of a gender gap in competitiveness among children may be partly cultural, and that the gap found in previous studies on adults may be caused by factors that emerge later in life. It remains to be explored whether these later factors are biological or cultural.,
Christopher S. Carpenter, Mark F. Stehr, NBER: Intended and Unintended Effects of Youth Bicycle Helmet Laws. Over 20 states have adopted laws requiring youths to wear a helmet when riding a bicycle. We confirm previous research indicating that these laws reduced fatalities and increased helmet use, but we also show that the laws significantly reduced youth bicycling. We find this result in standard two-way fixed effects models of parental reports of youth bicycling, as well as in triple difference models of self-reported bicycling among high school youths that explicitly account for bicycling by youths just above the helmet law age threshold.
Friday, January 15, 2010
JANUARY 15 2010
CEA: The economic impact of the American Recovery and Reinvestment Act of 2009. ARRA added between 2 and 3 percentage points to real GDP growth in the second quarter of 2009; between 3 and 4 percentage points in the third quarter; and between 1½ and 3 percentage points in the fourth quarter. These estimates are broadly similar to those of a wide range of other analysts. The CEA estimates that as of the fourth quarter of 2009, the ARRA has raised employment relative to what it otherwise would have been by 1½ to 2 million.
By Robert E. Rubin, NEWSWEEK: Getting the Economy Back On Track. There must be sound fiscal and monetary policies. The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries. The American people are growing increasingly concerned about deficits, creating a public environment more conducive to political action. But the substance and the politics of returning over time to a sound fiscal position are very difficult, and the timing is even more complicated because of the current economic circumstances.
Kenneth Rogoff, Project Syndicate: Grandmasters and Global Growth. I do not share the view of many that, after the Internet and the personal computer, it will be a long wait until the next paradigm-shifting innovation. Artificial intelligence will provide the boost that keeps the teens rolling. So, despite a rough start from the financial crisis (which will still slow global growth this year and next), there is no reason why the new decade has to be an economic flop. Barring another round of deep financial crises, it won’t be – as long as politicians do not stand in the way of the new paradigm of trade, technology, and artificial intelligence.
Tobias Adrian, Arturo Estrella, Hyun Song Shin, NY Fed: Monetary Cycles, Financial Cycles, and the Business Cycle. One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. The economic rationale for this forecasting power usually appeals to expectations of future interest rates, which affect the slope of the term structure. In this paper, we propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries. When monetary tightening is associated with a flattening of the term spread, it reduces net interest margin, which in turn makes lending less profitable, leading to a contraction in the supply of credit. We provide empirical support for this hypothesis, thereby linking monetary cycles, financial cycles, and the business cycle.
OECD: The Surge in Borrowing Needs of OECD Governments. Amidst continued uncertainty about the pace of recovery as well as the timing and sequencing of the steps of the exit strategy, gross borrowing needs of OECD governments are expected to reach almost USD 16 trillion in 2009, up from an earlier estimate of around USD 12 trillion. The tentative outlook for 2010 shows a stabilising borrowing picture at around the level of USD 16 trillion. A looming challenge is the risk that when the recovery gains traction, yields will start to rise. Although there are signs that issuance conditions are becoming tougher, most OECD debt managers have been successful in financing the surge in funding needs. Less successful auctions can therefore best be interpreted as “single market events” and not as unambiguous evidence of systemic market absorption problems.
Paul Krugman, NYT: Learning From Europe. Europe is often held up as a cautionary tale, a demonstration that if you try to make the economy less brutal, to take better care of your fellow citizens when they’re down on their luck, you end up killing economic progress. But what European experience actually demonstrates is the opposite: social justice and progress can go hand in hand, writes Krugman. Jim Manzi started the debate with an essay in National Affairs. Much of the initial response focused on his abuse and misuse of statistics in making. Greg Mankiw reminds us that GDP per capita, adjusted for differences in price levels (PPP), from the IMF, still is much higher for the United States than for the five most populous countries in Western Europe. Ryan Avent, the Economist, reflects in The futility of cross-country comparisons: “Why focus the debate on sweeping and misleading generalisations across policies, when you can take things on a policy by policy basis, and have quite a specific and effective discussion?”
Thomas L. Friedman, NYT: Is China the Next Enron? James Chanos — reportedly one of America’s most successful short-sellers, the man who bet that Enron was a fraud and made a fortune when that proved true and its stock collapsed — is now warning that China is “Dubai times 1,000 — or worse” and looking for ways to short that country’s economy before its bubbles burst. Still, I’d rather bet against the euro. Shorting China today? Well, good luck with that, Mr. Chanos. Dani Rodrik comments this in Will China Rule the World? The trouble is that it will become increasingly difficult for China to maintain the kind of growth that it has experienced in recent years. China’s growth currently relies on an undervalued currency and a huge trade surplus. This is unsustainable, and sooner or later it will precipitate a major confrontation with the US (and Europe). China will likely have to settle for lower growth. If China surmounts these hurdles and does eventually become the world’s predominant economic power, globalization will, indeed, take on Chinese characteristics. Democracy and human rights will then likely lose their luster as global norms. That is the bad news. The good news is that a Chinese global order will display greater respect for national sovereignty and more tolerance for national diversity.
Reuven Glick, and Kevin J. Lansing, Fed San Fransisco: Global Household Leverage, House Prices, and Consumption. Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling.
Karel Lannoo, Centre for European Policy Studies: Comparing EU and US Responses to the Financial Crisis. On the institutional side, the EU and the US seem to be moving in radically different directions, with (most likely) reduced powers for the Fed in the US, and more for the ECB in Europe. The US Financial Services Oversight Council in the US will be chaired by the Secretary of the Treasury, and composed of all regulators, including the Fed. The EU Systemic Risk Board, on the other hand, will be chaired by a central banker, most likely the ECB president, and largely composed of central bank representatives, with only one delegate from among the EU’s finance ministers. On the micro-prudential side, the EU is gradually moving towards a more integrated model of functional supervision, whereas the US proposals do not seem to go far enough at the present time.
Oriana Bandiera, Valentino Larcinese, Imran Rasul, VoxEU: The impact of class size on the performance of university students. The effect of increasing class size in tertiary education is not well understood. This column estimates the effects of class size on students’ exam performance by comparing the same student’s performance to her own performance in courses with small and large class sizes. Going from the average class of 56 to a class size of 89 would decrease the mark by 9% of the observed variation in marks within a given student. The effect is almost four times larger for students in the top 10%.
Christopher L. Smith, Fed: The Impact of Low-Skilled Immigration on the Youth Labor Market. The employment-to-population rate of high-school aged youth has fallen by about 20 percentage points since the late 1980s. The human capital implications of this decline depend on the reasons behind it. In this paper, I demonstrate that growth in the number of less-educated immigrants may have considerably reduced youth employment rates. This finding stands in contrast to previous research that generally identifies, at most, a modest negative relationship across states or cities between immigration levels and adult labor market outcomes. At least two factors are at work: there is greater overlap between the jobs that youth and less-educated adult immigrants traditionally do, and youth labor supply is more responsive to immigration-induced changes in their wage. Despite a slight increase in schooling rates in response to immigration, I find little evidence that reduced employment rates are associated with higher earnings ten years later in life. This raises the possibility that an immigration-induced reduction in youth employment, on net, hinders youths' human capital accumulation.
Amanda Ripley, The Atlantic: What Makes a Great Teacher? For years, the secrets to great teaching have seemed more like alchemy than science, a mix of motivational mumbo jumbo and misty-eyed tales of inspiration and dedication. But for more than a decade, one organization has been tracking hundreds of thousands of kids, and looking at why some teachers can move them three grade levels ahead in a year and others can’t. Now, as the Obama administration offers states more than $4 billion to identify and cultivate effective teachers, Teach for America is ready to release its data. In general, Teach for America’s staffers have discovered that past performance—especially the kind you can measure—is the best predictor of future performance. Recruits who have achieved big, measurable goals in college tend to do so as teachers.
Greg Mankiw's Blog: Wealth-dependent Fines. A Swiss court has slapped a wealthy speeder with a chalet-sized fine — a full $290,000. Judges at the cantonal court in St. Gallen, in eastern Switzerland, based the record-breaking fine on the speeder's estimated wealth of over $20 million. Is it optimal to base fines on wealth? I think a case can be made, at least theoretically, to support the judges' ruling. First, assume that the negative externalities are very great, so the optimal quantity of the externality is about zero. By itself, that argues for a large fine, not a wealth-dependent one. But then add another assumption: Suppose there is some small probability that an innocent person will be found guilty because of a rogue, or simply a mistaken, policeman. This possibility, together with risk aversion, would induce us to temper how large the fine is. And this tempering of the large fine would seem to be less for richer taxpayers: Because the mistaken ticket is a proportionately smaller fraction of their wealth, we need to worry less about the uncertainty large fines impose. The result is larger fines for richer offenders.
Anne Case, Christina Paxson, NBER: Causes and Consequences of Early Life Health. Among children in general, and more strikingly among siblings, those who are heavier and longer at birth are taller in childhood on average…Children who are taller are healthier, they score significantly higher on cognitive tests and make their way more quickly through school. They are also more likely to perceive themselves to be scholastically competent. All of these haracteristics send children on different trajectories into adulthood and old age—trajectories that were, in part, set in place by mothers’ behaviors while pregnant. Childhood circumstances are important. Taller individuals attain more education, earn more, and are more likely to be employed. They are also more likely to have better health and cognitive outcomes in middle age to old age.
By Robert E. Rubin, NEWSWEEK: Getting the Economy Back On Track. There must be sound fiscal and monetary policies. The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries. The American people are growing increasingly concerned about deficits, creating a public environment more conducive to political action. But the substance and the politics of returning over time to a sound fiscal position are very difficult, and the timing is even more complicated because of the current economic circumstances.
Kenneth Rogoff, Project Syndicate: Grandmasters and Global Growth. I do not share the view of many that, after the Internet and the personal computer, it will be a long wait until the next paradigm-shifting innovation. Artificial intelligence will provide the boost that keeps the teens rolling. So, despite a rough start from the financial crisis (which will still slow global growth this year and next), there is no reason why the new decade has to be an economic flop. Barring another round of deep financial crises, it won’t be – as long as politicians do not stand in the way of the new paradigm of trade, technology, and artificial intelligence.
Tobias Adrian, Arturo Estrella, Hyun Song Shin, NY Fed: Monetary Cycles, Financial Cycles, and the Business Cycle. One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. The economic rationale for this forecasting power usually appeals to expectations of future interest rates, which affect the slope of the term structure. In this paper, we propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries. When monetary tightening is associated with a flattening of the term spread, it reduces net interest margin, which in turn makes lending less profitable, leading to a contraction in the supply of credit. We provide empirical support for this hypothesis, thereby linking monetary cycles, financial cycles, and the business cycle.
OECD: The Surge in Borrowing Needs of OECD Governments. Amidst continued uncertainty about the pace of recovery as well as the timing and sequencing of the steps of the exit strategy, gross borrowing needs of OECD governments are expected to reach almost USD 16 trillion in 2009, up from an earlier estimate of around USD 12 trillion. The tentative outlook for 2010 shows a stabilising borrowing picture at around the level of USD 16 trillion. A looming challenge is the risk that when the recovery gains traction, yields will start to rise. Although there are signs that issuance conditions are becoming tougher, most OECD debt managers have been successful in financing the surge in funding needs. Less successful auctions can therefore best be interpreted as “single market events” and not as unambiguous evidence of systemic market absorption problems.
Paul Krugman, NYT: Learning From Europe. Europe is often held up as a cautionary tale, a demonstration that if you try to make the economy less brutal, to take better care of your fellow citizens when they’re down on their luck, you end up killing economic progress. But what European experience actually demonstrates is the opposite: social justice and progress can go hand in hand, writes Krugman. Jim Manzi started the debate with an essay in National Affairs. Much of the initial response focused on his abuse and misuse of statistics in making. Greg Mankiw reminds us that GDP per capita, adjusted for differences in price levels (PPP), from the IMF, still is much higher for the United States than for the five most populous countries in Western Europe. Ryan Avent, the Economist, reflects in The futility of cross-country comparisons: “Why focus the debate on sweeping and misleading generalisations across policies, when you can take things on a policy by policy basis, and have quite a specific and effective discussion?”
Thomas L. Friedman, NYT: Is China the Next Enron? James Chanos — reportedly one of America’s most successful short-sellers, the man who bet that Enron was a fraud and made a fortune when that proved true and its stock collapsed — is now warning that China is “Dubai times 1,000 — or worse” and looking for ways to short that country’s economy before its bubbles burst. Still, I’d rather bet against the euro. Shorting China today? Well, good luck with that, Mr. Chanos. Dani Rodrik comments this in Will China Rule the World? The trouble is that it will become increasingly difficult for China to maintain the kind of growth that it has experienced in recent years. China’s growth currently relies on an undervalued currency and a huge trade surplus. This is unsustainable, and sooner or later it will precipitate a major confrontation with the US (and Europe). China will likely have to settle for lower growth. If China surmounts these hurdles and does eventually become the world’s predominant economic power, globalization will, indeed, take on Chinese characteristics. Democracy and human rights will then likely lose their luster as global norms. That is the bad news. The good news is that a Chinese global order will display greater respect for national sovereignty and more tolerance for national diversity.
Reuven Glick, and Kevin J. Lansing, Fed San Fransisco: Global Household Leverage, House Prices, and Consumption. Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling.
Karel Lannoo, Centre for European Policy Studies: Comparing EU and US Responses to the Financial Crisis. On the institutional side, the EU and the US seem to be moving in radically different directions, with (most likely) reduced powers for the Fed in the US, and more for the ECB in Europe. The US Financial Services Oversight Council in the US will be chaired by the Secretary of the Treasury, and composed of all regulators, including the Fed. The EU Systemic Risk Board, on the other hand, will be chaired by a central banker, most likely the ECB president, and largely composed of central bank representatives, with only one delegate from among the EU’s finance ministers. On the micro-prudential side, the EU is gradually moving towards a more integrated model of functional supervision, whereas the US proposals do not seem to go far enough at the present time.
Oriana Bandiera, Valentino Larcinese, Imran Rasul, VoxEU: The impact of class size on the performance of university students. The effect of increasing class size in tertiary education is not well understood. This column estimates the effects of class size on students’ exam performance by comparing the same student’s performance to her own performance in courses with small and large class sizes. Going from the average class of 56 to a class size of 89 would decrease the mark by 9% of the observed variation in marks within a given student. The effect is almost four times larger for students in the top 10%.
Christopher L. Smith, Fed: The Impact of Low-Skilled Immigration on the Youth Labor Market. The employment-to-population rate of high-school aged youth has fallen by about 20 percentage points since the late 1980s. The human capital implications of this decline depend on the reasons behind it. In this paper, I demonstrate that growth in the number of less-educated immigrants may have considerably reduced youth employment rates. This finding stands in contrast to previous research that generally identifies, at most, a modest negative relationship across states or cities between immigration levels and adult labor market outcomes. At least two factors are at work: there is greater overlap between the jobs that youth and less-educated adult immigrants traditionally do, and youth labor supply is more responsive to immigration-induced changes in their wage. Despite a slight increase in schooling rates in response to immigration, I find little evidence that reduced employment rates are associated with higher earnings ten years later in life. This raises the possibility that an immigration-induced reduction in youth employment, on net, hinders youths' human capital accumulation.
Amanda Ripley, The Atlantic: What Makes a Great Teacher? For years, the secrets to great teaching have seemed more like alchemy than science, a mix of motivational mumbo jumbo and misty-eyed tales of inspiration and dedication. But for more than a decade, one organization has been tracking hundreds of thousands of kids, and looking at why some teachers can move them three grade levels ahead in a year and others can’t. Now, as the Obama administration offers states more than $4 billion to identify and cultivate effective teachers, Teach for America is ready to release its data. In general, Teach for America’s staffers have discovered that past performance—especially the kind you can measure—is the best predictor of future performance. Recruits who have achieved big, measurable goals in college tend to do so as teachers.
Greg Mankiw's Blog: Wealth-dependent Fines. A Swiss court has slapped a wealthy speeder with a chalet-sized fine — a full $290,000. Judges at the cantonal court in St. Gallen, in eastern Switzerland, based the record-breaking fine on the speeder's estimated wealth of over $20 million. Is it optimal to base fines on wealth? I think a case can be made, at least theoretically, to support the judges' ruling. First, assume that the negative externalities are very great, so the optimal quantity of the externality is about zero. By itself, that argues for a large fine, not a wealth-dependent one. But then add another assumption: Suppose there is some small probability that an innocent person will be found guilty because of a rogue, or simply a mistaken, policeman. This possibility, together with risk aversion, would induce us to temper how large the fine is. And this tempering of the large fine would seem to be less for richer taxpayers: Because the mistaken ticket is a proportionately smaller fraction of their wealth, we need to worry less about the uncertainty large fines impose. The result is larger fines for richer offenders.
Anne Case, Christina Paxson, NBER: Causes and Consequences of Early Life Health. Among children in general, and more strikingly among siblings, those who are heavier and longer at birth are taller in childhood on average…Children who are taller are healthier, they score significantly higher on cognitive tests and make their way more quickly through school. They are also more likely to perceive themselves to be scholastically competent. All of these haracteristics send children on different trajectories into adulthood and old age—trajectories that were, in part, set in place by mothers’ behaviors while pregnant. Childhood circumstances are important. Taller individuals attain more education, earn more, and are more likely to be employed. They are also more likely to have better health and cognitive outcomes in middle age to old age.
Friday, January 8, 2010
JANUARY 8 2010
Klaus-Jürgen Gern, Nils Jannsen, Kiel Institute: Do we Face a Credit Crunch? The weakness of credit growth in the United States and Europe has given rise to concerns that the financial crisis has led to a credit crunch which has deepened the recession in the real economy and poses a serious threat to the recovery. We find that so far the development of credit aggregates and interest rates for loans does not provide strong evidence for a supply restraint that goes beyond what could be expected given the deterioration of the quality of borrowers. Still, the behaviour of interest rate spreads in the United States does indicate that the effectiveness of monetary policy is reduced for the time being as a result of distress in the financial sector, and we see some risks that inappropriate bank capitalization may restrain credit growth and threaten the current recovery.
Paul Krugman, NYT: That 1937 Feeling. The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder. But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.
Daniel Gross, Slate: No Pessimists Allowed! America's economic recovery will be twice as big as experts predict. The Great Panic of 2008 may have destroyed blind optimism. But if excessive optimism was the near-fatal pose in 2008, blind pessimism has emerged as the reflexive post-bust crouch. And it has led the economic establishment to miss yet another inflection point. While we were wringing our hands about America's financial and industrial crisis, we ignored a parallel narrative that was emerging: the repairing of balance sheets, an embrace of reality, a nascent recovery. The same folks who chased the recession down now are likely to chase the recovery up.
Carmen M. Reinhart, Kenneth S. Rogoff, AEA: Growth in a Time of Debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. Emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
Olivier Blanchard, Gian Maria Milesi-Ferretti, IMF: Global Imbalances: In Midstream? Before the crisis, there were strong arguments for reducing global imbalances. As a result of the crisis, there have been significant changes in saving and investment patterns across the world and imbalances have narrowed considerably. Does this mean that imbalances are a problem of the past? Hardly. The paper argues that there is an urgent need to implement policy changes to address the remaining domestic and international distortions that are a key cause of imbalances. Failure to do so could result in the world economy being stuck in “midstream,” threatening the sustainability of the recovery.
Stephen S. Cohen, J. Bradford DeLong: The End of Influence: What Happens When Other Countries Have the Money. When you have the money--and "you" are a big, economically and culturally vital nation--you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly--though, hopefully, in quiet, nonconfrontational ways. An you lose influence--the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don't. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time
Phoebus Athanassiou, ECB: Withdrawal and expulsion from the EU and EMU: some reflections. Negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU
or EMU, would be legally next to impossible. This paper concludes with a reminder that while, institutionally, a Member State’s membership of the euro area would not survive
the discontinuation of its membership of the EU, the same need not be true of the former Member State’s use of the euro.
Jane Dokko et al, Fed: Monetary Policy and the Housing Bubble. We find little evidence that the setting of U.S. monetary policy could have directly accounted for a substantial share of the strength in U.S. housing markets between 2003 and 2006. In particular, the rise in house prices or housing activity during this period was much faster than the pace consistent with the overall macroeconomic environment at that time. But we also find that housing-specific developments were unusual in this period—and not only with respect to prices and activity. The form of mortgage finance, the role of other “new” or exotic mortgage features, and the role of different types of lenders and securitization paths—all shifted during this period. These shifts undoubtedly fed on each other, with strong demand for housing and rising house prices spurring unsustainable evolution in the nature and perceived risks associated with mortgage innovations and vice versa.
Deniz Igan, Prachi Mishra, Thierry Tressel, IMF: A Fistful of Dollars: Lobbying and the Financial Crisis. Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and their mortgage lending activities to answer this question. We find that, during 2000-07, lenders lobbying more intensively on specific issues related to mortgage lending (such as consumer protection laws) and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing loan portfolios. Ex-post, delinquency rates are higher in areas where lobbying lenders’ mortgage lending grew faster. The results suggest that lobbying may be linked to lenders expecting special treatments from policymakers, allowing them to engage in riskier lending behavior.
Michael Mandel, McKinsey: Innovation and the strength of the dollar. Since 1997 we’ve seen three global financial earthquakes, with the current one being the biggest and most violent. Unfortunately, there’s no reason to believe we’ve come to the end of the string. The most likely suspect for the next financial crisis is, of course, a dollar crash, which many international economic experts have been predicting for the past two decades. But what will trigger it? I’m going to argue here that the odds of a dollar crash will go up if and when it becomes apparent that the United States has lost its premier position as the global innovation leader.
Pravin Krishna, Mine Z. Senses, VoxEU. Trade and labour income risk in the US: Evidence from longitudinal data. Public concerns regarding globalisation remain as economists still do not agree on trade’s effect on the labour market. This column focuses on the effect of increased trade on permanent income shocks experienced by workers in the US. It suggests that increased import penetration is associated with increased risk to worker incomes.
W. Michael Cox, Richard Alm, Justyna Dymerska, Dallas Fed: Labor Market Globalization in the Recession and Beyond. Technology-driven virtual immigration has held up better than traditional physical immigration during the global recession. The spread of computer and telecommunications technologies in recent decades allows workers to circumvent barriers of traditional physical immigration
Roger E. A. Farmer, VoxEU: Farewell to the natural rate: Why unemployment persists. Most policymakers subscribe to the existence of a natural rate of unemployment. This column provides a visual history of unemployment, vacancies, and inflation in the US and says there is no natural rate. It suggests the economy can rest in any equilibrium on the Beveridge curve, as decided by the confidence of households and firms that pins down asset values.
Peter Coy, Michelle Conlin and Moira Herbst, BusinessWeek: The Disposable Worker. Pay is falling, benefits are vanishing, and no one's job is secure. How companies are making the era of the temp more than temporary. The forecast for the next five to 10 years: more of the same, with paltry pay gains, worsening working conditions, and little job security. More jobs will be freelance and temporary, and even seemingly permanent positions will be at greater risk. "We're all temps now."
Andrew J. Oswald, Eugenio Proto, Daniel Sgroi, IZA: Happiness and Productivity. The paper provides evidence that happiness raises productivity. In Experiment 1, a randomized trial is designed. Some subjects have their happiness levels increased, while those in a control group do not. Treated subjects have 12% greater productivity in a paid piece-rate Niederle-Vesterlund task. They alter output but not the per-piece quality of their work. To check the robustness and lasting nature of this kind of effect, a complementary Experiment 2 is designed. In this, major real-world unhappiness shocks – bereavement and family illness – are studied. The findings from (real-life) Experiment 2 match those from (random-assignment) Experiment 1.
Justin Lahart, WSJ: Secrets of the Economist's Trade: First, Purchase a Piggy Bank. Academic economists gather in Atlanta this weekend for their annual meetings, always held the first weekend after New Year's Day. That's not only because it coincides with holidays at most universities. A post-holiday lull in business travel also puts hotel rates near the lowest point of the year. Economists are often cheapskates. Some of the world's most famous economists were famously frugal.
Barbara Ehrenreich: Bright-sided. How the Relentless Promotion of Positive Thinking Has Undermined America. Americans are a “positive” people—cheerful, optimistic, and upbeat: this is our reputation as well as our self-image. But more than a temperament, being positive, we are told, is the key to success and prosperity. In this utterly original take on the American frame of mind, Barbara Ehrenreich traces the strange career of our sunny outlook from its origins as a marginal nineteenth-century healing technique to its enshrinement as a dominant, almost mandatory, cultural attitude. The medical profession prescribes positive thinking for its presumed health benefits. Academia has made room for new departments of “positive psychology” and the “science of happiness.” Nowhere, though, has bright-siding taken firmer root than within the business community, where, as Ehrenreich shows, the refusal even to consider negative outcomes—like mortgage defaults—contributed directly to the current economic crisis
Benjamin Popper, Slate: Build-a-Bomber. Why do so many terrorists have engineering degrees? Engineering is not a profession most people associate with religion. The failed attack this Christmas by mechanical engineer Umar Farouk Abdulmutallab was a reminder that the combination has a long history of producing violent radicals. Diego Gambetta and Steffen Hertog, adds empirical evidence to this observation. The pair looked at more than 400 radical Islamic terrorists from more than 30 nations in the Middle East and Africa born mostly between the 1950s and 1970s. Earlier studies had shown that terrorists tend to be wealthier and better-educated than their countrymen, but Gambetta and Hertog found that engineers, in particular, were three to four times more likely to become violent terrorists than their peers in finance, medicine or the sciences (pointer Freakonomics Blog).
Paul Krugman, NYT: That 1937 Feeling. The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder. But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.
Daniel Gross, Slate: No Pessimists Allowed! America's economic recovery will be twice as big as experts predict. The Great Panic of 2008 may have destroyed blind optimism. But if excessive optimism was the near-fatal pose in 2008, blind pessimism has emerged as the reflexive post-bust crouch. And it has led the economic establishment to miss yet another inflection point. While we were wringing our hands about America's financial and industrial crisis, we ignored a parallel narrative that was emerging: the repairing of balance sheets, an embrace of reality, a nascent recovery. The same folks who chased the recession down now are likely to chase the recovery up.
Carmen M. Reinhart, Kenneth S. Rogoff, AEA: Growth in a Time of Debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. Emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
Olivier Blanchard, Gian Maria Milesi-Ferretti, IMF: Global Imbalances: In Midstream? Before the crisis, there were strong arguments for reducing global imbalances. As a result of the crisis, there have been significant changes in saving and investment patterns across the world and imbalances have narrowed considerably. Does this mean that imbalances are a problem of the past? Hardly. The paper argues that there is an urgent need to implement policy changes to address the remaining domestic and international distortions that are a key cause of imbalances. Failure to do so could result in the world economy being stuck in “midstream,” threatening the sustainability of the recovery.
Stephen S. Cohen, J. Bradford DeLong: The End of Influence: What Happens When Other Countries Have the Money. When you have the money--and "you" are a big, economically and culturally vital nation--you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly--though, hopefully, in quiet, nonconfrontational ways. An you lose influence--the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don't. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time
Phoebus Athanassiou, ECB: Withdrawal and expulsion from the EU and EMU: some reflections. Negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU
or EMU, would be legally next to impossible. This paper concludes with a reminder that while, institutionally, a Member State’s membership of the euro area would not survive
the discontinuation of its membership of the EU, the same need not be true of the former Member State’s use of the euro.
Jane Dokko et al, Fed: Monetary Policy and the Housing Bubble. We find little evidence that the setting of U.S. monetary policy could have directly accounted for a substantial share of the strength in U.S. housing markets between 2003 and 2006. In particular, the rise in house prices or housing activity during this period was much faster than the pace consistent with the overall macroeconomic environment at that time. But we also find that housing-specific developments were unusual in this period—and not only with respect to prices and activity. The form of mortgage finance, the role of other “new” or exotic mortgage features, and the role of different types of lenders and securitization paths—all shifted during this period. These shifts undoubtedly fed on each other, with strong demand for housing and rising house prices spurring unsustainable evolution in the nature and perceived risks associated with mortgage innovations and vice versa.
Deniz Igan, Prachi Mishra, Thierry Tressel, IMF: A Fistful of Dollars: Lobbying and the Financial Crisis. Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and their mortgage lending activities to answer this question. We find that, during 2000-07, lenders lobbying more intensively on specific issues related to mortgage lending (such as consumer protection laws) and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing loan portfolios. Ex-post, delinquency rates are higher in areas where lobbying lenders’ mortgage lending grew faster. The results suggest that lobbying may be linked to lenders expecting special treatments from policymakers, allowing them to engage in riskier lending behavior.
Michael Mandel, McKinsey: Innovation and the strength of the dollar. Since 1997 we’ve seen three global financial earthquakes, with the current one being the biggest and most violent. Unfortunately, there’s no reason to believe we’ve come to the end of the string. The most likely suspect for the next financial crisis is, of course, a dollar crash, which many international economic experts have been predicting for the past two decades. But what will trigger it? I’m going to argue here that the odds of a dollar crash will go up if and when it becomes apparent that the United States has lost its premier position as the global innovation leader.
Pravin Krishna, Mine Z. Senses, VoxEU. Trade and labour income risk in the US: Evidence from longitudinal data. Public concerns regarding globalisation remain as economists still do not agree on trade’s effect on the labour market. This column focuses on the effect of increased trade on permanent income shocks experienced by workers in the US. It suggests that increased import penetration is associated with increased risk to worker incomes.
W. Michael Cox, Richard Alm, Justyna Dymerska, Dallas Fed: Labor Market Globalization in the Recession and Beyond. Technology-driven virtual immigration has held up better than traditional physical immigration during the global recession. The spread of computer and telecommunications technologies in recent decades allows workers to circumvent barriers of traditional physical immigration
Roger E. A. Farmer, VoxEU: Farewell to the natural rate: Why unemployment persists. Most policymakers subscribe to the existence of a natural rate of unemployment. This column provides a visual history of unemployment, vacancies, and inflation in the US and says there is no natural rate. It suggests the economy can rest in any equilibrium on the Beveridge curve, as decided by the confidence of households and firms that pins down asset values.
Peter Coy, Michelle Conlin and Moira Herbst, BusinessWeek: The Disposable Worker. Pay is falling, benefits are vanishing, and no one's job is secure. How companies are making the era of the temp more than temporary. The forecast for the next five to 10 years: more of the same, with paltry pay gains, worsening working conditions, and little job security. More jobs will be freelance and temporary, and even seemingly permanent positions will be at greater risk. "We're all temps now."
Andrew J. Oswald, Eugenio Proto, Daniel Sgroi, IZA: Happiness and Productivity. The paper provides evidence that happiness raises productivity. In Experiment 1, a randomized trial is designed. Some subjects have their happiness levels increased, while those in a control group do not. Treated subjects have 12% greater productivity in a paid piece-rate Niederle-Vesterlund task. They alter output but not the per-piece quality of their work. To check the robustness and lasting nature of this kind of effect, a complementary Experiment 2 is designed. In this, major real-world unhappiness shocks – bereavement and family illness – are studied. The findings from (real-life) Experiment 2 match those from (random-assignment) Experiment 1.
Justin Lahart, WSJ: Secrets of the Economist's Trade: First, Purchase a Piggy Bank. Academic economists gather in Atlanta this weekend for their annual meetings, always held the first weekend after New Year's Day. That's not only because it coincides with holidays at most universities. A post-holiday lull in business travel also puts hotel rates near the lowest point of the year. Economists are often cheapskates. Some of the world's most famous economists were famously frugal.
Barbara Ehrenreich: Bright-sided. How the Relentless Promotion of Positive Thinking Has Undermined America. Americans are a “positive” people—cheerful, optimistic, and upbeat: this is our reputation as well as our self-image. But more than a temperament, being positive, we are told, is the key to success and prosperity. In this utterly original take on the American frame of mind, Barbara Ehrenreich traces the strange career of our sunny outlook from its origins as a marginal nineteenth-century healing technique to its enshrinement as a dominant, almost mandatory, cultural attitude. The medical profession prescribes positive thinking for its presumed health benefits. Academia has made room for new departments of “positive psychology” and the “science of happiness.” Nowhere, though, has bright-siding taken firmer root than within the business community, where, as Ehrenreich shows, the refusal even to consider negative outcomes—like mortgage defaults—contributed directly to the current economic crisis
Benjamin Popper, Slate: Build-a-Bomber. Why do so many terrorists have engineering degrees? Engineering is not a profession most people associate with religion. The failed attack this Christmas by mechanical engineer Umar Farouk Abdulmutallab was a reminder that the combination has a long history of producing violent radicals. Diego Gambetta and Steffen Hertog, adds empirical evidence to this observation. The pair looked at more than 400 radical Islamic terrorists from more than 30 nations in the Middle East and Africa born mostly between the 1950s and 1970s. Earlier studies had shown that terrorists tend to be wealthier and better-educated than their countrymen, but Gambetta and Hertog found that engineers, in particular, were three to four times more likely to become violent terrorists than their peers in finance, medicine or the sciences (pointer Freakonomics Blog).
Monday, January 4, 2010
DECEMBER 31 2009
Joel Waldfogel, AER: The Deadweight Loss of Christmas. Much of the holiday spending is on gifts for others. Guessing of preferences of others is no mean feat; indeed, it is often done badly. Intrigued by this mismatch between wants and gifts, in 1993 Joel Waldfogel, then an economist at Yale University, sought to estimate the disparity in dollar terms. In a paper that has proved seminal in the literature on the issue, he asked students two questions at the end of a holiday season: first, estimate the total amount paid (by the givers) for all the holiday gifts you received; second, apart from the sentimental value of the items, if you did not have them, how much would you be willing to pay to get them? His results were gloomy: on average, a gift was valued by the recipient well below the price paid by the giver. The most conservative estimate put the average receiver's valuation at 90% of the buying price. The missing 10% is a deadweight loss.
Joel Waldfogel: Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. Christmas Giving Is ‘Orgy of Value Destruction. Christmas is a waste of money because people who give presents overestimate how much recipients will enjoy their offerings. His findings use surveys of people about presents they received during a season that prompts about $65 billion of spending on gifts in the U.S. and a jump in retail sales in Europe and Japan. Giving more thoughtful presents is one solution for those close to you, and gift cards, which avoid the “stigma” of cash, are good for people you don’t know well and have an obligation to give to.
Edward L. Glaeser, NYT Economix Blog: In Defense of Holiday Gift-Giving. So as much as I admire Joel Waldfogel, I’m not joining his war against holiday gift-giving. I think humanity engages in too few costly displays of affection, not too many. I support the far more prosaic cause of making gifts easier to return or exchange. The ability to exchange provides an easy way of limiting the deadweight loss from giving, while still ensuring that the recipients have seen givers’ best stabs at matching their tastes.
Stephen J. Dubner, Steven D. Levitt, Freakonomics Blog: The Gift-Card Economy. We argue that gift cards in particular are a bad idea. Gift cards are known within the retail industry as a stored-value product: they store their value very well, and often permanently. The financial-services research firm TowerGroup estimates that of the $80 billion spent on gift cards in 2006, roughly $8 billion will never be redeemed — “a bigger impact on consumers,” Tower notes, “than the combined total of both debit- and credit-card fraud.” A survey by Marketing Workshop Inc. found that only 30 percent of recipients use a gift card within a month of receiving it, while Consumer Reports estimates that 19 percent of the people who received a gift card in 2005 never used it.
Carol Horton Tremblay; Victor J. Tremblay, AEL: Children and the economics of Christmas gift-giving. Waldfogel (1993) found a substantial amount of deadweight loss associated with Christmas gift-giving. Here it is shown that the Waldfogel study is incomplete and alternative models of consumer choice theory which better explain Christmas gift-giving are identified. Although the standard neoclassical and altruistic models predict no relationship between the population of children and per capita Christmas spending, a model is developed that includes non-pecuniary externalities and predicts that children have a positive impact on Christmas gift-giving. This prediction is supported by empirical evidence.
Greg Mankiw, Blog: The Economics of Gifts. People typically know their own preferences better than others do, so we might expect everyone to prefer cash to in-kind transfers. If your employer substituted merchandise of his choosing for your paycheck, you would likely object to the means of payment. But your reaction is very different when someone who (you hope) loves you does the same thing. One interpretation of gift giving is that it reflects asymmetric information and signaling. The act of picking out a gift, rather than giving cash, has the right characteristics to be a signal. People care most about the custom when the strength of affection is most in question. Thus, giving cash to a girlfriend or boyfriend is usually a bad move. But when college students receive a check from their parents, they are less often offended.
Alex Tabarrok, Marginal Revolution: Giving to my Wild Self: The economist in me says the best gift is cash. The rest of me rebels. … [W]e want the gift giver to buy something for us that we would not have bought for ourselves. Or more precisely, one of our selves wants this — the self that is usually restrained, squashed, and limited, the wild self, the passionate self, the romantic self.
Australian Conservation Foundation: The Hidden Cost of Christmas. While the financial cost of Christmas is commonly measured, the environmental cost of Christmas spending has not before been calculated. In this report, the Australian Conservation Foundation has used data developed by the Integrated Sustainability Analysis Team at the
University of Sydney to calculate the environmental impacts that have occurred in the production of popular Christmas gifts. Christmas is damaging the environment, says the report. Every dollar Australians spend on new clothes as gifts consumes 20 litres (four gallons) of water and requires 3.4 square metres (37 sq feet) of land in the manufacturing process, it said. Christmas 2004, Australians spent A$1.5 billion (US$1.1 billion) on clothes, which required more than half a million hectares (1.2 million acres) of land to produce.
Jennifer Steinhauer, NYT: He Delivers Christmas Trees for Rent. Scott Martin — landscape architect and tree hugger in a literal sense — was unnerved by the sight of post-Christmas trees lying about like so much discarded sausage casing. What people really ought to do, he reasoned, was rent a Christmas tree, and return it, alive, to the nursery after the season. Mr. Martin’s idea, enabled by a rotten economy that made his free time greater and his potential labor pool deeper, is now manifest in his new business delivering live, potted Christmas trees that are taken away once the toys have been unwrapped.
American Christmas Tree Association: Carbon Footprint Study Finds Artificial Christmas Trees Best for the Environment. Owning an artificial Christmas tree is healthier for the environment over a 10 year period than using real trees. The most significant contribution to global warming came from fossil fuel consumption in transportation of real Christmas trees from tree farms and lots to consumer homes.
David Lazer, Harvard: Inefficiencies of Christmas cards. Thomas Schelling, in Micromotives and Macrobehavior, notes the social inefficiencies of Christmas cards. He claims that cards are based on a system of obligations, and that once a card has been sent one year, failing to send one each subsequent years sends and active—and negative—signal. Tim Hartford, the Undercover Economist, reiterates this theme, and notes that the yearly lag for feedback (I send a card this year, and receive one in return next year) may create this trap. Instead of thinking of the card tradition as a forced system of obligations, however, suppose we look at it from a networks perspective.
Clement C. Moore, The Project Gutenberg: Twas the Night Before Christmas. A Visit from St. Nicholas. Twas the night before Christmas, when all through the house/ Not a creature was stirring, not even a mouse/ The stockings were hung by the chimney with care/ In hopes that St. Nicholas soon would be there (Pointer Economist View).
Clare Murphy, Kathryn Westcott, BBC News Online: The politics of Christmas cards. The venerable Abraham Lincoln was the first US president who saw political mileage in the Christmas message, and in the process, immortalised the figure of Santa as we know him. During the American Civil War, which pitted the slave-owning South against the government union of the North, the then president requested a political cartoonist, Thomas Nast, to illustrate Santa with the Union troops in an attempt to bolster their spirits. Mr Nast was the first to introduce a fat Santa in the now-traditional red suit and big leather belt. Seeing this jolly fellow side with the North was allegedly very demoralising for the southern forces. They lost not very long after.
Joel Waldfogel: Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. Christmas Giving Is ‘Orgy of Value Destruction. Christmas is a waste of money because people who give presents overestimate how much recipients will enjoy their offerings. His findings use surveys of people about presents they received during a season that prompts about $65 billion of spending on gifts in the U.S. and a jump in retail sales in Europe and Japan. Giving more thoughtful presents is one solution for those close to you, and gift cards, which avoid the “stigma” of cash, are good for people you don’t know well and have an obligation to give to.
Edward L. Glaeser, NYT Economix Blog: In Defense of Holiday Gift-Giving. So as much as I admire Joel Waldfogel, I’m not joining his war against holiday gift-giving. I think humanity engages in too few costly displays of affection, not too many. I support the far more prosaic cause of making gifts easier to return or exchange. The ability to exchange provides an easy way of limiting the deadweight loss from giving, while still ensuring that the recipients have seen givers’ best stabs at matching their tastes.
Stephen J. Dubner, Steven D. Levitt, Freakonomics Blog: The Gift-Card Economy. We argue that gift cards in particular are a bad idea. Gift cards are known within the retail industry as a stored-value product: they store their value very well, and often permanently. The financial-services research firm TowerGroup estimates that of the $80 billion spent on gift cards in 2006, roughly $8 billion will never be redeemed — “a bigger impact on consumers,” Tower notes, “than the combined total of both debit- and credit-card fraud.” A survey by Marketing Workshop Inc. found that only 30 percent of recipients use a gift card within a month of receiving it, while Consumer Reports estimates that 19 percent of the people who received a gift card in 2005 never used it.
Carol Horton Tremblay; Victor J. Tremblay, AEL: Children and the economics of Christmas gift-giving. Waldfogel (1993) found a substantial amount of deadweight loss associated with Christmas gift-giving. Here it is shown that the Waldfogel study is incomplete and alternative models of consumer choice theory which better explain Christmas gift-giving are identified. Although the standard neoclassical and altruistic models predict no relationship between the population of children and per capita Christmas spending, a model is developed that includes non-pecuniary externalities and predicts that children have a positive impact on Christmas gift-giving. This prediction is supported by empirical evidence.
Greg Mankiw, Blog: The Economics of Gifts. People typically know their own preferences better than others do, so we might expect everyone to prefer cash to in-kind transfers. If your employer substituted merchandise of his choosing for your paycheck, you would likely object to the means of payment. But your reaction is very different when someone who (you hope) loves you does the same thing. One interpretation of gift giving is that it reflects asymmetric information and signaling. The act of picking out a gift, rather than giving cash, has the right characteristics to be a signal. People care most about the custom when the strength of affection is most in question. Thus, giving cash to a girlfriend or boyfriend is usually a bad move. But when college students receive a check from their parents, they are less often offended.
Alex Tabarrok, Marginal Revolution: Giving to my Wild Self: The economist in me says the best gift is cash. The rest of me rebels. … [W]e want the gift giver to buy something for us that we would not have bought for ourselves. Or more precisely, one of our selves wants this — the self that is usually restrained, squashed, and limited, the wild self, the passionate self, the romantic self.
Australian Conservation Foundation: The Hidden Cost of Christmas. While the financial cost of Christmas is commonly measured, the environmental cost of Christmas spending has not before been calculated. In this report, the Australian Conservation Foundation has used data developed by the Integrated Sustainability Analysis Team at the
University of Sydney to calculate the environmental impacts that have occurred in the production of popular Christmas gifts. Christmas is damaging the environment, says the report. Every dollar Australians spend on new clothes as gifts consumes 20 litres (four gallons) of water and requires 3.4 square metres (37 sq feet) of land in the manufacturing process, it said. Christmas 2004, Australians spent A$1.5 billion (US$1.1 billion) on clothes, which required more than half a million hectares (1.2 million acres) of land to produce.
Jennifer Steinhauer, NYT: He Delivers Christmas Trees for Rent. Scott Martin — landscape architect and tree hugger in a literal sense — was unnerved by the sight of post-Christmas trees lying about like so much discarded sausage casing. What people really ought to do, he reasoned, was rent a Christmas tree, and return it, alive, to the nursery after the season. Mr. Martin’s idea, enabled by a rotten economy that made his free time greater and his potential labor pool deeper, is now manifest in his new business delivering live, potted Christmas trees that are taken away once the toys have been unwrapped.
American Christmas Tree Association: Carbon Footprint Study Finds Artificial Christmas Trees Best for the Environment. Owning an artificial Christmas tree is healthier for the environment over a 10 year period than using real trees. The most significant contribution to global warming came from fossil fuel consumption in transportation of real Christmas trees from tree farms and lots to consumer homes.
David Lazer, Harvard: Inefficiencies of Christmas cards. Thomas Schelling, in Micromotives and Macrobehavior, notes the social inefficiencies of Christmas cards. He claims that cards are based on a system of obligations, and that once a card has been sent one year, failing to send one each subsequent years sends and active—and negative—signal. Tim Hartford, the Undercover Economist, reiterates this theme, and notes that the yearly lag for feedback (I send a card this year, and receive one in return next year) may create this trap. Instead of thinking of the card tradition as a forced system of obligations, however, suppose we look at it from a networks perspective.
Clement C. Moore, The Project Gutenberg: Twas the Night Before Christmas. A Visit from St. Nicholas. Twas the night before Christmas, when all through the house/ Not a creature was stirring, not even a mouse/ The stockings were hung by the chimney with care/ In hopes that St. Nicholas soon would be there (Pointer Economist View).
Clare Murphy, Kathryn Westcott, BBC News Online: The politics of Christmas cards. The venerable Abraham Lincoln was the first US president who saw political mileage in the Christmas message, and in the process, immortalised the figure of Santa as we know him. During the American Civil War, which pitted the slave-owning South against the government union of the North, the then president requested a political cartoonist, Thomas Nast, to illustrate Santa with the Union troops in an attempt to bolster their spirits. Mr Nast was the first to introduce a fat Santa in the now-traditional red suit and big leather belt. Seeing this jolly fellow side with the North was allegedly very demoralising for the southern forces. They lost not very long after.
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