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.