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.
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