Stephen G Cecchetti, M S Mohanty, Fabrizio Zampolli: The Future of Public Debt: Prospects and Implications. Fiscal problems facing industrial economies are bigger than suggested by official debt figures that show the implications of the financial crisis on fiscal balances. Large public debts have significant financial and real consequences. The recent sharp rise in risk premia on long-term bonds issued by several industrial countries suggests that markets no longer consider sovereign debt low-risk. The limited evidence we have suggests default risk premia move up with debt levels and down with the revenue share of GDP as well as the availability of private saving. We note the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth potential. A recent study suggests that there may be non-linear effects of public debt on growth. Looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability. We describe two channels through which unstable debt dynamics could lead to higher inflation – direct debt monetisation and the temptation to reduce the real value of government debt through higher inflation.
Richard Berner, Morgan Stanley: We Can't Inflate Our Way Out. Adding fuel to the fire, a growing chorus of household-name economists from both sides of the political aisle appears to be advocating higher inflation as the remedy for our fiscal maladies. Indeed, many believe that higher inflation will cure multiple ills, and that central banks should raise their inflation targets to as high as 4% from the current ones (some implicit) that cluster near 2%. From a policy perspective, we couldn't disagree more. As we see it, central bank responses to this financial crisis underscore the fact that inflation targets are medium-term goals to be met flexibly; they have not limited central banks from responding aggressively to the shock.
Aki Ito, Patrick Rial, Bloomberg: Rogoff Says China Crisis May Trigger Regional Slump. China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt- fueled bubble” within 10 years, sparking a regional recession, according to Harvard University Professor Kenneth Rogoff. “You’re not going to go a decade without having a bump in the business cycle,” Rogoff, former chief economist at the International Monetary Fund, said in an interview in Tokyo yesterday. “We would learn just how important China is when that happens. It would cause a recession everywhere surrounding” the country, including Japan and South Korea, and be “horrible” for Latin American commodity exporters, he said.
Christopher J. Neely, St Louise Fed: Okun’s Law: Output and Unemployment. U.S. output growth declined less than in most other industrialized countries while U.S. unemployment rose higher and faster than it did in most other major industrialized countries. Economists have long noted that most industrialized countries have larger Okun coefficients than do the United States and—to a lesser extent—Canada and the United Kingdom. In other words, most industrialized countries’ unemployment rates tend to vary less for a given gross domestic product (GDP) fluctuation than does that of the United States. The usual explanation for this is that the United States, Canada, and the United Kingdom have less heavily regulated labor markets in which businesses can more easily lay people off during slowdowns. Most countries have some combination of stronger implicit social job protections (e.g., Japan), stronger unions, or greater formal restrictions on releasing workers.
Robert J. Gordon, Northwestern University: Okun’s Law, Productivity Innovations, And Conundrums in Business Cycle Dating. Regression analysis reveals regular features of postwar business cycles, including lags of hours and employment behind output and leads of productivity changes ahead of output changes. While Okun’s Law was roughly accurate until 1986, regressions for the post 1986 period turn Okun’s Law on its head. The elasticity of changes in the hours gap to the output gap was 0.74 before 1986, close to Okun’s 2/3, but rose after 1986 to 1.2. Productivity no longer exhibits procyclical fluctuations, rendering as obsolete both the Real Business Cycle model and those aspects of modern macro that include productivity shocks as an explanation of business cycles. Productivity grows slowest in the later stages of the business cycle expansion and most rapidly in the early phase of the business cycle recovery. And this is nothing new.
Gauti Eggertsson, NY Fed: The Paradox of Toil. Suppose everyone wakes up one day and decides they want to work more. What happens to aggregate employment? This paper shows that, under certain conditions, aggregate employment falls; that is, there is less work in the aggregate because everyone wants to work more. The conditions for the paradox to apply are that the short-term nominal interest rate is zero and there are deflationary pressures and output contraction, much as during the Great Depression in the United States and, perhaps, the 2008 financial crisis in large parts of the world. The paradox of toil is tightly connected to the Keynesian idea of the paradox of thrift. Both are examples of a fallacy of composition.
Mark Thoma, Economist’s View Blog: Who Pays the Costs of the Recession? The recession is taking away opportunity for the young to gain employment experience, and many who are employed are working below their abilities in jobs they are likely to get stuck in for many years, if not forever. The recession is wiping out the accumulated assets of the unemployed as they try to bridge the gap until jobs return, and since many of these are older workers, this will have a large detrimental effect that lasts throughout their retirement years. Recessions cause skills to depreciate, there are psychological costs, there are costs to family members, the loss of a job generally means loss of health care, the costs to working class households go on and on. And there are other ways in which the costs have been distributed unequally, and in many cases these have not been thoroughly examined. For example, there is evidence that minority groups were given higher cost and highly profitable mortgages when lower cost but less profitable loans were available. This also served to wipe out accumulated assets of minority borrowers in addition to all the other problems that come when a high cost mortgage cannot be paid.
J. Bradford DeLong Blog: Economists for Wage Subsidies. Draft Letter to the Congress: A well-designed temporary and incremental hiring tax credit is a cost-effective way to create jobs, and could work well in the current environment. At a time when GDP is beginning to rise and demand is starting to return, private firms are likely to respond to such a tax incentive by hiring sooner and more aggressively than they otherwise would have done. Such a credit could thus help put Americans back to work more quickly than otherwise. And by targeting firms that are growing, such a tax credit supports the businesses most likely to lead the recovery of employment.
Alan S. Blinder, Washington Post: Getting the biggest bang for job-creation bucks. There are two key design elements in any tax credit for job-creation: minimizing the amount of the tax cut that is wasted (in this case, loses revenue without creating jobs) and minimizing possibilities for gaming the system. Many new jobs that receive the tax credit would have been created anyway. By increasing the demand for labor, the tax credit will drive up wages (which is good), which will in turn kill some other jobs (which is not good). Standard economic research can be used to estimate each of these three effects. The conclusion, in very round numbers, is that a $5,000-per-job tax credit similar to the administration's proposal should cost around $30,000 to $40,000 for each job created. Such estimates assume that most firms will not increase employment at all. Unfortunately, we know far less about the second problem: Gaming the system.
David Leonhardt, NYT: Judging Stimulus by Job Data Reveals Success. Just look at the outside evaluations of the stimulus. Perhaps the best-known economic research firms are IHS Global Insight, Macroeconomic Advisers and Moody’s Economy.com. They all estimate that the bill has added 1.6 million to 1.8 million jobs so far and that its ultimate impact will be roughly 2.5 million jobs. The Congressional Budget Office, an independent agency, considers these estimates to be conservative. The jobless rate is now expected to begin falling consistently by the end of this year. For that, the stimulus package, flaws and all, deserves a big heaping of credit.
Rajiv Sethi, Macroeconomic Resilience Blog: Natural Selection, Self-Deception and the Moral Hazard Explanation of the Financial Crisis. The current regime of explicit and implicit bank creditor protection and regulatory capital requirements means that a highly levered balance sheet invested in “safe” assets with severely negatively skewed payoffs is the optimal strategy to maximise the moral hazard free lunch. Reaching this optimum does not require explicit intentionality on the part of economic actors. The same may be achieved via a Hayekian spontaneous order of agents reacting to local incentives or even more generally through “natural selection”-like mechanisms.
Michael R. Crittenden, Marshall Eckblad, WSJ: Lending Falls at Epic Pace. U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry's continued slide is making it harder for the economy to recover. While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the Federal Deposit Insurance Corp. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers.
Gary Becker, Becker Posner Blog: Should the Government try to Stimulate US Exports? The US has China over the barrel. For the US could threaten to inflate away much of the burden of its debt, and thereby greatly reduce the real value of China’s assets. The US could also use the Fed to maintain relatively low interest rates, even though this would likely increase inflation as well. …China may be willing to take some losses in order to pressure the US in its military relations to Taiwan, and other geo-political areas of conflict. But its threats in the government bond market have little credibility since China would suffer much more than the US would.
David Laibson, Johanna Mollerstrom, Harvard: Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis. Bernanke (2005) hypothesized that a “global savings glut” was causing large trade imbalances. However, we show that the global savings rates did not show a robust upward trend during the relevant period. Moreover, if there had been a global savings glut there should have been a large investment boom in the countries that imported capital. Instead, those countries experienced consumption booms. National asset bubbles explain the international imbalances. The bubbles raised consumption, resulting in large trade deficits. In a sample of 18 OECD countries plus China, movements in home prices alone explain half of the variation in trade deficits.
Sagiri Kitao, NY Fed: Labor-Dependent Capital Income Taxation That Encourages Work and Saving. This paper proposes a simple mechanism of capital taxation that is negatively correlated with labor supply. Using a life-cycle model of heterogeneous agents, I show that this tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life cycle, when they would otherwise work less. This reformed system also adds to the saving motive and raises aggregate capital. Moreover, the increased economic activities expand the tax base, and the revenue-neutral reform results in a lower average tax rate. My findings show that this tax scheme improves long-run welfare and that the majority of current generations would experience a welfare gain from a transition to the reformed system.
Larissa MacFarquhar, The New Yorker: The Deflationist. How Paul Krugman found politics. In his columns, Krugman is belligerently, obsessively political, but this aspect of his personality is actually a recent development. His parents were New Deal liberals, but they weren’t especially interested in politics. In his academic work, Krugman focussed mostly on subjects with little political salience. During the eighties, he thought that supply-side economics was stupid, but he didn’t think that much about it. Unlike Wells, who was so upset when Reagan was elected that she moved to England, Krugman found Reagan comical rather than evil. “I feel now like I was sleepwalking through the twenty years before 2000.” Translating unmappable facts into economic discourse, it turned out, was what Krugman was better at than anyone else: he could take an intriguing notion that had come up in real-world discussions, pare away the details (knowing just what to take out and what was essential), and refine what was left into a clean, clever, “cute” (as he liked to put it), and simple model. “It’s poetry,” Kenneth Rogoff, an economist at Harvard, says. “I mean, you go back to his first book and there was this beautiful chart about what the Volcker contraction did to output that swept aside so much—he just drew this little graph which really cleared the air. I’ve heard economists use the word ‘poet’ in describing him for decades.”
Nicholas O. Rule*, Nalini Ambady, Tufts University: Democrats and Republicans Can Be Differentiated from Their Faces. Individuals' political affiliations could be accurately discerned from their faces. Perceivers were able to accurately distinguish whether U.S. Senate candidates were either Democrats or Republicans based on photos of their faces. These effects extended to Democrat and Republican college students, based on their senior yearbook photos. These judgments were related to differences in perceived traits among the Democrat and Republican faces. Republicans were perceived as more powerful than Democrats. Moreover, as individual targets were perceived to be more powerful, they were more likely to be perceived as Republicans by others. Similarly, as individual targets were perceived to be warmer, they were more likely to be perceived as Democrats.
Friday, February 26, 2010
Friday, February 19, 2010
FEBRUARY 19 2010
Olivier Blanchard, Giovanni Dell’Ariccia, Paolo Mauro, IMF: Rethinking Macroeconomic Policy. The crisis was not triggered primarily by macroeconomic policy. But it has exposed flaws in the precrisis policy framework. In many ways, the general policy framework should remain the same. The ultimate goals should be to achieve a stable output gap and stable inflation. But the crisis has made clear that policymakers have to watch many targets, including the composition of output, the behavior of asset prices, and the leverage of different agents. It has also made clear that they have potentially many more instruments at their disposal than they used before the crisis. The crisis has also reinforced lessons that we were always aware of, but with greater experience now internalize more strongly. Low public debt in good times creates room to act forcefully when needed. Good plumbing, in terms of prudential regulation, and transparent data in the monetary, financial, and fiscal areas are critical to our economic system functioning well.
Louise Story, Landon Thomas Jr. And Nelson D. Schwartz, NYT: Wall St. Helped to Mask Debt Fueling Europe’s Crisis. Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities. As recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.” Edward Hugh, in A Fistful of Euros Blog writes: Just What Is The Real Level Of Government Debt In Europe?
Paul van den Noord, ECFIN Briefs: Exit strategy: is 1937/38 relevant? The 1937/38 recession in the United States is often quoted as a warning against premature exits from monetary and fiscal stimulus. The presumption is that the 1937/38 recession was indeed due to such a premature exit. This Economic Brief presents evidence that goes against this view. The 1937/38 recession is equivalent to a downturn in 2016/17, which is obviously of little relevance now. Moreover, the cutback in policy stimulus at the time was not an early but rather a late exit, in the wake of an unduly late and timid entry. Even more importantly, while the 1937/38 recession can be attributed to cut backs in policy stimulus to some extent, other factors appear to have been predominant. Notably, geopolitical tensions played a major role, along with adverse business confidence effects of Roosevelt's New Deal policies. Concerning the latter, the strengthening of wage bargaining power amid mass unemployment and heightened uncertainty over property rights were prominent.
Kevin B. Moore, Michael G. Palumbo, Fed: The Finances of American Households in the Past Three Recessions: Evidence from the Survey of Consumer Finances. This paper uses household-level data from the Federal Reserve Board's series of Surveys of Consumer Finances to document three factors that appear to have contributed to greater financial stress in the household sector in the current downturn compared with the prior two: 1) substantial and widespread reductions in home values that resulted in sizable erosions of home equity and net worth for many homeowners; 2) markedly expanded holdings of corporate equity among middle-income households which lost significant market value, on net, as stock prices sunk; and, 3) greater debt on household balance sheets and overall financial vulnerability around the onset of the 2008-09 recession, particularly for those in the middle of the income distribution.
Zheng Liu et al, FedSan Francisco: Do credit constraints amplify macroeconomic fluctuations? Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model: we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints."
Uri Dadush, Vera Eidelman, Carnegie: Exchange Rates and the Crisis: The Dog That Didn’t Bark. At the outbreak of the crisis, the world’s exchange rate “system”—a messy construct of flexible, managed, and pegged regimes, including a few currency boards and a large currency union—was not reassuring. The dollar, the world’s reserve currency, belonged to the country at the epicenter of the crisis. The specter of the protectionism, competitive devaluations, and sovereign debt crises that wrecked the world economy during the Great Depression loomed, and the IMF, the system’s ostensible surveillor and lender of last resort, had become dysfunctional. Yet, exchange rates have adjusted in a remarkably orderly way and, while month-to-month volatility increased in 2009, changes in real exchange rates since the crisis’ outbreak have been modest, with a few notable exceptions. This orderly adjustment appears to have contributed to and resulted from global policy’s successful response to the crisis.
N. Gregory Mankiw, NYT: What’s Sustainable About This Budget? Moreover, even in the long run, a balanced budget is too strict a standard. Because of technological progress, population growth and inflation, the nation’s income and tax base grows over time. If the government’s debts grow at or below that pace, servicing the debt will not become a major problem. That means the government can run budget deficits in perpetuity, as long as they are not too large. Recent history illustrates this principle. From 2005 to 2007, before the recession and financial crisis, the federal government ran budget deficits, but they averaged less than 2 percent of gross domestic product. Because this borrowing was moderate in magnitude and the economy was growing at about its normal rate, the federal debt held by the public fell from 36.8 percent of gross domestic product at the end of the 2004 fiscal year to 36.2 percent three years later.
James W. Fuchs, Timothy A. Bosch, St Louise Fed: Why Are Banks Failing? Although today's challenges are great, the four underlying reasons for bank failures have not changed from those of years' past, which are: an imbalance of risk versus return, failure to diversify, offering products and services that management doesn't fully understand and poor management of risks.
Gregory Clark, UCDAVIS: Was there ever a Ruling Class? Surnames and Social Mobility in England, 1200-2009. This paper reports on a preliminary investigation of surname distributions as a measure long run social mobility. In England this
suggests two surprising claims. First, England, all the way from the heart of the Middle Ages in 1200 to 2009, is a society without persistent social classes, at least among the descendants of the medieval population. It was a world of complete social mobility, with no permanent over-class and under-class, a world of complete equal opportunity. However, for some recent immigrant groups it may no longer be true. Instead of moving from a world of immobility and class rigidity in medieval England to a world of equal opportunity, we may have moved in the opposite direction. Other modern societies such as the US and Brazil also show sign of persistent social classes. There was, however, a gain from being in the upper class in any generation in the form of leaving more copies of your DNA permanently in later populations.
Marianne Simonsen, Lars Skipper, Niels Skipper, Aarhus University: Price Sensitivity of Demand for Prescription Drugs: Exploiting a Regression Kink Design. This paper investigates price sensitivity of demand for prescription drugs using drug purchase records for at 20% random sample of the Danish population. We identify price responsiveness by exploiting exogenous variation in prices caused by kinked reimbursement schemes and implement a regression kink design. Thus, within a unifying framework we uncover price sensitivity for different subpopulations and types of drugs. The results suggest low average price responsiveness with corresponding price elasticities ranging from -0.08 to -0.25, implying that demand is inelastic. Individuals with lower education and income are, however, more responsive to the price. Also, essential drugs that prevent deterioration in health and prolong life have lower associated average price sensitivity.
Stephen Gandel, The Curious Capitalist Blog: The Real Economic Cost of Snow. How much does a snow storm cost? Every year, on days like the one we are having today on the East Coast and in the Midwest, economic forecasters try to estimate the impact of all the white stuff falling from the sky. The numbers are always huge. And they are always wrong. The biggest reason is that snow storms are often looked at as a snap shot. What is the money spent or lost on that day. That ignores how the economy really works. And it ignores the way snow works. Money spent today doesn't disappear. Snow on the other hand does. Snow expenditures go into the economy and pop out somewhere else. Money not spent today doesn't disappear either.
Louise Story, Landon Thomas Jr. And Nelson D. Schwartz, NYT: Wall St. Helped to Mask Debt Fueling Europe’s Crisis. Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities. As recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.” Edward Hugh, in A Fistful of Euros Blog writes: Just What Is The Real Level Of Government Debt In Europe?
Paul van den Noord, ECFIN Briefs: Exit strategy: is 1937/38 relevant? The 1937/38 recession in the United States is often quoted as a warning against premature exits from monetary and fiscal stimulus. The presumption is that the 1937/38 recession was indeed due to such a premature exit. This Economic Brief presents evidence that goes against this view. The 1937/38 recession is equivalent to a downturn in 2016/17, which is obviously of little relevance now. Moreover, the cutback in policy stimulus at the time was not an early but rather a late exit, in the wake of an unduly late and timid entry. Even more importantly, while the 1937/38 recession can be attributed to cut backs in policy stimulus to some extent, other factors appear to have been predominant. Notably, geopolitical tensions played a major role, along with adverse business confidence effects of Roosevelt's New Deal policies. Concerning the latter, the strengthening of wage bargaining power amid mass unemployment and heightened uncertainty over property rights were prominent.
Kevin B. Moore, Michael G. Palumbo, Fed: The Finances of American Households in the Past Three Recessions: Evidence from the Survey of Consumer Finances. This paper uses household-level data from the Federal Reserve Board's series of Surveys of Consumer Finances to document three factors that appear to have contributed to greater financial stress in the household sector in the current downturn compared with the prior two: 1) substantial and widespread reductions in home values that resulted in sizable erosions of home equity and net worth for many homeowners; 2) markedly expanded holdings of corporate equity among middle-income households which lost significant market value, on net, as stock prices sunk; and, 3) greater debt on household balance sheets and overall financial vulnerability around the onset of the 2008-09 recession, particularly for those in the middle of the income distribution.
Zheng Liu et al, FedSan Francisco: Do credit constraints amplify macroeconomic fluctuations? Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model: we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints."
Uri Dadush, Vera Eidelman, Carnegie: Exchange Rates and the Crisis: The Dog That Didn’t Bark. At the outbreak of the crisis, the world’s exchange rate “system”—a messy construct of flexible, managed, and pegged regimes, including a few currency boards and a large currency union—was not reassuring. The dollar, the world’s reserve currency, belonged to the country at the epicenter of the crisis. The specter of the protectionism, competitive devaluations, and sovereign debt crises that wrecked the world economy during the Great Depression loomed, and the IMF, the system’s ostensible surveillor and lender of last resort, had become dysfunctional. Yet, exchange rates have adjusted in a remarkably orderly way and, while month-to-month volatility increased in 2009, changes in real exchange rates since the crisis’ outbreak have been modest, with a few notable exceptions. This orderly adjustment appears to have contributed to and resulted from global policy’s successful response to the crisis.
N. Gregory Mankiw, NYT: What’s Sustainable About This Budget? Moreover, even in the long run, a balanced budget is too strict a standard. Because of technological progress, population growth and inflation, the nation’s income and tax base grows over time. If the government’s debts grow at or below that pace, servicing the debt will not become a major problem. That means the government can run budget deficits in perpetuity, as long as they are not too large. Recent history illustrates this principle. From 2005 to 2007, before the recession and financial crisis, the federal government ran budget deficits, but they averaged less than 2 percent of gross domestic product. Because this borrowing was moderate in magnitude and the economy was growing at about its normal rate, the federal debt held by the public fell from 36.8 percent of gross domestic product at the end of the 2004 fiscal year to 36.2 percent three years later.
James W. Fuchs, Timothy A. Bosch, St Louise Fed: Why Are Banks Failing? Although today's challenges are great, the four underlying reasons for bank failures have not changed from those of years' past, which are: an imbalance of risk versus return, failure to diversify, offering products and services that management doesn't fully understand and poor management of risks.
Gregory Clark, UCDAVIS: Was there ever a Ruling Class? Surnames and Social Mobility in England, 1200-2009. This paper reports on a preliminary investigation of surname distributions as a measure long run social mobility. In England this
suggests two surprising claims. First, England, all the way from the heart of the Middle Ages in 1200 to 2009, is a society without persistent social classes, at least among the descendants of the medieval population. It was a world of complete social mobility, with no permanent over-class and under-class, a world of complete equal opportunity. However, for some recent immigrant groups it may no longer be true. Instead of moving from a world of immobility and class rigidity in medieval England to a world of equal opportunity, we may have moved in the opposite direction. Other modern societies such as the US and Brazil also show sign of persistent social classes. There was, however, a gain from being in the upper class in any generation in the form of leaving more copies of your DNA permanently in later populations.
Marianne Simonsen, Lars Skipper, Niels Skipper, Aarhus University: Price Sensitivity of Demand for Prescription Drugs: Exploiting a Regression Kink Design. This paper investigates price sensitivity of demand for prescription drugs using drug purchase records for at 20% random sample of the Danish population. We identify price responsiveness by exploiting exogenous variation in prices caused by kinked reimbursement schemes and implement a regression kink design. Thus, within a unifying framework we uncover price sensitivity for different subpopulations and types of drugs. The results suggest low average price responsiveness with corresponding price elasticities ranging from -0.08 to -0.25, implying that demand is inelastic. Individuals with lower education and income are, however, more responsive to the price. Also, essential drugs that prevent deterioration in health and prolong life have lower associated average price sensitivity.
Stephen Gandel, The Curious Capitalist Blog: The Real Economic Cost of Snow. How much does a snow storm cost? Every year, on days like the one we are having today on the East Coast and in the Midwest, economic forecasters try to estimate the impact of all the white stuff falling from the sky. The numbers are always huge. And they are always wrong. The biggest reason is that snow storms are often looked at as a snap shot. What is the money spent or lost on that day. That ignores how the economy really works. And it ignores the way snow works. Money spent today doesn't disappear. Snow on the other hand does. Snow expenditures go into the economy and pop out somewhere else. Money not spent today doesn't disappear either.
Friday, February 12, 2010
FEBRUARY 12 2010
Richard Berner et al, Morgan Stanley: Policy Uncertainty Clouds the Outlook. We also think that new uncertainty around economic policies at home and abroad is creating downside risks to US and global growth through two channels. First, consumers and businesses could hesitate to commit to spending and hiring decisions until policy uncertainty diminishes. Second, prolonged uncertainty and consequent significant renewed weakness in asset prices would reverse some of the easing in financial conditions that has revived economic activity. In USA, there is uncertainty about coming tax hikes, more stringent banking regulations, and who will shoulder the costs of healthcare. Global fears center on the impact on growth of policy tightening in Asia and the potential contagion from sovereign credit risks.
Jon Hilsenrath, WSJ Blog: Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios. Historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end. But I do think there is still, for reasons that are beyond me, quite a bit of complacency out there. Eastern Europe is another source of concern, and Europe has limited resources. You can rescue one. You can maybe rescue two. But you can’t rescue all of them. The Baltics are very vulnerable. Romania is vulnerable. Hungary is vulnerable. Problems in these countries feed back to their lenders. Austrian bank exposure to Eastern Europe is great. The Italian exposure to Eastern Europe is great. The Swedish exposure is non-trivial. You started out with a major financial crisis in 2007 and 2008, in which some of these countries have seen their worst recessions, in a way that really harms fiscal sustainability, even if you were in a good shape fiscally at the outset of the crisis. It is the pattern that has been prevalent in the past, that these major financial crises have been followed by an afterwave of debt crises.
Dave Altig, Fed Atlanta: Competing histories. If your economic forecast for the coming year embeds something like robust growth in consumer spending, last Friday's Federal Reserve report on consumer credit should probably give you pause. As we peer ahead, we essentially have two competing, and contradictory, economic histories as our guides. First, there is the statistical regularity that deep recessions in the United States have in the post-WWII period been reliably followed by rapid recoveries. But second, there is the Reinhart-Rogoff statistical regularity that recoveries from financial crises are slow and difficult. One thing is certain. At least one history is going to be revised.
Simon Johnson,The Baseline Scenario: Europe Risks Another Global Depression. Europe is again entering a serious economic crisis. Europeans are not being careful – and it’s not just about Greece any more. Worries about government debt and associated public sector liabilities (e.g., because banking systems are in deep trouble) have spread through the eurozone to Spain and Portugal. Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind. Another Lehman/AIG-type situation lurks somewhere on the European continent, and again our purported G7 (or even G20) leaders are slow to see the risk. And this time, given that they already used almost all their fiscal bullets, it will be considerably more difficult for governments to respond effectively when they do wake up.
Paul Krugman, NYT Blog: Anatomy of a Euromess. Greece is up against the wall to a greater extent than anyone else. But the Greek economy is also very small; in economic terms the heart of the crisis is in Spain, which is much bigger. And as I’ve tried to point out in a number of posts, Spain’s troubles are not, despite what you may have read, the result of fiscal irresponsibility. Instead, they reflect “asymmetric shocks” within the eurozone, which were always known to be a problem, but have turned out to be an even worse problem than the euroskeptics feared. Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable. But oh, what a mess.
Thorvaldur Gylfason et al, VoxEU: The Nordics in the global crisis. Is the Nordic model an asset or a liability? The global crisis has seen GDP in the region decline by between 4.5% and 7%. This column argues that the Nordic model, with its welfare state and high rate of investment in human capital, can, properly implemented, be part of the solution.
Linda S. Goldberg, NY Fed: Is the International Role of the Dollar Changing? Recently the U.S. dollar’s preeminence as an international currency has been questioned. The emergence of the euro, changes in the dollar’s value, and the financial market crisis have, in the view of many commentators, posed a significant challenge to the currency’s long-standing position in world markets. However, a study of the dollar across critical areas of international trade and finance suggests that the dollar has retained its standing in key roles. While changes in the global status of the dollar are possible, factors such as inertia in currency use, the large size and relative stability of the U.S. economy, and the dollar pricing of oil and other commodities will help perpetuate the dollar’s role as the dominant medium for international transactions.
Enrico Perotti, VoxEU: Tax banks to discourage systemic-risk creation, not to fund bailouts. Obama’s plans for bank taxation took markets, policymakers, and academics by surprise, leaving all parties now debating its merits. This column suggests an alternative. By raising a Pigouvian tax based on banks’ individual contribution to systemic-risk creation, the policy would target the externality caused by funding fragility while raising the cost of opportunistic risk creation in good times.
Edward Glaeser, Boston Globe: Success of the left in Europe, the right in US. Over decades, the success of the left in Europe and the right in the United States has led to wildly different beliefs about the nature of poverty and success. We found that 60 percent of Americans thought that the poor were lazy, while only 26 percent of European share that view. Fifty four percent of Europeans think luck determines income; only 30 percent of Americans concur. These differences don’t reflect economic reality. The American poor work longer hours than their European counterparts. They instead reflect the long-run ability of politics to shape public opinion.
Brian A. Jacob, NBER: The Effect of Employment Protection on Worker Effort: Evidence from Public Schooling. This paper studies the effect of employment protection on worker productivity and firm output in the context of a public school system. In 2004, the Chicago Public Schools (CPS) and Chicago Teachers Union (CTU) signed a new collective bargaining agreement that gave principals the flexibility to dismiss probationary teachers (defined as those with less than five years of experience) for any reason, and without the elaborate documentation and hearing process typical in many large, urban school districts. Results suggest that the policy reduced annual teacher absences by roughly 10 percent and
reduced the prevalence of teachers with 15 or more annual absences by 20 percent. The effects were strongest among teachers in elementary schools and in low-achieving, redominantly African-American high schools, and among teachers with highpredicted absences. There is also evidence that the impact of the policy increased substantially
after its first year.
C. Kirabo Jackson, NBER: A Stitch in Time: The Effects of a Novel Incentive-Based High-School Intervention on College Outcomes. I analyze the longer-run effects of a program that pays both 11th and 12th grade students and teachers for passing scores on Advanced Placement exams. Using a difference-in-differences strategy, I find that affected students attend college in greater numbers, have improved college GPAs, and are more likely to remain in college beyond their freshman year. Moreover, the program improves college outcomes even for those students who would have enrolled in college without the program. I also find evidence of increased college graduation for black and Hispanic students groups that tend to underperform in college.
OECD: A Family Affair: Intergenerational Social Mobility across OECD Countries. It is easier to climb the social ladder and earn more than one’s parents in the Nordic countries, Australia and Canada than in France, Italy, Britain and the United States, according to a new OECD study. Intergenerational Social Mobility: a family affair? says weak social mobility can signal a lack of equal opportunities, constrain productivity and curb economic growth.
Jérôme Adda, Francesca Cornaglia, CEP/LSE: The Effect of Bans and Taxes on Passive Smoking. This paper evaluates the effect of smoking bans in public places on the exposure to tobacco smoke of non-smokers and contrasts it with the effect of excise taxes. Exploiting data on cotinine - a metabolite of nicotine - as well as state and time variation in anti-smoking policies across US states, we show that smoking bans in public places can perversely increase the exposure of non-smokers to tobacco smoke by displacing smokers to private places where they contaminate non-smokers, and in particular young children. In contrast, we find that higher taxes are an efficient way to decrease exposure to tobacco smoke, especially for those most exposed.
Jon Hilsenrath, WSJ Blog: Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios. Historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end. But I do think there is still, for reasons that are beyond me, quite a bit of complacency out there. Eastern Europe is another source of concern, and Europe has limited resources. You can rescue one. You can maybe rescue two. But you can’t rescue all of them. The Baltics are very vulnerable. Romania is vulnerable. Hungary is vulnerable. Problems in these countries feed back to their lenders. Austrian bank exposure to Eastern Europe is great. The Italian exposure to Eastern Europe is great. The Swedish exposure is non-trivial. You started out with a major financial crisis in 2007 and 2008, in which some of these countries have seen their worst recessions, in a way that really harms fiscal sustainability, even if you were in a good shape fiscally at the outset of the crisis. It is the pattern that has been prevalent in the past, that these major financial crises have been followed by an afterwave of debt crises.
Dave Altig, Fed Atlanta: Competing histories. If your economic forecast for the coming year embeds something like robust growth in consumer spending, last Friday's Federal Reserve report on consumer credit should probably give you pause. As we peer ahead, we essentially have two competing, and contradictory, economic histories as our guides. First, there is the statistical regularity that deep recessions in the United States have in the post-WWII period been reliably followed by rapid recoveries. But second, there is the Reinhart-Rogoff statistical regularity that recoveries from financial crises are slow and difficult. One thing is certain. At least one history is going to be revised.
Simon Johnson,The Baseline Scenario: Europe Risks Another Global Depression. Europe is again entering a serious economic crisis. Europeans are not being careful – and it’s not just about Greece any more. Worries about government debt and associated public sector liabilities (e.g., because banking systems are in deep trouble) have spread through the eurozone to Spain and Portugal. Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind. Another Lehman/AIG-type situation lurks somewhere on the European continent, and again our purported G7 (or even G20) leaders are slow to see the risk. And this time, given that they already used almost all their fiscal bullets, it will be considerably more difficult for governments to respond effectively when they do wake up.
Paul Krugman, NYT Blog: Anatomy of a Euromess. Greece is up against the wall to a greater extent than anyone else. But the Greek economy is also very small; in economic terms the heart of the crisis is in Spain, which is much bigger. And as I’ve tried to point out in a number of posts, Spain’s troubles are not, despite what you may have read, the result of fiscal irresponsibility. Instead, they reflect “asymmetric shocks” within the eurozone, which were always known to be a problem, but have turned out to be an even worse problem than the euroskeptics feared. Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable. But oh, what a mess.
Thorvaldur Gylfason et al, VoxEU: The Nordics in the global crisis. Is the Nordic model an asset or a liability? The global crisis has seen GDP in the region decline by between 4.5% and 7%. This column argues that the Nordic model, with its welfare state and high rate of investment in human capital, can, properly implemented, be part of the solution.
Linda S. Goldberg, NY Fed: Is the International Role of the Dollar Changing? Recently the U.S. dollar’s preeminence as an international currency has been questioned. The emergence of the euro, changes in the dollar’s value, and the financial market crisis have, in the view of many commentators, posed a significant challenge to the currency’s long-standing position in world markets. However, a study of the dollar across critical areas of international trade and finance suggests that the dollar has retained its standing in key roles. While changes in the global status of the dollar are possible, factors such as inertia in currency use, the large size and relative stability of the U.S. economy, and the dollar pricing of oil and other commodities will help perpetuate the dollar’s role as the dominant medium for international transactions.
Enrico Perotti, VoxEU: Tax banks to discourage systemic-risk creation, not to fund bailouts. Obama’s plans for bank taxation took markets, policymakers, and academics by surprise, leaving all parties now debating its merits. This column suggests an alternative. By raising a Pigouvian tax based on banks’ individual contribution to systemic-risk creation, the policy would target the externality caused by funding fragility while raising the cost of opportunistic risk creation in good times.
Edward Glaeser, Boston Globe: Success of the left in Europe, the right in US. Over decades, the success of the left in Europe and the right in the United States has led to wildly different beliefs about the nature of poverty and success. We found that 60 percent of Americans thought that the poor were lazy, while only 26 percent of European share that view. Fifty four percent of Europeans think luck determines income; only 30 percent of Americans concur. These differences don’t reflect economic reality. The American poor work longer hours than their European counterparts. They instead reflect the long-run ability of politics to shape public opinion.
Brian A. Jacob, NBER: The Effect of Employment Protection on Worker Effort: Evidence from Public Schooling. This paper studies the effect of employment protection on worker productivity and firm output in the context of a public school system. In 2004, the Chicago Public Schools (CPS) and Chicago Teachers Union (CTU) signed a new collective bargaining agreement that gave principals the flexibility to dismiss probationary teachers (defined as those with less than five years of experience) for any reason, and without the elaborate documentation and hearing process typical in many large, urban school districts. Results suggest that the policy reduced annual teacher absences by roughly 10 percent and
reduced the prevalence of teachers with 15 or more annual absences by 20 percent. The effects were strongest among teachers in elementary schools and in low-achieving, redominantly African-American high schools, and among teachers with highpredicted absences. There is also evidence that the impact of the policy increased substantially
after its first year.
C. Kirabo Jackson, NBER: A Stitch in Time: The Effects of a Novel Incentive-Based High-School Intervention on College Outcomes. I analyze the longer-run effects of a program that pays both 11th and 12th grade students and teachers for passing scores on Advanced Placement exams. Using a difference-in-differences strategy, I find that affected students attend college in greater numbers, have improved college GPAs, and are more likely to remain in college beyond their freshman year. Moreover, the program improves college outcomes even for those students who would have enrolled in college without the program. I also find evidence of increased college graduation for black and Hispanic students groups that tend to underperform in college.
OECD: A Family Affair: Intergenerational Social Mobility across OECD Countries. It is easier to climb the social ladder and earn more than one’s parents in the Nordic countries, Australia and Canada than in France, Italy, Britain and the United States, according to a new OECD study. Intergenerational Social Mobility: a family affair? says weak social mobility can signal a lack of equal opportunities, constrain productivity and curb economic growth.
Jérôme Adda, Francesca Cornaglia, CEP/LSE: The Effect of Bans and Taxes on Passive Smoking. This paper evaluates the effect of smoking bans in public places on the exposure to tobacco smoke of non-smokers and contrasts it with the effect of excise taxes. Exploiting data on cotinine - a metabolite of nicotine - as well as state and time variation in anti-smoking policies across US states, we show that smoking bans in public places can perversely increase the exposure of non-smokers to tobacco smoke by displacing smokers to private places where they contaminate non-smokers, and in particular young children. In contrast, we find that higher taxes are an efficient way to decrease exposure to tobacco smoke, especially for those most exposed.
Friday, February 5, 2010
FEBRUARY 5 2010
Phil Izzo, WSJ Blog: Groundhog Day 2010: Is the Economy Coming Out of Its Hole. For the third year in a row groundhog Punxsutawney Phil saw his shadow and headed back to his hole for six more weeks of winter. Does the famous rodent meteorologist tell us anything about the economy? His record as an economic forecaster isn’t much worse than some pros. According to CNN, Phil doesn’t have the best record as a weatherman (he’s correct just 39% of the time). During the last two years, he’s had more success as an economic forecaster predicting turning points.
Michael W. McCracken, St Louise Fed: Using FOMC Forecasts to Forecast the Economy. In almost every case, for the real variables (such as GDP and the unemployment rate), the midpoint of the full range is more accurate than the midpoint of the trimmed range. In contrast, for inflation, in each instance the midpoint of the trimmed range is more accurate than the midpoint of the full range. While the magnitudes of improvement are not always large, the pattern is consistent enough across forecast horizons to suggest using the midpoint of the full range for the real variables and the midpoint of the trimmed range for inflation.
Richard Berner et al, Morgan Stanley: Higher Yields Won't Kill the Economy. In our view, higher yields and a stronger economy can coexist; indeed, we think that an improving economy will help drive yields higher. Of course, changes in interest rates do matter for economic activity. But the coming rise in interest rates is a by-product of recovery, not a headwind for it. Two key factors mean that the higher rates we envision won't crush the economy. First, causation runs from the economy to credit demand, not the reverse. Several factors - such as strong global growth - are reviving US output and income. Second, credit-sensitive outlays are less responsive to interest rates than most believe.
Thomas L. Friedman, NYT: When Economics Meets Politics. The world’s major economies badly need 2010 to be another quiet year politically and geopolitically, but that will require, at a minimum, that three major struggles — the banks vs. President Obama, China vs. Google & friends, and the world vs. Iran — can be defused with win-win compromises rather than win-lose confrontations. The economics of recovery were always hard, but in 2010 politics and geopolitics could make them even harder. Pray that cooler heads prevail.
Kenneth Rogoff, Project Syndicate: Can Greece Avoid the Lion? Avoiding default may be possible, but it will not be easy. One has only to look at official data, including Greece’s external debt, which amounts to 170% of national income, or its gaping government budget deficit (almost 13% of GDP). But the problem is not only the numbers; it is one of credibility. Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures. Nor does Greece’s default history inspire confidence. In the case of Argentina, a pair of massive IMF loans in 2000 and 2001 ultimately only delayed the inevitable harsh adjustment, and made the country’s ultimate default even more traumatic. Like Argentina, Greece has a fixed exchange rate, a long history of fiscal deficits, and an even longer history of sovereign defaults. Nevertheless, Greece can avoid an Argentine-style meltdown, but it needs to engage in far more determined adjustment. It is time to put on the running shoes.
Werner Roeger, Janos Varga, Jan int Veldy, DG ECFIN: How to close the productivity gap between the US and Europe. This paper uses a semi-endogenous growth model to identify possible sources for three interrelated stylised differences between the EU and the US, namely a higher level of productivity and knowledge investment and larger skill premia in the US compared to the EU. Goods market competition and both administrative and financial entry barriers are the most important explanatory factors for lower productivity in the EU, while entry barriers explain the bulk of the knowledge investment gap and high skilled wage premia.
Javier J. Pérez, Jesús Sánchez, ECB: Is there a signalling role for public wages? This paper tries to isolate the pure signalling effect that one sector might exert on the other by controlling for other determinants of wages (prices, productivity, institutions) for the main euro area economies (Germany, France, Italy and Spain) and the periods 1980-2007 and 1991-2007. There is strong evidence of public wages’ leadership, either in conjunction with bi-directional links from the private sector (Germany and Spain) or pure public wage leadership (France in the sample 1991-2007, Italy for within-the-year linkages).
Catherine Rampell, NYT Economix Blog: The Growing Underclass: Jobs Gone Forever. Lots of the bloodletting we’ve seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel’s famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the “cleansing effect” of recessions. In this recession the shift from temporary layoffs to permanent job loss has been especially pronounced. In fact, the share of the unemployed who lost their jobs permanently is at its highest level since at least 1967, the first year for which the Labor Department has these numbers available.
Gary Becker, Becker-Posner Blog: Subsidies to Small Business? President Obama, in his State of the Union Address last week, indicated that he would assist small business, particularly to encourage their hiring of additional workers. Two days later he proposed a $33 billion tax credit to small businesses that increase their hiring. Obama’s aims are laudable: to simultaneously increase employment, reduce unemployment, and encourage the expansion of small and medium sized businesses. Yet, as an employment-increasing plan, the President’s approach has many problems, and is likely to have only limited impact. This is partly because while $33 billion is a lot of money, it is less than ¼ of one percent of American GDP. Yet even a much larger sum would have a small impact on employment. One reason is that the subsidy proposal gives small business some incentive to fire some employees, and then later to replace them with unemployed workers for whom they can collect the subsidy
OECD: The automobile industry in and beyond the crisis. While a rebound in car sales is likely in North America, Japan and the United Kingdom, car sales in Germany have been pushed significantly above trend and may weaken going forward. Over the medium term, in mature markets such as Europe and North America, trend sales are likely to remain stagnant. By contrast, rapid increases are foreseen in China and to a lesser extent in India. Medium-term projections suggest that capacity exceeds trend sales by around 20% in the five largest Western European markets considered as a whole. Without an adjustment in capacity, these countries would need to ensure an ongoing strong export performance. By contrast, automakers in the NAFTA area would need to halt their decline in domestic market share or to rely increasingly on exports in order to avoid excess capacity. In order to maintain their high levels of capacity utilisation, Korean and Japanese manufacturers will need to keep up their strong export performance.
Jonathan Heathcote, Fabrizio Perri, Gianluca Violante, VoxEU: Inequality in times of crisis: Lessons from the past and a first look at the current recession. The unemployment rate has dominated economic headlines, but recessions raise numerous problems. This column warns that recessions raise earnings inequality and income inequality, absent mitigating government programmes. The current recession has indeed raised such inequality, but consumption inequality has surprisingly declined.
Daron Acemoglu, Pierre Yared, NBER: Political Limits to Globalization. Despite the major advances in information technology that have shaped the recent wave of globalization, openness to trade is still a political choice, and trade policy can change with shifts in domestic political equilibria. This paper suggests that a particular threat and a limiting factor to globalization and its future developments may be militarist sentiments that appear to be on the rise among many nations around the globe today. We proxy militarism by spending on the military and the size of the military, and document that over the past 20 years, countries experiencing greater increases in militarism according to these measures have had lower growth in trade. Focusing on bilateral trade flows, we also show that controlling flexibly for country trends, a pair of countries jointly experiencing greater increases in militarism has lower growth in bilateral trade.
François R. Velde, Chicago Fed: The Case of the Undying Debt. The French government currently honors a very unusual debt contract: an annuity that was issued in 1738 and currently yields C1.20 per year. I tell the story of this unique debt, which serves as an anecdotal but symbolic summary of French public finances since the 18th century. The Linotte rente, with its pitiful return, is nothing but the value of an eighteenth century servant’s loyalty, adjusted for all the misfortunes that befell France in the intervening two and a half centuries.
Michael W. McCracken, St Louise Fed: Using FOMC Forecasts to Forecast the Economy. In almost every case, for the real variables (such as GDP and the unemployment rate), the midpoint of the full range is more accurate than the midpoint of the trimmed range. In contrast, for inflation, in each instance the midpoint of the trimmed range is more accurate than the midpoint of the full range. While the magnitudes of improvement are not always large, the pattern is consistent enough across forecast horizons to suggest using the midpoint of the full range for the real variables and the midpoint of the trimmed range for inflation.
Richard Berner et al, Morgan Stanley: Higher Yields Won't Kill the Economy. In our view, higher yields and a stronger economy can coexist; indeed, we think that an improving economy will help drive yields higher. Of course, changes in interest rates do matter for economic activity. But the coming rise in interest rates is a by-product of recovery, not a headwind for it. Two key factors mean that the higher rates we envision won't crush the economy. First, causation runs from the economy to credit demand, not the reverse. Several factors - such as strong global growth - are reviving US output and income. Second, credit-sensitive outlays are less responsive to interest rates than most believe.
Thomas L. Friedman, NYT: When Economics Meets Politics. The world’s major economies badly need 2010 to be another quiet year politically and geopolitically, but that will require, at a minimum, that three major struggles — the banks vs. President Obama, China vs. Google & friends, and the world vs. Iran — can be defused with win-win compromises rather than win-lose confrontations. The economics of recovery were always hard, but in 2010 politics and geopolitics could make them even harder. Pray that cooler heads prevail.
Kenneth Rogoff, Project Syndicate: Can Greece Avoid the Lion? Avoiding default may be possible, but it will not be easy. One has only to look at official data, including Greece’s external debt, which amounts to 170% of national income, or its gaping government budget deficit (almost 13% of GDP). But the problem is not only the numbers; it is one of credibility. Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures. Nor does Greece’s default history inspire confidence. In the case of Argentina, a pair of massive IMF loans in 2000 and 2001 ultimately only delayed the inevitable harsh adjustment, and made the country’s ultimate default even more traumatic. Like Argentina, Greece has a fixed exchange rate, a long history of fiscal deficits, and an even longer history of sovereign defaults. Nevertheless, Greece can avoid an Argentine-style meltdown, but it needs to engage in far more determined adjustment. It is time to put on the running shoes.
Werner Roeger, Janos Varga, Jan int Veldy, DG ECFIN: How to close the productivity gap between the US and Europe. This paper uses a semi-endogenous growth model to identify possible sources for three interrelated stylised differences between the EU and the US, namely a higher level of productivity and knowledge investment and larger skill premia in the US compared to the EU. Goods market competition and both administrative and financial entry barriers are the most important explanatory factors for lower productivity in the EU, while entry barriers explain the bulk of the knowledge investment gap and high skilled wage premia.
Javier J. Pérez, Jesús Sánchez, ECB: Is there a signalling role for public wages? This paper tries to isolate the pure signalling effect that one sector might exert on the other by controlling for other determinants of wages (prices, productivity, institutions) for the main euro area economies (Germany, France, Italy and Spain) and the periods 1980-2007 and 1991-2007. There is strong evidence of public wages’ leadership, either in conjunction with bi-directional links from the private sector (Germany and Spain) or pure public wage leadership (France in the sample 1991-2007, Italy for within-the-year linkages).
Catherine Rampell, NYT Economix Blog: The Growing Underclass: Jobs Gone Forever. Lots of the bloodletting we’ve seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel’s famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the “cleansing effect” of recessions. In this recession the shift from temporary layoffs to permanent job loss has been especially pronounced. In fact, the share of the unemployed who lost their jobs permanently is at its highest level since at least 1967, the first year for which the Labor Department has these numbers available.
Gary Becker, Becker-Posner Blog: Subsidies to Small Business? President Obama, in his State of the Union Address last week, indicated that he would assist small business, particularly to encourage their hiring of additional workers. Two days later he proposed a $33 billion tax credit to small businesses that increase their hiring. Obama’s aims are laudable: to simultaneously increase employment, reduce unemployment, and encourage the expansion of small and medium sized businesses. Yet, as an employment-increasing plan, the President’s approach has many problems, and is likely to have only limited impact. This is partly because while $33 billion is a lot of money, it is less than ¼ of one percent of American GDP. Yet even a much larger sum would have a small impact on employment. One reason is that the subsidy proposal gives small business some incentive to fire some employees, and then later to replace them with unemployed workers for whom they can collect the subsidy
OECD: The automobile industry in and beyond the crisis. While a rebound in car sales is likely in North America, Japan and the United Kingdom, car sales in Germany have been pushed significantly above trend and may weaken going forward. Over the medium term, in mature markets such as Europe and North America, trend sales are likely to remain stagnant. By contrast, rapid increases are foreseen in China and to a lesser extent in India. Medium-term projections suggest that capacity exceeds trend sales by around 20% in the five largest Western European markets considered as a whole. Without an adjustment in capacity, these countries would need to ensure an ongoing strong export performance. By contrast, automakers in the NAFTA area would need to halt their decline in domestic market share or to rely increasingly on exports in order to avoid excess capacity. In order to maintain their high levels of capacity utilisation, Korean and Japanese manufacturers will need to keep up their strong export performance.
Jonathan Heathcote, Fabrizio Perri, Gianluca Violante, VoxEU: Inequality in times of crisis: Lessons from the past and a first look at the current recession. The unemployment rate has dominated economic headlines, but recessions raise numerous problems. This column warns that recessions raise earnings inequality and income inequality, absent mitigating government programmes. The current recession has indeed raised such inequality, but consumption inequality has surprisingly declined.
Daron Acemoglu, Pierre Yared, NBER: Political Limits to Globalization. Despite the major advances in information technology that have shaped the recent wave of globalization, openness to trade is still a political choice, and trade policy can change with shifts in domestic political equilibria. This paper suggests that a particular threat and a limiting factor to globalization and its future developments may be militarist sentiments that appear to be on the rise among many nations around the globe today. We proxy militarism by spending on the military and the size of the military, and document that over the past 20 years, countries experiencing greater increases in militarism according to these measures have had lower growth in trade. Focusing on bilateral trade flows, we also show that controlling flexibly for country trends, a pair of countries jointly experiencing greater increases in militarism has lower growth in bilateral trade.
François R. Velde, Chicago Fed: The Case of the Undying Debt. The French government currently honors a very unusual debt contract: an annuity that was issued in 1738 and currently yields C1.20 per year. I tell the story of this unique debt, which serves as an anecdotal but symbolic summary of French public finances since the 18th century. The Linotte rente, with its pitiful return, is nothing but the value of an eighteenth century servant’s loyalty, adjusted for all the misfortunes that befell France in the intervening two and a half centuries.
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