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.