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.
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