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.