Carmen M. Reinhart, Kenneth S. Rogoff, NBER: From Financial Crash to Debt Crisis. Newly developed long historical time series on public debt, along with modern data on external debts, allow a deeper analysis of the cycles underlying serial debt and banking crises. The evidence confirms a strong link between banking crises and sovereign default across the economic history of great many countries, advanced and emerging alike. The focus of the analysis is on three related hypotheses tested with both “world” aggregate levels and on an individual country basis. First, private debt surges are a recurring antecedent to banking crises; governments quite contribute to this stage of the borrowing boom. Second, banking crises (both domestic ones and those emanating from international financial centers) often precede or accompany sovereign debt crises. Indeed, we find they help predict them. Third, public borrowing accelerates markedly ahead of a sovereign debt crisis; governments often have “hidden debts” that far exceed the better documented levels of external debt. These hidden debts encompass domestic public debts (which prior to our data were largely undocumented).
Clemente De Lucia, BNP Paribas: Financial crisis and potential output. If the crisis were to lead to a new “equilibrium” with higher public debt, this would mean that sooner or later the level of taxation has to be increased, with negative effects on growth perspectives. Note that demographic developments are already exerting downward pressure on potential output. By contrast, the crisis could even trigger an acceleration of structural reforms in the eurozone. Making eurozone product and labour markets more flexible and more open to competition could increase growth prospects, creating the conditions for a “full recovery”. Under this more optimistic scenario, the level of potential output returns to its pre-crisis period. Finland, which faced a serious banking crisis in the early 1990s, is an example of output recovering completely from losses due to financial distress.
Ben Steverman, Business Week: Corporate Balance Sheets Show Surprising Strength. Despite a harsh recession and alluringly low interest rates, many companies have shrunk debt and other obligations over the past year U.S. large-cap companies have survived the recession without taking on loads of new debt. According to an analysis of Bloomberg data on nonfinancial companies in the Standard & Poor's 500-stock index, the average large-cap company has shrunk liabilities on its balance sheet by 8.2%. The liabilities on a company's balance sheet include its debts, as well as any other financial obligations, such as those toward pension plans. Stronger corporate balance sheets stand out at a time when government and consumer finances remain shaky.
Murat Tasci, Cleveland Fed: Are Jobless Recoveries the New Norm? Ultimately, whether we have a muted, jobless recovery or a rapid one featuring full employment gains will depend on the demand for labor. The unemployment rate is stabilizing, but unfortunately, the demand for workers has not been showing any signs of major improvement yet. Of course, some kinds of slack might exist that prevent rising demand for labor from translating immediately into new jobs. Employers could potentially ask for more hours from their current employees before hiring new workers. Similarly, part-time employees can be made full-time workers. A good measure of this potential slack is the number of workers employed part-time for economic reasons. Significant underemployment could be a major contributor to a jobless recovery.
Mark Vitner, Wells Fargo: Reflections on 25 Years Following The U.S. Economy. Over the past 25 years the greatest forecasting mistake economists have made is to underestimate economic growth. Paying too much attention to all the negatives in the economy tends to make economic forecast too pessimistic. Forecasters tended to overestimate the drag from federal budgets deficits during the late 1980s, the banking crisis in the early 1990s, and most of the subsequent crises that we faced during the past two decades. Many forecasters were also slow in recognizing that the potential growth rate of the economy had increased in the late 1990s with the advent of new information technologies.
Yener Altunbas, BIS: Does monetary policy affect bank risk-taking? This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks' risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls.
Joyce M. Dargay, Dermot Gately, NYU: World oil demand’s shift toward faster growing and less price-responsive products and regions. World oil demand has shifted toward products and regions that are faster growing and less price-responsive. In contrast to projections to 2030 of declining percapita demand for the world as a whole – by the U.S. Department of Energy (DOE), International Energy Agency (IEA) and OPEC – we project modest growth. Our projections for total world demand in 2030 are at least 20% higher than projections by those three institutions, using similar assumptions about income growth and oil prices, because we project rest-of-world growth that is consistent with historical patterns, in contrast to the dramatic slowdowns which they project.
Paul M. Romer, NBER: Which Parts of Globalization Matter for Catch-up Growth? Economists devote too much attention to international flows of goods and services and not enough to international flows of ideas. Traditional trade flows are an imperfect substitute for flows of the underlying ideas. The simplest textbook trade model shows that a welfare-enhancing move toward freer flows of ideas should be associated with a reduction in conventional trade. The large quantitative effect from the flow of ideas is evident in the second half of the 20th century as the life expectancies in poor and rich countries began to converge. Another example comes from China, where authorities dramatically reduced accident rates by adopting rules of civil aviation that were developed in the United States. All economists, including trade economists, would be better equipped to talk about international flows of technologies and rules if they adopted a consistent vocabulary based on the concepts of nonrivalry and excludability. An analysis of the interaction between rules and technologies may help explain important puzzles such as why private firms have successfully diffused some technologies (mobile telephony) but not others (safe municipal water.)
Pierre Koning, Carolyn J. Heinrich, IZA: Cream-Skimming, Parking and Other Intended and Unintended Effects of Performance-Based Contracting in Social Welfare Services. We analyze the incentive effects of performance-based contracts, as well as their impacts on provider job placement rates, using unique data on Dutch cohorts of unemployed and disabled workers that were assigned to private social welfare providers in 2002-2005. We take advantage of variation in contract design over this period, where procured contracts gradually moved from partial performance-contingent pay to contracts with 100%-performance contingent reward schemes, and analyze the impact of these changes using panel data that allow us to control for cohort types and to develop explicit measures of selection into the programs. We find evidence of cream-skimming and other gaming activities on the part of providers but little impact of these activities on job placement rates. Overall, moving to a system with contract payments fully contingent on performance appears to increase job placements for more readily employable workers, although it does not affect the duration of their jobs.
Douglas Almond, Janet Currie, NBER: Human Capital Development Before Age Five. Events before five years old can have large long term impacts on adult outcomes. Several longitudinal studies suggest that characteristics that are measured as of age 7 can explain a great deal of the variation in educational attainment, earnings as of the early 30s, and the probability of employment. Child and family characteristics measured at school entry do as much to explain future outcomes as factors that labor economists have more traditionally focused on, such as years of education. Yet while children can be permanently damaged at this age, an important message is that the damage can often be remediated. We provide a brief overview of evidence regarding the effectiveness of different types of policies to provide remediation.
Paul J. Burke, Andrew Leigh, IZA: Do Output Contractions Trigger Democratic Change? Does faster economic growth increase pressure for democratic change, or reduce it? Using data for 154 countries for the period 1963-2007, we examine the short-run relationship between economic growth and moves toward and away from greater democracy. To address the potential endogeneity of economic growth, we use variation in precipitation, temperatures, and commodity prices as instruments for a country’s rate of economic growth. Our results indicate that more rapid economic growth reduces the short-run likelihood of institutional change toward democracy. Output contractions due to adverse weather shocks appear to have a particularly important impact on the timing of democratic change.
Pierre Brochu et al, University of Ottawa: The ‘Trendiness’ of Sleep: An Empirical Investigation into the Cyclical Nature of Sleep Time. Using Canadian time use data, we exploit exogenous variation in local unemployment rates to investigate the cyclical nature of sleep time and show that for both men and women, sleep time decreases when the economy is doing relatively better. Our results suggest that in a recession Canadians sleep an average of 2 hours and 34 minutes more per week, or 22 minutes more per day. Given the importance of even small changes in sleep time on measures of cognitive functioning such as reaction time and concentration, our findings may help explain the countercyclical nature of mortality. Further, we find that sleep time should not be treated as exogenously determined, but, like any other resource, determined by its relative cost.
Friday, March 26, 2010
Friday, March 19, 2010
MARCH 19 2010
Paul Krugman, NYT Blog: How Much Of The World Is In a Liquidity Trap? Being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense. How much of the world is currently in a liquidity trap? Almost all advanced countries. The US, obviously; Japan, even more obviously; the eurozone, because the ECB probably couldn’t engage in Fed-style quantitative easing even if it wanted to, given the lack of a single backing government; Britain. Essentially the whole advanced world, accounting for 70 percent of world GDP at market prices, is in a liquidity trap.
Laurel Graefe, Jacob Smith, Atlanta Fed: A look at the income-side estimates of growth. Last week, a post in the New York Times' blog on Okun's law made note of the statistical discrepancy between the two methods for calculating national output: "…there are two measures of output growth—the usual measure, which adds up total spending in the economy, and the alternative, which adds up total income. In theory, the two should be exactly the same. In practice, they have been very different during this recession… These GDI numbers suggest that output growth actually declined much more sharply than had been widely understood." Indeed, the recession looks deeper and the recovery seems much less pronounced, looking at the income-side data. History suggests that when these two measures of national output disagree, GDP tends to get revised in the direction of GDI and not the other way around. It would be prudent not to dismiss the latest divergence in the two measures because it suggests that the decline in national output has been more protracted, and the recovery more modest, than what is being reflected in GDP.
Joachim Fels et al, Morgan Stanley: What Fiscal Tightening? We continue to forecast solid, above-consensus global GDP growth of 4.4% this year - despite growth downgrades in Europe, a weaker 1Q in the US (largely weather-related) and the recent softening in the China Manufacturing PMI. At the same time, we think that downside risks for the global economy in 2011 are mounting. First, many central banks in EM are about to start tightening monetary policy, and we expect the Fed to nudge official rates higher from 3Q10 and thus earlier than markets currently expect. Second, our macro team is looking for significantly higher bond yields this year and for a sell-off in developed equity markets. If so, it would dampen growth prospects for next year further. Third, we expect sovereign debt concerns to spread throughout the advanced economies as fiscal policy in most developed countries is on an unsustainable path.
Nouriel Roubini, Project Syndicate: States of Risk. The dilemma is that, whereas fiscal consolidation is necessary to prevent an unsustainable increase in the spread on sovereign bonds, the short-run effects of raising taxes and cutting government spending tend to be contractionary. In countries like the euro-zone members, a loss of external competitiveness, caused by tight monetary policy and a strong currency, erosion of long-term comparative advantage relative to emerging markets, and wage growth in excess of productivity growth, impose further constraints on the resumption of growth. A vicious circle of public-finance deficits, current-account gaps, worsening external-debt dynamics, and stagnating growth can then set in. Eventually, this can lead to default on euro-zone members’ public and foreign debt, as well as exit from the monetary union by fragile economies unable to adjust and reform fast enough.
Prakash Loungani, IMF: Housing Prices: More Room to Fall? Though there are some signs of stabilization, the global correction in housing markets continued through 2009. House prices in the OECD economies fell on average about 5 percent in real terms between the fourth quarter of 2007 and the third quarter of 2009.House prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. Prices remain above rents and incomes. Econometric models show that house prices increased during 2000–06 to a greater degree than can be explained by either short-run driving forces or long-run relationships: the corrections thus far have not erased all of the excesses generated by the house price increases. That leads to an uncomfortable conclusion: house prices in many countries still have room to fall.
Robert J. Shiller, Project Syndicate: A Crisis of Understanding. Few economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes. The problem for macroeconomics is that the types of causes mentioned for the current crisis are difficult to systematize. The mathematical models that macroeconomists have may resemble weather models in some respects, but their structural integrity is not guaranteed by anything like a solid, immutable theory. The most important new book about the origins of the economic crisis, Carmen Reinhart’s and Kenneth Rogoff’s This Time Is Different, is essentially a summary of lessons learned from virtually every financial crisis in every country in recorded history. But the book is almost entirely non-theoretical. This leaves us trying to use patterns from past, dissimilar crises to try to infer the likely prognosis for the current crisis. As a result, we simply do not know if the recovery will be solid or disappointing.
Huixin Bi, Eric M. Leeper, NBER: Sovereign Debt Risk Premia and Fiscal Policy in Sweden. What are the tradeoffs between short-run stabilization and long-run sustainability when the perceived riskiness of government debt depends, in part, on the current and expected fiscal environment in place? We calibrate a simple model to Swedish fiscal data in two periods: before and after the financial crisis of the early 1990s. We compute the dynamic fiscal limit, which depends on the peak of the Laffer curve, for the pre-crisis and three alternative post-crisis fiscal policies. The model simulates the macroeconomic consequences of alternative policies in the face of the sequence of bad output shocks that Sweden experienced from 1991-1997.
Carmen M. Reinhart, NBER: This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises. This Chartbook provides a pictorial history, on a country-by-country basis, of public debt and economic crises of various forms. It is a timeline of a countrys creditworthiness and financial turmoil. The analysis, narrative, and illustrations in the book “This Time is Different” were primarily organized around themes (serial default, inflation, etc.), although detailed tables in the book chronicled country-specific information on the dating, frequency, incidence, etc. of specific crises episodes by country. The Chartbook compliments the thematic analysis with individual country histories, and provides the grounds for a systematic analysis of the temporal patterns of debt cycles, banking and sovereign debt crises, hyperinflation, and, for the post World War II period, the reliance on IMF programs.
Mark Whitehouse, WSJ Blog: Atlanta Fed’s Altig on Small Business’s Potential to Derail Recovery. In recent weeks, policy makers from President Barack Obama to Federal Reserve Chairman Ben Bernanke have been taking extraordinary measures to remove what they see as a serious impediment to the recovery: A dearth of credit for the small businesses that many economists say must play a leading role in creating new jobs. David Altig, head of research at the Atlanta Fed, notes that an outsized fraction of the job losses during this recession came from small businesses, particularly very small businesses with less than 50 employees. We’re looking for explanations. One obvious candidate is that this was the group that would have more difficulty with a credit event, which clearly this recession was.
Jaison R. Abel, Ishita Dey, and Todd M. Gabe, NY Fed: Productivity and the Density of Human Capital. We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. Estimation accounts for potential biases due to the endogeneity of density and industrial composition effects. Using new information on output per worker for U.S. metropolitan areas along with a measure of density that accounts for the spatial distribution of population, we find that a doubling of density increases productivity by 2 to 4 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock one standard deviation below the mean realize no productivity gain, while doubling density in metropolitan areas with a human capital stock one standard deviation above the mean yields productivity benefits that are about twice the average.
Gary Becker, Becker Posner Blog: The Long-Term Unemployed: Consequences and Possible Cures. A current proposal in Washington is to give companies a subsidy if they hire workers who have been unemployed for longer than a few months. But the great majority of the new hires that would receive a subsidy under such a proposal to stimulate employment would have occurred anyway. The program would end up being another costly subsidy to businesses. The only real remedy for the long-term (and other) unemployed is to have the economy grow fast. It would help a lot if the leaders in Washington did not try to radically transform various aspects of the economy while we are recovering from a serious recession, and thereby magnify the high degree of uncertainty that is typically caused by a recession.
Deliana Kostova, VoxEU: Do higher cigarette prices deter smoking? Evidence from developing nations. Do higher cigarette prices deter smoking? This column finds that policymakers in developing countries could reduce cigarette consumption by youths by raising taxes. A 10% increase in the price will reduce youth cigarette demand by 18.3%.
Petter Lundborg, Paul Nystedt, Dan-Olof Rooth, IZA: No Country for Fat Men? Obesity, Earnings, Skills, and Health among 450,000 Swedish Men. We find that the crude obesity penalty in earnings, which amounts to about 18 percent, is linked to supply-side characteristics that are associated with both earnings and obesity. In particular, we show that the penalty reflects negative associations between obesity, on the one hand, and cognitive skills, non-cognitive skills, and physical fitness, on the other. Our results suggest that employers use obesity as a marker for skill limitations in order to statistically discriminate.
C. Eisenegger et al, University of Zurich: Prejudice and truth about the effect of testosterone on human bargaining behaviour. Evidence from animal studies in rodents shows that testosterone causes aggressive behaviour towards conspecifics. Folk wisdom generalizes and adapts these findings to humans, suggesting that testosterone induces antisocial, egoistic, or even aggressive human behaviours. Here we show that the sublingual administration of a single dose of testosterone in women causes a substantial increase in fair bargaining behaviour, thereby reducing bargaining conflicts and increasing the efficiency of social interactions. However, subjects who believed that they received testosterone—regardless of whether they actually received it or not—behaved much more unfairly than those who believed that they were treated with placebo. Thus, the folk hypothesis seems to generate a strong negative association between subjects’ beliefs and the fairness of their offers, even though testosterone administration actually causes a substantial increase in the frequency of fair bargaining offers in our experiment.
Isabelle Brocas, Juan D. Carrillo, VoxEU: Neuroeconomic theory: Using neuroscience to understand the bounds of rationality. Neuroeconomic theory will soon play a crucial role in the building of new reliable theories capable of explaining and predicting individual behaviour and strategic choices. The main message is that the individual is not one coherent body. The brain is a multi-system entity (with conflicting objectives, restricted information, etc.) and therefore the decision-maker must be modelled as an organisation. We conclude with an analogy. Before the so-called modern theory of the firm, organisations were modelled as individual players characterised by an input-output production function. The systematic study of interactions between agents and decision processes within organisations (acknowledging informational asymmetries, incentive problems, restricted communications channels, hierarchical structures, etc.) led to novel economic insights. Applying a similar methodology to study individual decision-making is, in our view, the most fruitful way to understand the bounds of rationality.
Laurel Graefe, Jacob Smith, Atlanta Fed: A look at the income-side estimates of growth. Last week, a post in the New York Times' blog on Okun's law made note of the statistical discrepancy between the two methods for calculating national output: "…there are two measures of output growth—the usual measure, which adds up total spending in the economy, and the alternative, which adds up total income. In theory, the two should be exactly the same. In practice, they have been very different during this recession… These GDI numbers suggest that output growth actually declined much more sharply than had been widely understood." Indeed, the recession looks deeper and the recovery seems much less pronounced, looking at the income-side data. History suggests that when these two measures of national output disagree, GDP tends to get revised in the direction of GDI and not the other way around. It would be prudent not to dismiss the latest divergence in the two measures because it suggests that the decline in national output has been more protracted, and the recovery more modest, than what is being reflected in GDP.
Joachim Fels et al, Morgan Stanley: What Fiscal Tightening? We continue to forecast solid, above-consensus global GDP growth of 4.4% this year - despite growth downgrades in Europe, a weaker 1Q in the US (largely weather-related) and the recent softening in the China Manufacturing PMI. At the same time, we think that downside risks for the global economy in 2011 are mounting. First, many central banks in EM are about to start tightening monetary policy, and we expect the Fed to nudge official rates higher from 3Q10 and thus earlier than markets currently expect. Second, our macro team is looking for significantly higher bond yields this year and for a sell-off in developed equity markets. If so, it would dampen growth prospects for next year further. Third, we expect sovereign debt concerns to spread throughout the advanced economies as fiscal policy in most developed countries is on an unsustainable path.
Nouriel Roubini, Project Syndicate: States of Risk. The dilemma is that, whereas fiscal consolidation is necessary to prevent an unsustainable increase in the spread on sovereign bonds, the short-run effects of raising taxes and cutting government spending tend to be contractionary. In countries like the euro-zone members, a loss of external competitiveness, caused by tight monetary policy and a strong currency, erosion of long-term comparative advantage relative to emerging markets, and wage growth in excess of productivity growth, impose further constraints on the resumption of growth. A vicious circle of public-finance deficits, current-account gaps, worsening external-debt dynamics, and stagnating growth can then set in. Eventually, this can lead to default on euro-zone members’ public and foreign debt, as well as exit from the monetary union by fragile economies unable to adjust and reform fast enough.
Prakash Loungani, IMF: Housing Prices: More Room to Fall? Though there are some signs of stabilization, the global correction in housing markets continued through 2009. House prices in the OECD economies fell on average about 5 percent in real terms between the fourth quarter of 2007 and the third quarter of 2009.House prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. Prices remain above rents and incomes. Econometric models show that house prices increased during 2000–06 to a greater degree than can be explained by either short-run driving forces or long-run relationships: the corrections thus far have not erased all of the excesses generated by the house price increases. That leads to an uncomfortable conclusion: house prices in many countries still have room to fall.
Robert J. Shiller, Project Syndicate: A Crisis of Understanding. Few economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes. The problem for macroeconomics is that the types of causes mentioned for the current crisis are difficult to systematize. The mathematical models that macroeconomists have may resemble weather models in some respects, but their structural integrity is not guaranteed by anything like a solid, immutable theory. The most important new book about the origins of the economic crisis, Carmen Reinhart’s and Kenneth Rogoff’s This Time Is Different, is essentially a summary of lessons learned from virtually every financial crisis in every country in recorded history. But the book is almost entirely non-theoretical. This leaves us trying to use patterns from past, dissimilar crises to try to infer the likely prognosis for the current crisis. As a result, we simply do not know if the recovery will be solid or disappointing.
Huixin Bi, Eric M. Leeper, NBER: Sovereign Debt Risk Premia and Fiscal Policy in Sweden. What are the tradeoffs between short-run stabilization and long-run sustainability when the perceived riskiness of government debt depends, in part, on the current and expected fiscal environment in place? We calibrate a simple model to Swedish fiscal data in two periods: before and after the financial crisis of the early 1990s. We compute the dynamic fiscal limit, which depends on the peak of the Laffer curve, for the pre-crisis and three alternative post-crisis fiscal policies. The model simulates the macroeconomic consequences of alternative policies in the face of the sequence of bad output shocks that Sweden experienced from 1991-1997.
Carmen M. Reinhart, NBER: This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises. This Chartbook provides a pictorial history, on a country-by-country basis, of public debt and economic crises of various forms. It is a timeline of a countrys creditworthiness and financial turmoil. The analysis, narrative, and illustrations in the book “This Time is Different” were primarily organized around themes (serial default, inflation, etc.), although detailed tables in the book chronicled country-specific information on the dating, frequency, incidence, etc. of specific crises episodes by country. The Chartbook compliments the thematic analysis with individual country histories, and provides the grounds for a systematic analysis of the temporal patterns of debt cycles, banking and sovereign debt crises, hyperinflation, and, for the post World War II period, the reliance on IMF programs.
Mark Whitehouse, WSJ Blog: Atlanta Fed’s Altig on Small Business’s Potential to Derail Recovery. In recent weeks, policy makers from President Barack Obama to Federal Reserve Chairman Ben Bernanke have been taking extraordinary measures to remove what they see as a serious impediment to the recovery: A dearth of credit for the small businesses that many economists say must play a leading role in creating new jobs. David Altig, head of research at the Atlanta Fed, notes that an outsized fraction of the job losses during this recession came from small businesses, particularly very small businesses with less than 50 employees. We’re looking for explanations. One obvious candidate is that this was the group that would have more difficulty with a credit event, which clearly this recession was.
Jaison R. Abel, Ishita Dey, and Todd M. Gabe, NY Fed: Productivity and the Density of Human Capital. We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. Estimation accounts for potential biases due to the endogeneity of density and industrial composition effects. Using new information on output per worker for U.S. metropolitan areas along with a measure of density that accounts for the spatial distribution of population, we find that a doubling of density increases productivity by 2 to 4 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock one standard deviation below the mean realize no productivity gain, while doubling density in metropolitan areas with a human capital stock one standard deviation above the mean yields productivity benefits that are about twice the average.
Gary Becker, Becker Posner Blog: The Long-Term Unemployed: Consequences and Possible Cures. A current proposal in Washington is to give companies a subsidy if they hire workers who have been unemployed for longer than a few months. But the great majority of the new hires that would receive a subsidy under such a proposal to stimulate employment would have occurred anyway. The program would end up being another costly subsidy to businesses. The only real remedy for the long-term (and other) unemployed is to have the economy grow fast. It would help a lot if the leaders in Washington did not try to radically transform various aspects of the economy while we are recovering from a serious recession, and thereby magnify the high degree of uncertainty that is typically caused by a recession.
Deliana Kostova, VoxEU: Do higher cigarette prices deter smoking? Evidence from developing nations. Do higher cigarette prices deter smoking? This column finds that policymakers in developing countries could reduce cigarette consumption by youths by raising taxes. A 10% increase in the price will reduce youth cigarette demand by 18.3%.
Petter Lundborg, Paul Nystedt, Dan-Olof Rooth, IZA: No Country for Fat Men? Obesity, Earnings, Skills, and Health among 450,000 Swedish Men. We find that the crude obesity penalty in earnings, which amounts to about 18 percent, is linked to supply-side characteristics that are associated with both earnings and obesity. In particular, we show that the penalty reflects negative associations between obesity, on the one hand, and cognitive skills, non-cognitive skills, and physical fitness, on the other. Our results suggest that employers use obesity as a marker for skill limitations in order to statistically discriminate.
C. Eisenegger et al, University of Zurich: Prejudice and truth about the effect of testosterone on human bargaining behaviour. Evidence from animal studies in rodents shows that testosterone causes aggressive behaviour towards conspecifics. Folk wisdom generalizes and adapts these findings to humans, suggesting that testosterone induces antisocial, egoistic, or even aggressive human behaviours. Here we show that the sublingual administration of a single dose of testosterone in women causes a substantial increase in fair bargaining behaviour, thereby reducing bargaining conflicts and increasing the efficiency of social interactions. However, subjects who believed that they received testosterone—regardless of whether they actually received it or not—behaved much more unfairly than those who believed that they were treated with placebo. Thus, the folk hypothesis seems to generate a strong negative association between subjects’ beliefs and the fairness of their offers, even though testosterone administration actually causes a substantial increase in the frequency of fair bargaining offers in our experiment.
Isabelle Brocas, Juan D. Carrillo, VoxEU: Neuroeconomic theory: Using neuroscience to understand the bounds of rationality. Neuroeconomic theory will soon play a crucial role in the building of new reliable theories capable of explaining and predicting individual behaviour and strategic choices. The main message is that the individual is not one coherent body. The brain is a multi-system entity (with conflicting objectives, restricted information, etc.) and therefore the decision-maker must be modelled as an organisation. We conclude with an analogy. Before the so-called modern theory of the firm, organisations were modelled as individual players characterised by an input-output production function. The systematic study of interactions between agents and decision processes within organisations (acknowledging informational asymmetries, incentive problems, restricted communications channels, hierarchical structures, etc.) led to novel economic insights. Applying a similar methodology to study individual decision-making is, in our view, the most fruitful way to understand the bounds of rationality.
Friday, March 12, 2010
MARCH 12 2010
Pelin Berkmen et al, IMF: The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact. Countries with more leveraged domestic financial systems and more rapid credit growth tended to suffer larger downward revisions to their growth outlooks. For emerging markets, this financial channel trumps the trade channel. For a broader set of developing countries, however, the trade channel seems to have mattered, with countries exporting more advanced manufacturing goods more affected than those exporting food. Exchange-rate flexibility clearly helped in buffering the impact of the shock. There is also some —weaker—evidence that countries with a stronger fiscal position prior to the crisis were hit less severely. We find little evidence for the importance of other policy variables.
Felix Hüfner and Isabell Koske, OECD: Explaining household saving rates in G7 countries: implications for Germany. We analyse the determinants of household saving rates in the G7 countries since the 1970s in a panel co-integration framework. Unlike many previous studies, our specification allows for heterogeneity in the long- and short-run parameters across countries and explicitly distinguishes between financial liberalisation effects and wealth effects. Apart from finding that income developments as well as real interest rates and inflation are influencing household savings in most countries, results suggest that wealth effects through house and stock prices play a role in many countries, notably over the more recent period. According to the model, the recent increase in the German saving rate is due to two factors: Firstly, the actual saving rate was below its estimated equilibrium level at the end of the 1990s, implying an upward correction over the medium term. Secondly, the equilibrium saving rate has moved upwards in the first half of the 2000s, largely because of declines in stock prices.
Mary Daly And Bart Hobijn, San Fransisco Fed: Okun’s Law and the Unemployment Surprise. In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun’s law. If Okun’s law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year.
Paul Beaudry, David A. Green, Benjamin M. Sand, NBER: How Much Is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation. The main finding of the paper is that U.S. labor market outcomes observed at the city-industry level appear to conform well to the restrictions implied by search and bargaining theory and, using 10-year differences, we estimate the elasticity of the job creation curve with respect to wages to be -0.3. We interpret this relatively low elasticity as reflecting a low propensity for individuals to become more entrepreneurial and create more jobs when labor costs are lower and variable profits are higher.
Jan van Ours, VoxEU: Age, wage, and productivity. Ageing populations are a concern for many developed countries, with increasing dependence on the working population expected. Despite this, there is relatively little research on how productivity changes with age. This column argues that while older people do not run as fast, there is no evidence of a mental productivity decline and little evidence of an increasing pay-productivity gap. The negative effects of ageing on productivity should not be exaggerated.
Edward L. Glaeser, Boston Globe: Why the anti-urban bias? The billions of dollars being spent on infrastructure across the nation provide an opportunity to plan for a better America, but politics-as-usual favors sprawl over city. This anti-urban bias of national policies must end. Over the past 60 years, cities have been hit by a painful policy trifecta: subsidization of highways, subsidization of homeownership, and a school system that creates strong incentives for many parents to leave city borders. Subsidizing transportation decreases the advantage of living close together in cities. It is a mistake to think that spending on trains balances the scales. Cities will always benefit far less than exurbs from transportation because dense areas already have good means of getting around, like walking.
Sara Markowitz, Erik Nesson, Joshua Robinson, NBER: Are Pink Slips Better Than Flu Shots? The Effects of Employment on Influenza Rates. In this paper, we examine whether increases in labor market activities are associated with an increased incidence of the flu. Flu data come from the Centers for Disease Control. We check the robustness of our results using unique data from Google Flu Trends. Using a first-difference two stage least squares estimation approach, we find that a one percentage point increase in the employment rate increases the number of influenza related doctor visits by about 8.1 additional flu-related doctor visits per 1000 doctor visits for all causes. To put this in perspective, on average, 33 additional people out of every 100,000 new employees will have a flu-related doctor visit. The results are robust across several specifications.
Paul Krugman, Princeton: Climate Policy, A Note. I’m trying to do a popular writeup of debates over climate change policy, which meant that I had to get a grip on the big dispute over the timing of action – Nordhaus and other modelers calling for a “climate policy ramp” in which carbon prices start fairly low and rise only gradually, Stern and others calling for a quick rise in prices. I found the discussion hard to follow, so I did what I usually do in such cases – tried to write down a toy model that hopefully clarifies the issues. And it leaves me both understanding and worried about the climate policy ramp.
Sam Dillon, NYT: Panel Proposes Single Standard for All Schools. A panel of educators convened by the nation’s governors and state school superintendents proposed a uniform set of academic standards on Wednesday, laying out their vision for what all the nation’s public school children should learn in math and English, year by year, from kindergarten to high school graduation. The new proposals could transform American education, replacing the patchwork of standards ranging from mediocre to world-class that have been written by local educators in every state. Under the proposed standards for English, for example, fifth graders would be expected to explain the differences between drama and prose, and to identify elements of drama like characters, dialogue and stage directions. Seventh graders would study, among other math concepts, proportional relationships, operations with rational numbers and solutions for linear equations.
Gustavo A. Marrero, Juan G. Rodríguez, ECINEQ: Inequality of opportunity and growth. Theoretical and empirical studies exploring the effects of income inequality upon growth reach a disappointing inconclusive result. This paper postulates that one reason for this ambiguity is that income inequality is actually a composite measure of at least two different sorts of inequality: inequality of opportunity and inequality of returns to effort. These two types of inequality affect growth through opposite channels, so the relationship between income inequality and growth is positive or negative depending on which component is larger. We test this proposal using inequality-of-opportunity measures computed from the PSID database for 23 states of the U.S. in 1980 and 1990. We find robust support for a negative relationship between inequality of opportunity and growth, and a positive relationship between inequality of returns to effort and growth.
Andrew Leigh, ANU: Permanent Income Inequality: Australia, Britain, Germany, and the United States Compared. I find (1) using pre-government income, annual inequality and permanent inequality have grown in Germany and the US, while post-government income inequality has grown in the US; (2) comparing levels of annual post-government income inequality across countries, the ranking was the US, Australia, Britain, Germany; (3) comparing levels of permanent income inequality across countries, the ranking of triennial post-government inequality in the most recent year was the US, Australia, Germany, Britain; (4) in the most recent year, the most mobile country was Australia, while the least mobile was Germany. However, as a comparison of points (2) and (3) demonstrates, mobility had little effect on the overall rankings.
Thomas A. Garrett, Russell M. Rhine St Louis Fed: "Economic Freedom and Employment Growth in U.S. States. We find that states with greater economic freedom – defined as the protection of private property and private markets operating with minimal government interference – experienced greater rates of employment growth. In addition, we find that less restrictive state and national government labor market policies have the greatest impact on employment growth in U.S. states. Except for labor market policies, we find that state employment growth is influenced by state and local government policies, but not the policies of all levels of government, including the national government. Our results suggest that policy-makers concerned with employment should seriously consider the degree to which their own labor market policies, as well as those of the national government, may be limiting economic growth and development in their respective states.
John Cassidy, New Yorker: No Credit. Timothy Geithner’s financial plan is working—and making him very unpopular. “We saved the economy, but we kind of lost the public,” Geithner said. For all the wrath that has descended upon his slight frame, he appears to have succeeded in putting out another inferno. “Why do policymakers screw up financial crises?” he said before I left his office. “They screw up financial crises because the politics are horrible, and that deters action. They are slow and late and tentative and weak because they are scared to death of the politics. But sometimes a policymaker has to say, I’ll take pain now against pain later.”
Jan-Emmanuel De Neve, James H. Fowler, Bruno S. Frey, CESIFO: Genes, Economics, and Happiness. This article presents evidence of a specific gene that predicts subjective well-being. Using data from the National Longitudinal Study of Adolescent Health, we show that individuals with a transcriptionally more efficient version of the serotonin transporter gene (5HTT) are significantly more likely to report higher levels of life satisfaction. Having one or two alleles of the more efficient type raises the average likelihood of being very satisfied with one’s life by 8.5% and 17.3%, respectively. This result may help to explain the stable component of happiness and suggests that genetic association studies can help us to better understand individual heterogeneity in subjective well-being.
Felix Hüfner and Isabell Koske, OECD: Explaining household saving rates in G7 countries: implications for Germany. We analyse the determinants of household saving rates in the G7 countries since the 1970s in a panel co-integration framework. Unlike many previous studies, our specification allows for heterogeneity in the long- and short-run parameters across countries and explicitly distinguishes between financial liberalisation effects and wealth effects. Apart from finding that income developments as well as real interest rates and inflation are influencing household savings in most countries, results suggest that wealth effects through house and stock prices play a role in many countries, notably over the more recent period. According to the model, the recent increase in the German saving rate is due to two factors: Firstly, the actual saving rate was below its estimated equilibrium level at the end of the 1990s, implying an upward correction over the medium term. Secondly, the equilibrium saving rate has moved upwards in the first half of the 2000s, largely because of declines in stock prices.
Mary Daly And Bart Hobijn, San Fransisco Fed: Okun’s Law and the Unemployment Surprise. In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun’s law. If Okun’s law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year.
Paul Beaudry, David A. Green, Benjamin M. Sand, NBER: How Much Is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation. The main finding of the paper is that U.S. labor market outcomes observed at the city-industry level appear to conform well to the restrictions implied by search and bargaining theory and, using 10-year differences, we estimate the elasticity of the job creation curve with respect to wages to be -0.3. We interpret this relatively low elasticity as reflecting a low propensity for individuals to become more entrepreneurial and create more jobs when labor costs are lower and variable profits are higher.
Jan van Ours, VoxEU: Age, wage, and productivity. Ageing populations are a concern for many developed countries, with increasing dependence on the working population expected. Despite this, there is relatively little research on how productivity changes with age. This column argues that while older people do not run as fast, there is no evidence of a mental productivity decline and little evidence of an increasing pay-productivity gap. The negative effects of ageing on productivity should not be exaggerated.
Edward L. Glaeser, Boston Globe: Why the anti-urban bias? The billions of dollars being spent on infrastructure across the nation provide an opportunity to plan for a better America, but politics-as-usual favors sprawl over city. This anti-urban bias of national policies must end. Over the past 60 years, cities have been hit by a painful policy trifecta: subsidization of highways, subsidization of homeownership, and a school system that creates strong incentives for many parents to leave city borders. Subsidizing transportation decreases the advantage of living close together in cities. It is a mistake to think that spending on trains balances the scales. Cities will always benefit far less than exurbs from transportation because dense areas already have good means of getting around, like walking.
Sara Markowitz, Erik Nesson, Joshua Robinson, NBER: Are Pink Slips Better Than Flu Shots? The Effects of Employment on Influenza Rates. In this paper, we examine whether increases in labor market activities are associated with an increased incidence of the flu. Flu data come from the Centers for Disease Control. We check the robustness of our results using unique data from Google Flu Trends. Using a first-difference two stage least squares estimation approach, we find that a one percentage point increase in the employment rate increases the number of influenza related doctor visits by about 8.1 additional flu-related doctor visits per 1000 doctor visits for all causes. To put this in perspective, on average, 33 additional people out of every 100,000 new employees will have a flu-related doctor visit. The results are robust across several specifications.
Paul Krugman, Princeton: Climate Policy, A Note. I’m trying to do a popular writeup of debates over climate change policy, which meant that I had to get a grip on the big dispute over the timing of action – Nordhaus and other modelers calling for a “climate policy ramp” in which carbon prices start fairly low and rise only gradually, Stern and others calling for a quick rise in prices. I found the discussion hard to follow, so I did what I usually do in such cases – tried to write down a toy model that hopefully clarifies the issues. And it leaves me both understanding and worried about the climate policy ramp.
Sam Dillon, NYT: Panel Proposes Single Standard for All Schools. A panel of educators convened by the nation’s governors and state school superintendents proposed a uniform set of academic standards on Wednesday, laying out their vision for what all the nation’s public school children should learn in math and English, year by year, from kindergarten to high school graduation. The new proposals could transform American education, replacing the patchwork of standards ranging from mediocre to world-class that have been written by local educators in every state. Under the proposed standards for English, for example, fifth graders would be expected to explain the differences between drama and prose, and to identify elements of drama like characters, dialogue and stage directions. Seventh graders would study, among other math concepts, proportional relationships, operations with rational numbers and solutions for linear equations.
Gustavo A. Marrero, Juan G. Rodríguez, ECINEQ: Inequality of opportunity and growth. Theoretical and empirical studies exploring the effects of income inequality upon growth reach a disappointing inconclusive result. This paper postulates that one reason for this ambiguity is that income inequality is actually a composite measure of at least two different sorts of inequality: inequality of opportunity and inequality of returns to effort. These two types of inequality affect growth through opposite channels, so the relationship between income inequality and growth is positive or negative depending on which component is larger. We test this proposal using inequality-of-opportunity measures computed from the PSID database for 23 states of the U.S. in 1980 and 1990. We find robust support for a negative relationship between inequality of opportunity and growth, and a positive relationship between inequality of returns to effort and growth.
Andrew Leigh, ANU: Permanent Income Inequality: Australia, Britain, Germany, and the United States Compared. I find (1) using pre-government income, annual inequality and permanent inequality have grown in Germany and the US, while post-government income inequality has grown in the US; (2) comparing levels of annual post-government income inequality across countries, the ranking was the US, Australia, Britain, Germany; (3) comparing levels of permanent income inequality across countries, the ranking of triennial post-government inequality in the most recent year was the US, Australia, Germany, Britain; (4) in the most recent year, the most mobile country was Australia, while the least mobile was Germany. However, as a comparison of points (2) and (3) demonstrates, mobility had little effect on the overall rankings.
Thomas A. Garrett, Russell M. Rhine St Louis Fed: "Economic Freedom and Employment Growth in U.S. States. We find that states with greater economic freedom – defined as the protection of private property and private markets operating with minimal government interference – experienced greater rates of employment growth. In addition, we find that less restrictive state and national government labor market policies have the greatest impact on employment growth in U.S. states. Except for labor market policies, we find that state employment growth is influenced by state and local government policies, but not the policies of all levels of government, including the national government. Our results suggest that policy-makers concerned with employment should seriously consider the degree to which their own labor market policies, as well as those of the national government, may be limiting economic growth and development in their respective states.
John Cassidy, New Yorker: No Credit. Timothy Geithner’s financial plan is working—and making him very unpopular. “We saved the economy, but we kind of lost the public,” Geithner said. For all the wrath that has descended upon his slight frame, he appears to have succeeded in putting out another inferno. “Why do policymakers screw up financial crises?” he said before I left his office. “They screw up financial crises because the politics are horrible, and that deters action. They are slow and late and tentative and weak because they are scared to death of the politics. But sometimes a policymaker has to say, I’ll take pain now against pain later.”
Jan-Emmanuel De Neve, James H. Fowler, Bruno S. Frey, CESIFO: Genes, Economics, and Happiness. This article presents evidence of a specific gene that predicts subjective well-being. Using data from the National Longitudinal Study of Adolescent Health, we show that individuals with a transcriptionally more efficient version of the serotonin transporter gene (5HTT) are significantly more likely to report higher levels of life satisfaction. Having one or two alleles of the more efficient type raises the average likelihood of being very satisfied with one’s life by 8.5% and 17.3%, respectively. This result may help to explain the stable component of happiness and suggests that genetic association studies can help us to better understand individual heterogeneity in subjective well-being.
Friday, March 5, 2010
MARCH 5 2010
Jan Hatzius et al, Chicago University: Financial Conditions Indexes: A Fresh Look after the Financial Crisis. This report explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes. Third, we control for past GDP growth and inflation and thus focus on the predictive power of financial conditions for future economic activity. During most of the past two decades for which comparisons are possible, including the last five years, our FCI shows a tighter link with future economic activity than existing indexes, although some of this undoubtedly reflects the fact that we selected the variables partly based on our observation of the recent financial crisis. As of the end of 2009, our FCI showed financial conditions at somewhat worse-than-normal levels. The main reason is that quantitative credit measures (e.g. asset-backed securities issuance) remain very weak, especially once we control for past economic growth. Thus, our analysis is consistent with an ongoing modest drag from financial conditions on economic growth in 2010.
Alberto Musso, Stefano Neri, Livio Stracca, ECB: Housing, consumption and monetary policy how different are the US and the euro area? The paper presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the e¤ects of three structural shocks, (i) monetary policy, (ii) credit supply and (iii) housing demand shocks on the housing market and the broader economy. We find that similarities overshadow differences as far as the role of the housing market is concerned. We find evidence pointing in the direction of a stronger role for housing in the transmission of monetary policy shocks in the US, while the evidence is less clearcut for housing demand shocks. We also find that credit supply shocks matter more in the euro area.
Lorenzo Cappiello et al, VoxEU: The effect of bank loans and credit standards on output. How important is credit availability to the real economy? This column examines evidence from the Eurozone and suggests that a change in loan availability has a positive and statistically significant effect on GDP. This provides support for the policies taken by central banks to alleviate pressures on the banking system.
Martin Feldstein, Project Syndicate: How Safe Are Your Dollars? Chinese officials and private investors around the world have been worrying aloud about whether their dollar investments are safe. Since the Chinese government holds a large part of its $2 trillion of foreign exchange in dollars, they have good reason to focus on the future value of the greenback. And investors with smaller dollar holdings, who can shift to other currencies much more easily than the Chinese, are right to ask themselves whether they should be diversifying into non-dollar assets – or even shunning the dollar completely.
Behzad Kianian, Kei-Mu Yi, Philadelphia Fed: China’s Emergence as a Manufacturing Juggernaut: Is It Overstated? The wages of China’s manufacturing workers are rising rapidly; and China’s production of export goods relies heavily on imported inputs and the final exported goods face large mark-ups in their destination markets. The first theme implies that China will lose global market share in some categories of goods. The second implies that China’s trading relationship with many countries is complementary, not competitive, and that the omnipresence of China’s goods exaggerates the extent of its manufacturing performance. China’s emergence as a global manufacturing power should not be overstated, and concerns that China will “take over” all manufacturing markets are unfounded.
Egbert L.W. Jongen, CPB: Child care subsidies revisited. Public spending on child care has taken a high flight in the Netherlands. One of the key policy goals of child care subsidies is to stimulate labour participation. We study the impact of child care subsidies on labour participation using a general equilibrium model. Next to the labour supply choice, we also model the choice over formal and informal care. The choice between formal and informal care plays an important role in the overall impact of child care subsidies on labour participation. The model is calibrated to Dutch data. Our analysis shows that existing child care subsidies have promoted labour participation. However, at the current average subsidy rate of almost 80%, a further increase in the subsidy rate is a rather ineffective way to promote formal participation, the main effect being substitution of informal for formal care.
Lorenzo Bini Smaghi, ECB: Slaves of defunct economists. The economist John Maynard Keynes is back in fashion”, writes Robert Skidelsky. A question that comes to mind in reading these words is why Keynes had to make a comeback in the first place, why the General Theory was forgotten and its prescriptions abandoned. There are two possible answers to the question. The first is that the Theory is not general, and thus cannot apply to all economic states of the world. The second is that Keynes’ famous admonition in the last page of his General Theory – according to which “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” – has been turned upside down. In other words, defunct economists – and their theories – are usually enslaved by practical men who do not fully understand them.
Alfonso Arpaia, Nicola Curci, ECFIN: EU labour market behaviour during the Great Recession. At this juncture, the major risks concern the possibility that unemployed people become disenfranchised from the labour market and, thus, that high unemployment does not curb the growth of real wages (i.e. becomes structural unemployment). Apart from being a constraint to the recovery in the short term, a decline in the labour supply may heavily affect the potential output. However, reforms in many countries have strengthened the labour market attachment of most vulnerable groups and a large reduction in the overall activity rate is less likely now than in the past.
Ayşegül Şahin, Joseph Song, Bart Hobijn, NY Fed: The Unemployment Gender Gap during the 2007 Recession. Women fared decidedly better than men during the most recent recession. By August 2009, the unemployment rate for men had hit 11.0 percent, while that for women held at 8.3 percent. This 2.7 percentage point unemployment gender gap—the largest in the postwar era—appears to reflect two factors: First, men were much more heavily represented in the industries that suffered the most during the downturn. Second, there was a much sharper increase in the percentage of men who—prompted, perhaps, by a decline in household liquidity—rejoined the labor force but failed to find a job.
Nuria Rodriguez-Planas, IZA: Longer-Term Impacts of Mentoring, Educational Services, and Incentives to Learn: Evidence from a Randomized Trial. This paper is the first to use a randomized trial in the US to analyze the short- and long-term educational and employment impacts of an after-school program, the Quantum Opportunity Program, that offered disadvantaged high-school youth: mentoring, educational services, and financial rewards with the objective to improve high-school graduation and post-secondary schooling enrollment. Average impacts reveal that the hefty beneficial educational outcomes quickly faded away. Heterogeneity matters. While encouraging results are found for the younger youth; detrimental long-lived outcomes for males suggest that extrinsic rewards may be crowding out intrinsic motivation. Evidence by sites' funding source, which led to implementation differences, supports this hypothesis.
Xavier Sala-i-Martin, Maxim Pinkovskiy , NBER: African Poverty is Falling...Much Faster than You Think! We estimate income distributions, poverty rates, and inequality and welfare indices for African countries for the period 1970-2006. We show that: (1) African poverty is falling and is falling rapidly; (2) if present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time; (3) the growth spurt that began in 1995 decreased African income inequality instead of increasing it; (4) African poverty reduction is remarkably general: it cannot be explained by a large country, or even by a single set of countries possessing some beneficial geographical or historical characteristic.
Bockerman, Petri et al, MPRA: Does physical capacity explain the height premium? The paper examines the role of physical capacity in the determination of the height premium by using the “Health 2000 in Finland” data that contain both self-reported information on the physical strenuousness of work, and information on muscle mass from medical examinations. Our results show that the height premium does not vary according to the physical strenuousness of work. We also find that muscle mass is not related to wages. Furthermore, we observe that the shortest men do physically very demanding work and the tallest do sedentary work, even after controlling for the effects of age and education.
Alex Tabarrok, Marginal Revolution Blog: The Philosophical Cow. Suppose that you are a cow philosopher contemplating the welfare of cows. In the world today there are about 1.3 billion of your compatriots. It would be a fine thing for cows if all cows were well treated and if none were slaughtered for food. Nevertheless, being a clever cow, you understand that it's the demand for beef that brings cows to life. How do you regard such a trade off? If each cow brought to life adds even some small bit of cow utility to the grand total of cow welfare must not beef eaters be lauded, at least if they are hungry enough?
Alberto Musso, Stefano Neri, Livio Stracca, ECB: Housing, consumption and monetary policy how different are the US and the euro area? The paper presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the e¤ects of three structural shocks, (i) monetary policy, (ii) credit supply and (iii) housing demand shocks on the housing market and the broader economy. We find that similarities overshadow differences as far as the role of the housing market is concerned. We find evidence pointing in the direction of a stronger role for housing in the transmission of monetary policy shocks in the US, while the evidence is less clearcut for housing demand shocks. We also find that credit supply shocks matter more in the euro area.
Lorenzo Cappiello et al, VoxEU: The effect of bank loans and credit standards on output. How important is credit availability to the real economy? This column examines evidence from the Eurozone and suggests that a change in loan availability has a positive and statistically significant effect on GDP. This provides support for the policies taken by central banks to alleviate pressures on the banking system.
Martin Feldstein, Project Syndicate: How Safe Are Your Dollars? Chinese officials and private investors around the world have been worrying aloud about whether their dollar investments are safe. Since the Chinese government holds a large part of its $2 trillion of foreign exchange in dollars, they have good reason to focus on the future value of the greenback. And investors with smaller dollar holdings, who can shift to other currencies much more easily than the Chinese, are right to ask themselves whether they should be diversifying into non-dollar assets – or even shunning the dollar completely.
Behzad Kianian, Kei-Mu Yi, Philadelphia Fed: China’s Emergence as a Manufacturing Juggernaut: Is It Overstated? The wages of China’s manufacturing workers are rising rapidly; and China’s production of export goods relies heavily on imported inputs and the final exported goods face large mark-ups in their destination markets. The first theme implies that China will lose global market share in some categories of goods. The second implies that China’s trading relationship with many countries is complementary, not competitive, and that the omnipresence of China’s goods exaggerates the extent of its manufacturing performance. China’s emergence as a global manufacturing power should not be overstated, and concerns that China will “take over” all manufacturing markets are unfounded.
Egbert L.W. Jongen, CPB: Child care subsidies revisited. Public spending on child care has taken a high flight in the Netherlands. One of the key policy goals of child care subsidies is to stimulate labour participation. We study the impact of child care subsidies on labour participation using a general equilibrium model. Next to the labour supply choice, we also model the choice over formal and informal care. The choice between formal and informal care plays an important role in the overall impact of child care subsidies on labour participation. The model is calibrated to Dutch data. Our analysis shows that existing child care subsidies have promoted labour participation. However, at the current average subsidy rate of almost 80%, a further increase in the subsidy rate is a rather ineffective way to promote formal participation, the main effect being substitution of informal for formal care.
Lorenzo Bini Smaghi, ECB: Slaves of defunct economists. The economist John Maynard Keynes is back in fashion”, writes Robert Skidelsky. A question that comes to mind in reading these words is why Keynes had to make a comeback in the first place, why the General Theory was forgotten and its prescriptions abandoned. There are two possible answers to the question. The first is that the Theory is not general, and thus cannot apply to all economic states of the world. The second is that Keynes’ famous admonition in the last page of his General Theory – according to which “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” – has been turned upside down. In other words, defunct economists – and their theories – are usually enslaved by practical men who do not fully understand them.
Alfonso Arpaia, Nicola Curci, ECFIN: EU labour market behaviour during the Great Recession. At this juncture, the major risks concern the possibility that unemployed people become disenfranchised from the labour market and, thus, that high unemployment does not curb the growth of real wages (i.e. becomes structural unemployment). Apart from being a constraint to the recovery in the short term, a decline in the labour supply may heavily affect the potential output. However, reforms in many countries have strengthened the labour market attachment of most vulnerable groups and a large reduction in the overall activity rate is less likely now than in the past.
Ayşegül Şahin, Joseph Song, Bart Hobijn, NY Fed: The Unemployment Gender Gap during the 2007 Recession. Women fared decidedly better than men during the most recent recession. By August 2009, the unemployment rate for men had hit 11.0 percent, while that for women held at 8.3 percent. This 2.7 percentage point unemployment gender gap—the largest in the postwar era—appears to reflect two factors: First, men were much more heavily represented in the industries that suffered the most during the downturn. Second, there was a much sharper increase in the percentage of men who—prompted, perhaps, by a decline in household liquidity—rejoined the labor force but failed to find a job.
Nuria Rodriguez-Planas, IZA: Longer-Term Impacts of Mentoring, Educational Services, and Incentives to Learn: Evidence from a Randomized Trial. This paper is the first to use a randomized trial in the US to analyze the short- and long-term educational and employment impacts of an after-school program, the Quantum Opportunity Program, that offered disadvantaged high-school youth: mentoring, educational services, and financial rewards with the objective to improve high-school graduation and post-secondary schooling enrollment. Average impacts reveal that the hefty beneficial educational outcomes quickly faded away. Heterogeneity matters. While encouraging results are found for the younger youth; detrimental long-lived outcomes for males suggest that extrinsic rewards may be crowding out intrinsic motivation. Evidence by sites' funding source, which led to implementation differences, supports this hypothesis.
Xavier Sala-i-Martin, Maxim Pinkovskiy , NBER: African Poverty is Falling...Much Faster than You Think! We estimate income distributions, poverty rates, and inequality and welfare indices for African countries for the period 1970-2006. We show that: (1) African poverty is falling and is falling rapidly; (2) if present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time; (3) the growth spurt that began in 1995 decreased African income inequality instead of increasing it; (4) African poverty reduction is remarkably general: it cannot be explained by a large country, or even by a single set of countries possessing some beneficial geographical or historical characteristic.
Bockerman, Petri et al, MPRA: Does physical capacity explain the height premium? The paper examines the role of physical capacity in the determination of the height premium by using the “Health 2000 in Finland” data that contain both self-reported information on the physical strenuousness of work, and information on muscle mass from medical examinations. Our results show that the height premium does not vary according to the physical strenuousness of work. We also find that muscle mass is not related to wages. Furthermore, we observe that the shortest men do physically very demanding work and the tallest do sedentary work, even after controlling for the effects of age and education.
Alex Tabarrok, Marginal Revolution Blog: The Philosophical Cow. Suppose that you are a cow philosopher contemplating the welfare of cows. In the world today there are about 1.3 billion of your compatriots. It would be a fine thing for cows if all cows were well treated and if none were slaughtered for food. Nevertheless, being a clever cow, you understand that it's the demand for beef that brings cows to life. How do you regard such a trade off? If each cow brought to life adds even some small bit of cow utility to the grand total of cow welfare must not beef eaters be lauded, at least if they are hungry enough?
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