APRIL 30 2010

Martin Feldstein, Project Syndicate: Why Greece Will Default. Greece will default on its national debt. That default will be due in large part to its membership in the European Monetary Union. Greece’s default on its national debt need not mean an explicit refusal to make principal and interest payments when they come due. More likely would be an IMF-organized restructuring of the existing debt, swapping new bonds with lower principal and interest for existing bonds. Or it could be a “soft default” in which Greece unilaterally services its existing debt with new debt rather than paying in cash. But, whatever form the default takes, the current owners of Greek debt will get less than the full amount that they are now owed.

Jacob Funk Kirkegaard, Peterson Institute: The Biggest Losers: Who Gets Hurt from a Greek Default or Restructuring. Spain are the principal losers from the “no policy action taken” European crisis management that would lead bigger losses as a result of their share of ECB capital. The banks in these two large countries have very little exposure to Greek debt (and hence have little to offload to the ECB). But through their substantial share in the ECB paid-up capital they would suffer sizable implied losses. Italy would be Europe’s “Greek loss” leader with an implied $23 billion loss, while Spain would suffer $18 billion in implied losses via the ECB route. Ironically, Europe’s inability to take action on Greece, and a resulting default or restructuring, would end up penalizing countries like Italy and Spain for having well-managed banks with limited risk exposure to Greece if the ECB ends up absorbing the brunt of the costs. France, whose banks took far higher risks, would benefit.

Felix Salmon, Reuters Blog: Is it now too late to save Greece? When Goldman Sachs noticed a pattern of regular losses in its mortgage book at the end of 2006, it decided to start going short, in a move which helped to position it as the most successful bank in the financial crisis. The markets have learned their lesson: now that Greece and Portugal have been downgraded, the rush to the exits is palpable: the flight to quality is on, and bond yields in the European periphery are going stratospheric.... The trick about going short an imploding asset class, of course, is that it only works if you’re in the minority. If everybody is doing it, you just get overshooting asset markets and chaos — which is what we’re seeing now. As far as the financial markets are concerned, if any bailout comes now, it’ll be too late: no country can sustain Greece’s combination of funding costs and debt-to-GDP ratio, no matter how much German money it burns through...

Paul Krugman, NYT Blog: How Reversible Is The Euro? Think of it this way: the Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that. But at this point it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling. And if Greece is in effect forced out of the euro, what happens to other shaky members? I think I’ll go hide under the table now.

Alcidi Cinzia, Daniel Gros, VoxEU: The European experience with large fiscal adjustments. The key question for European policymakers and financial markets alike is now whether ‘Greece can make it’. This column reviews past episodes and suggests such huge fiscal adjustments have been possible in the past, but take at least 5 years and the debt to GDP ratio keeps on increasing during the process.

Robert D. Kaplan, NYT: For Greece’s Economy, Geography Was Destiny. THE debt crisis that caused Greece to ask for an international bailout on Friday has been attributed to many things, all economic: Greece’s budget deficits, its lack of transparency and its over-the-top corruption, symbolized by the words “fakelaki,” for envelopes containing bribes, and “rousfeti,” political favors. But there is a deeper cause for the Greek crisis that no one dares mention because it implies an acceptance of fate: geography. That Europe’s problem economies — Greece, Italy, Spain and Portugal — are all in the south is no accident. Mediterranean societies, despite their innovations in politics. The relatively poor quality of Mediterranean soils favored large holdings that were, perforce, under the control of the wealthy. This contributed to an inflexible social order, in which middle classes developed much later than in northern Europe, and which led to economic and political pathologies like statism and autocracy. It’s no surprise that for the last half-century Greek politics have been dominated by two families, the Karamanlises and the Papandreous.

Amartya Sen, New Statesman: The economist manifesto. The 18th-century philosopher Adam Smith wasn’t the free-market fundamentalist he is thought to have been. The nature of the present economic crisis illustrates very clearly the need for departures from unmitigated and unrestrained self-seeking in order to have a decent society. Even John McCain ... complained constantly in his campaign speeches of "the greed of Wall Street". Smith had a diagnosis for this: he called such promoters of excessive risk in search of profits "prodigals and projectors" - which, by the way, is quite a good description of many of the entrepreneurs of credit swap insurances and sub-prime mortgages in the recent past.

Emi Nakamura, Jon Steinsson, Robert Barro, Jose Ursua, NBER: Crises and Recoveries in an Empirical Model of Consumption. Our estimates imply that the probability of entering a disaster is 1.7% per year and that disasters last on average for 6.5 years. In the average disaster episode identified by our model, consumption falls by 30% in the short run. In the long run, roughly half of this fall in consumption is reversed. Disasters also greatly increase uncertainty about consumption growth. Our estimates imply a standard deviation of consumption growth during disasters of 12%. We investigate the asset pricing implications of these rare disasters. In a model with power utility and standard values for risk aversion, stocks surge at the onset of a disaster due to agents' strong desire to save. This counterfactual prediction causes a low equity premium, especially in normal times. In contrast, a model with Epstein-Zin-Weil preferences and an intertemporal elasticity of substitution equal to 2 yields a sizeable equity premium in normal times for modest values of risk aversion.

Gary Becker, Becker Posner Blog: Should the US Introduce a Value Added Tax? The greater efficiency of a VAT and its easy of collection is a two-edged sword. On the one hand, it would raise a given amount of tax revenue efficiently and cheaply. Since economists usually evaluate different types of taxes by their efficiency and easy of collecting a given amount of tax revenue, economists typically like value added taxes. The error in this method of evaluating taxes is that it does not consider the political economy determinants of the level of taxes. From this political economy perspective, the value added tax does not look so attractive, at least to those of us who worry that governments would spend and tax at higher levels than is economically and socially desirable. Since high taxes and high levels of government spending would discourage economic growth and raise rather than lower the overall distortions in an economy, I am highly dubious about introducing a VAT into the federal tax system unless accompanied by a major overall of this system.

Matthew J. Eichner, Donald L. Kohn, Michael G. Palumbo, Fed: Financial Statistics for the United States and the Crisis: What Did They Get Right, What Did They Miss, and How Should They Change? We agree that more comprehensive real-time data is necessary, but we also emphasize that collecting more data is only part of the process of developing early warning systems. More fundamental, in our view, is the need to use data in a different way--in a way that integrates the ongoing analysis of macro data to identify areas of interest with the development of highly specialized information to illuminate those areas, including the relevant instruments and transactional forms. In this paper, we describe why we are concerned that specifying this second stage generically and prior to processing the first-stage signals will not be fruitful: We can easily imagine specifying ex ante a program of data collection that would look for vulnerabilities in the wrong place, particularly if the actual act of looking by macro- or microprudential supervisors causes the locus of activity to shift into a new shadow somewhere else--something we argue occurred during the buildup of risks ahead of this crisis.

Badi H. Baltagi, Francesco Moscone, IZA: Health Care Expenditure and Income in the OECD Reconsidered: Evidence from Panel Data. This paper reconsiders the long-run economic relationship between health care expenditure and income using a panel of 20 OECD countries observed over the period 1971-2004. In particular, the paper studies the non-stationarity and cointegration properties between health care spending and income. This is done in a panel data context controlling for both cross-section dependence and unobserved heterogeneity. Cross-section dependence is modelled through a common factor model and through spatial dependence. Heterogeneity is handled through fixed effects in a panel homogeneous model and through a panel heterogeneous model. Our findings suggest that health care is a necessity rather than a luxury, with an elasticity much smaller than that estimated in previous studies.

Christopher Barrington-Leigh et al, VoxEU: International evidence on the social context of wellbeing. What accounts for life satisfaction differences across countries? This column presents new findings from the Gallup World Poll of more than 140,000 respondents worldwide. It suggests the happiest nations are those with strong social support from family and friends, freedom in making life choices, and low levels of corruption.

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APRIL 23 2010

EU, EUROPEAN ECONOMY NEWS: Divergences within the euro area: threat and opportunity. Divergences in the competitive positions and current-account balances of euro area Member States have been building up over the past decade. The divergences may threaten both the economic stability of individual countries and the cohesiveness of the euro area. Addressing the divergences will require significant price and cost adjustments in current-account deficit countries and removing the structural factors that hinder domestic demand in surplus countries. The euro area and the EU as a whole must urgently improve economic surveillance and policy coordination in order to address divergences in the competitive positions and current-account balances of euro-area Member States.

Caroline Baum, Business Week: Greenspan’s Delusions Get Much Worse With Age. Greenspan was a big cheerleader for adjustable-rate mortgages in 2004. He dismissed the idea that record levels of household debt were a problem as long as people could service it, courtesy of his super-low interest rates. He repeatedly rejected the notion of a housing bubble, admitting belatedly that there might be some “froth” in the residential real estate market. He gave political support to the Bush tax cut in 2001 because -- get this -- unless the government reduced taxes, there would be no more Treasuries for the Fed to buy to conduct monetary policy! He refused to raise margin requirements in the late 1990s to defuse the technology stock bubble, arguing publicly it would have no effect. (Privately, he acknowledged it would curtail the bubble but might nail the economy in the process.) He advocated a “risk-management” approach to monetary policy and failed to exercise even a modicum of risk- management during two asset bubbles on his watch. Could anyone have been more wrong about so many things than Alan Greenspan?

Reint Gropp, Christian Gründl, Andre Güttler, VoxEU: The impact of public guarantees on bank risk taking: Evidence from a natural experiment. Public guarantees in the wake of the global crisis have been wide-spread. This column presents recent research on the effects of a 2001 law to remove government guarantees for German banks. It finds that such guarantees were associated with significant moral hazards and removing them reduced the risk taking of banks, their average loan size and their overall lending volumes.

Christina Romer, Christopher Carroll, White House: Did 'Cash-for-Clunkers' work as intended? A plausible interpretation of the available data is that many of the Car Allowance Rebate System (CARS) sales were to the kinds of thrifty people who can afford to buy a new car but normally wait until the old one is thoroughly worn out. Stimulating spending by such people is very nearly the best possible countercylical fiscal policy in an economy suffering from temporarily low aggregate demand.

Chris Dillow, Stumbling and Mumbling Blog: Corporate tax incidence: some evidence. Here are three papers which show that taxes that formally fall upon companies in fact cost workers money. 1. Bill Gentry concludes from a literature survey that “labor bears a substantial burden from the corporate income tax.” 2. Work by Alison Felix in the US finds that: Labor bears a substantial weight of the corporate tax. While this burden has fluctuated over time, the relationship between corporate taxes and wages has been consistently negative. In other words, higher corporate taxes are typically associated with lower wages. 3. A study of European countries finds that, in the long-run, 92% of any rise in corporation tax falls upon wages. This, I think, corroborates the view that employers’ NICs are in fact paid at least in part by workers: why should these be significantly different from corporation tax?

David Warsh, Seeking Alpha Blog: The Hunt for New (Economic) Ideas. Last week the National Bureau of Economics held its Twenty-Fifth Annual Conference on Macroeconomics. Toy models of the business cycle morph into the more elaborate and realistic versions known as dynamic stochastic general equilibrium; caricatures of forward-looking behavior become dynamic public finance; monetary policy becomes an experiment with various rules; development becomes a preoccupation; political economy returns. What could you learn from this meeting? For one thing, that economists continue to zero in on the role of leverage and rapidly-changing margin requirements, to the extent that significant new vocabulary is emerging (if not yet entirely ready for prime time) to describe what happened in the recent crisis.

James D. Hamilton, UCLA: Nonlinearities and the Macroeconomic Effects of Oil Prices. I noted in a paper published in the Journal of Political Economy in 1983 that at that time, 7 out of the 8 postwar U.S. recessions had been preceded by a sharp increase in the price of crude petroleum. To me, the evidence is convincing that the relation between GDP growth and oil prices is nonlinear. The recent paper by Kilian and Vigfusson (2009) does not challenge that conclusion, but does offer a useful reminder that we need to think carefully about what question we want to ask with an impulse-response function in such a system and cannot rely on off-the-shelf linear methods for an answer.

Valerie A. Ramey and Daniel J. Vine, NBER: Oil, Automobiles, and the U.S. Economy: How Much have Things Really Changed? This paper re-examines whether the impact of oil shocks on the aggregate economy, and on the motor vehicle industry in particular, has changed over time. We find remarkable stability in the response of aggregate real variables to oil shocks once we account for the additional cost of shortages and rationing during the 1970s. To understand why the response of aggregate real variables has not changed, we focus on the motor vehicle industry, because it is considered to be the most important channel through which oil shocks affect the economy. We find that, contrary to common perceptions, the share of motor vehicles in the goods-producing sector of the economy has shown little decline over time. Moreover, within the motor vehicle industry, the recent oil shocks had similar effects on segment shifts and capacity utilization as the shocks during the 1970s.

Rob Valletta, Katherine Kuang, San Fransisco Fed: Extended Unemployment and UI Benefits. During the current labor market downturn, unemployment duration has reached levels well above its previous highs. Analysis of unemployment data suggests that extended unemployment insurance benefits have not been important factors in the increase in the duration of unemployment or in the elevated unemployment rate.

Roland G. Fryer, Jr, NBER: Financial Incentives and Student Achievement: Evidence from Randomized Trials. This paper describes a series of school-based randomized trials in over 250 urban schools designed to test the impact of financial incentives on student achievement. In stark contrast to simple economic models, our results suggest that student incentives increase achievement when the rewards are given for inputs to the educational production function, but incentives tied to output are not effective. Relative to popular education reforms of the past few decades, student incentives based on inputs produce similar gains in achievement at lower costs. Qualitative data suggest that incentives for inputs may be more effective because students do not know the educational production function, and thus have little clue how to turn their excitement about rewards into achievement. Several other models, including lack of self-control, complementary inputs in production, or the unpredictability of outputs, are also consistent with the experimental data.

Richard Florida, The Atlantic: Working Smart for the Money. Smarter states also work less. Working hours are negatively associated with state human capital levels (a correlation of -.59) and also with creative class work (a correlation of -.33). Working hours are, however, positively associated with blue-collar, working-class jobs (.4). It's time to get over the notion that simply working harder brings wealth and economic development. The structure and composition of jobs matter greatly. At a time when job creation is at the top of the agenda, this is something policy-makers need to factor into their thinking about exactly what kinds of jobs we wish to create.

Edward L. Glaeser, NYT Blog: A Tale of Many Cities. ”Zipf’s Law ” is one of the great curiosities of urban research. The law claims that the number of people in a city is inversely proportional to the city’s rank among all cities. In other words, the biggest city is about twice the size of the second biggest city, three times the size of the third biggest city, and so forth. Zipf’s Law is named after the linguist George Kingsley Zipf, who discovered the law when studying the distribution of words: the second most common word in a text typically shows up one-half as often as the most commonly used word. The law has been observed in many other contexts, including firm sizes and income distribution, which follows the closely-connected Pareto Distribution.

Joshua Keating, Foreign Affairs: Why Have There Been So Many Geological Catastrophes Lately? There haven't been. These days, you don't have to be a conspiracy theorist or religious fanatic to wonder whether there's something strange going on with the Earth. Major earthquakes in Haiti, Chile, and China have killed thousands, and a cloud of volcanic ash has grounded flights across Europe. This past weekend also saw deadly quakes in Afghanistan, Papua New Guinea, and the Dominican Republic. So is the Earth going through a period of especially high geological activity? No, we're just paying more attention. 2010 is actually shaping up to be a perfectly average year for quakes. According to the U.S. Geological Survey, since 1900 the Earth has experienced an average of 16 major quakes -- magnitude 7.0 or higher -- per year. So why does it seem like this has been a particularly bad year? It likely has something to do with increased media coverage. This weekend's quake off the coast of the Dominican Republic is thought to have killed only three people and probably wouldn't have garnered much international attention if not for the catastrophic temblor that struck nearby Haiti in January. But while earthquakes haven't become more frequent, they are getting more deadly. Earthquakes killed 650,000 people in the last decade, more than any other decade in history. Around 250,000 have already died this year. This is likely because of the expansion of urban areas in fault zones.

APRIL 16 2010

Ad van Riet et al, ECB: Euro Area Fiscal Policies and the Crisis. The crisis-related deterioration of fiscal positions has called the longer-term sustainability of public finances into question. The risks to fiscal sustainability are manifold. They arise from persistently high primary budget deficits in the event that fiscal stimulus packages are not fully reversed, ongoing government spending growth in the face of a prolonged period of more subdued output growth, rising government bond yields and thus increasing debt servicing costs, and possible budget payouts related to state guarantees to financial and non-financial corporations. Furthermore, rising government indebtedness may itself trigger higher interest rates and contribute to lower growth, creating a negative feedback loop. These challenges for public finances are compounded by the expected rising costs from ageing populations. The euro-area government debt-to-GDP ratio could increase to 100% in the next years–and in some euro-area countries well above that level–if governments do not take strong corrective action. To contain these risks, euro area countries will need to realign their fiscal policies so as to bring their debt ratios back onto a steadily declining path and limit the debt servicing burden for future generations.

Alberto F. Alesina, Edward L. Glaeser, Bruce Sacerdote, Harvard University:Work and Leisure in the U.S. and Europe: Why so Different? Americans average 25.1 working hours per person in working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the French average 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the U.S. and Europe. Another popular view is that these differences are explained by long-standing European "culture", but Europeans worked more than Americans as late as the 1960s. In this paper, we argue that European labor market regulations, advocated by unions in declining European industries who argued "work less, work all" explain the bulk of the difference between the U.S. and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier where the returns to leisure increase as more people are taking longer vacations.

Floyd Norris, NYT: Why So Glum? Numbers Point to a Recovery. The American economy appears to be in a cyclical recovery that is gaining strength. Firms have begun to hire and consumer spending seems to be accelerating. That is what usually happens after particularly sharp recessions, so it is surprising that many commentators, whether economists or politicians, seem to doubt that such a thing could possibly be happening.

John H. Cochrane, University of Chicago: Understanding policy in the great recession: Some unpleasant fiscal arithmetic. I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009, to think about whether the US is headed for a fiscal inflation, and what that inflation will look like. I emphasize that inflation can come well before large deficits or monetization are realized. The “nightmare scenario” for inflation starts with growth much poorer than the administration’s forecasts, possibly due to larger government distortions and higher tax rates. Lower growth is the single most important danger to the Federal budget. Then, the government may have to make good on its many credit guarantees, and continue its string of bailouts. A wave of sovereign (Greece) and semi-sovreign bailouts (California) may pave the way. If this happens, prospective deficit to GDP ratios, or more relevant deficit to revenue ratios, will rise much further than current projections suggest.

Antonello D’Agostino, Ireland Central Bank: Are Some Forecasters Really Better Than Others? In any dataset with individual forecasts of economic variables, some forecasters will perform better than others. However, it is possible that these ex post differences reflect sampling variation and thus overstate the ex ante differences between forecasters. In this paper, we present a simple test of the null hypothesis that all forecasters in the US Survey of Professional Forecasters have equal ability. We construct a test statistic that reflects both the relative and absolute performance of the forecaster and use bootstrap techniques to compare the empirical results with the equivalents obtained under the null hypothesis of equal forecaster ability. Results suggests limited evidence for the idea that the best forecasters are actually innately better than others, though there is evidence that a relatively small group of forecasters perform very poorly.

Matthew Richardson, Nouriel Roubini, Washington Post: How to reduce risk on Wall Street? Make the banks pay. First, we have to drive a stake through the heart of the "too big to fail" mantra that only fattens our financial beasts. Second, we should stop focusing on the problems of individual banks and look at the broader risk that the largest and most complex financial institutions pose. We can accomplish both goals by charging such institutions an annual fee, or tax, or surcharge, or levy, or whatever the politicians need to call it. The amount of the fee would vary according to each bank or financial firm and would include two key elements: an insurance premium based on whichever of the institution's debts carry a real or implied government guarantee (akin to the FDIC system already in place), and a fee that reflects the institution's contribution to a potential large-scale, systemic crisis.

Karen Dynan, Brookings: The Income Rollercoaster: Rising Income Volatility and its Implications. Household income volatility appears to have trended significantly upward over the past several decades, with much of the rise tied to an increase in the frequency of very large changes in income. Volatility of earnings per hour has risen more sharply than the volatility of hours, suggesting an important involuntary component to the increase in income variability. Expanded access to credit has probably mitigated the degree to which income declines translate into consumption declines, but this development has posed other risks to household economic security, as have other trends in household financial opportunities. It is too early to know what effects the current economic crisis will have on these trends. The high current degree of weakness in labor markets—together with the expectation that the economic recovery will proceed only slowly—implies that household income volatility may be unusually elevated for several years to come.

Jennie E. Branda, Yu Xieb, ASA: Who Benefits Most from College? Evidence for Negative Selection in Heterogeneous Economic Returns to Higher Education. Scholars commonly presume that positive selection is at work, that is, individuals who are most likely to select into college also benefit most from college. Net of observed economic and noneconomic factors influencing college attendance, we conjecture that individuals who are least likely to obtain a college education benefit the most from college. We call this theory the negative selection hypothesis. To adjudicate between the two hypotheses, we study the effects of completing college on earnings by propensity score strata using an innovative hierarchical linear model with data from the National Longitudinal Survey of Youth 1979 and the Wisconsin Longitudinal Study. For both cohorts, for both men and women, and for every observed stage of the life course, we find evidence suggesting negative selection. Results from auxiliary analyses lend further support to the negative selection hypothesis.

Gary Becker, Becker Posner Blog: The Effects on Children of the Decline in Marriage. The most important economic and social concerns due to low marriage rates are the effects on rearing of children. These effects are not due to lower marriage rates alone, but rather to the close connection between these low rates and high divorce rates, and to the greater propensity of women to have children without being married, or without living with the fathers of their children. Although many single mothers do an absolutely wonderful job in raising their children, common sense and most academic findings suggest that having a father present during the raising of children generally has a positive effect on the development of non-cognitive traits of children. These include a general respect for authority and reduced rebelliousness in school, and the avoidance of gangs and other criminal activities. It also appears that the absence of fathers has a greater effect on the non-cognitive traits of sons than daughters, although that is a less well-established finding.

John Komlos, Marek Brabec, NBER: The Trend of Mean BMI Values of Us Adults, Birth Cohorts 1882-1986 Indicates that the Obesity Epidemic Began Earlier than Hitherto Thought. In contrast to the prevailing strategies, we estimate the trend and rate of change of BMI values by birth cohorts stratified by gender and ethnicity born 1882-1986. We use loess additive regression models to estimate age and trend effects of BMI values of US-born black and white adults measured between 1959 and 2006. We find that the increase in BMI was already underway among the birth cohorts of the early 20th century. The rate of increase was fastest among black females; for the three other groups under consideration, the rates of increase were similar. The generally persistent upward trend was punctuated by upsurges, particularly after each of the two World Wars. That the estimated rate of change of BMI values increased by 71% among black females between

the birth cohorts 1955 and those of 1965 is indicative of the rapid increases in their weight.

Gergaud, Olivier et al, MPRA: Stars War in French Gastronomy: Prestige of Restaurants and Chefs’ Careers. In this paper, we analyze the careers from a sample of more than 1,000 top French chefs over more than twenty years and link it to the success or reputation of the restaurants where they have worked. This allows us to test what are the determinants of success but also to investigate the dynamics of performance and reputation, stressing the importance of the quality of apprenticeships, mentoring and entrepreneurship spirit. We find that the prestige of the restaurant where individuals work is on average declining along the career, and that the quality of apprenticeship is strongly related to the future success as chef. We also find that prices of restaurants with higher reputation are more sensitive to bad signals.

APRIL 9 2010

Prakash Kannan, IMF: Credit Conditions and Recoveries from Recessions Associated with Financial Crises. Recoveries from recessions associated with a financial crisis tend to be sluggish. In this paper, we present evidence that stressed credit conditions are an important factor constraining the pace of recovery. In particular, using industry-level data, we find that industries relying more on external finance grow more slowly than other industries during recoveries from recessions associated with financial crises. Additional tests, based on establishment size, on alternative definitions of financial crises, and on corporate-government interest rate spreads, support the findings. Moreover, for subsets of industries where financial frictions are more severe, we find much stronger differential growth effects.

Sagiri Kitao, NY Fed: Short-Run Fiscal Policy: Welfare, Redistribution, and Aggregate Effects in the Short and Long Run. This paper quantifies the effects of two short-run fiscal policies, a temporary tax cut and a temporary rebate transfer, that are intended to stimulate economic activity. A reduction in income taxation provides immediate incentives to work and save more, raising aggregate output and consumption. A temporary rebate is mostly saved and increases consumption marginally. Both policies improve the overall welfare of households, and the rebate policy especially benefits low-income households. In the long run, however, the debt accumulated to finance the stimulus and a higher tax to service the debt can crowd out capital and reduce output and consumption, causing welfare to deteriorate.

Enrico Perotti, VoxEU: The governance of macro-prudential taxation. What should an effective macro-prudential policy framework look like? This column argues that financial stability and macroeconomic stability should be dealt with differently. One requires prompt corrective action; the other requires more gradual policy intervention. Systemic levies offer a policy that can tighten financial discipline without the need for a large increase in interest rates across the whole economy.

Kenneth Rogoff, Project Syndicate: The IMF Does Europe. With the International Monetary Fund playing a central role in the eurozone’s blueprint for a bailout of Greece, the multilateral lender has come full circle. In its early days after World War II, the IMF’s central task was to help Europe emerge from the ravages of the war. But, until the financial crisis, most Europeans assumed they were now far too wealthy to ever face the humiliation of asking the IMF for financial assistance. Welcome to the new era. Europe has become ground zero for the biggest expansion of IMF lending and influence in years. Several large Eastern European countries, including Hungary, Romania, and Ukraine, already have substantial IMF loan programs. Now, the eurozone countries have agreed that the Fund can come into Greece and, presumably, Portugal, Spain, Italy, and Ireland, if needed.

Maurizio Michael Habib, VoxEU: The exorbitant privilege from a global perspective. Does the dollar enjoy an “exorbitant privilege”, in which US residents pay relatively low interest on their foreign liabilities while receiving relatively high returns on their foreign assets? This column argues that the answer is “yes”, while the excess returns are not explained by different risks between the US and elsewhere.

Edward Hugh, A Fistful of Euros Blog: From A Greek Debt Crisis To A Eurozone Structural One? When we look back five years from now, will we see this week as marking a turning point in the short, but far from uneventful, ten year history of Europe’s common currency? Certainly recent comments by the deputy governor of the People’s Bank of China have made evident what was already implicit: the dependence of EU sovereign debt on sentiment in global markets, especially in Asia and the Americas. Simon Derrick, chief currency strategist at Bank of New York Mellon even went so far as to say the trauma of recent days might well signal the point that we stop talking about a “Greek debt crisis” and start talking about a “Eurozone structural crisis” . And while Herman Van Rompuy, president of the European Council, was telling us on the one hand that the eurozone will never let Greece fail, Jane Foley, research director at Forex.com busied herself explaining, on the other, that any involvement of the International Monetary Fund in helping Greece to stabilise its fiscal position only heightens the risk that the country might one day end up leaving the eurozone.

N. Gregory Mankiw, NBER: Spreading the Wealth Around: Reflections Inspired by Joe the Plumber. This essay discusses the policy debate concerning optimal taxation and the distribution of income. It begins with a brief overview of trends in income inequality, the leading hypothesis to explain these trends, and the distribution of the tax burden. It then considers the framework that economists use to address the normative problem of designing tax systems. The conventional utilitarian approach is found to be wanting, as it leads to prescriptions that conflict with many individuals moral intuitions. The essay then explores an alternative normative framework, dubbed the Just Deserts Theory,

according to which an individuals compensation should reflect his or her social contribution.

Edward L. Glaeser, NYT Blog: Teach Your Neighbors Well. The more than one-for-one relationship between metropolitan area unemployment and the rate predicted by educational composition is an example of what economists call “social multipliers,” which may exist when aggregate relationships are stronger than individual relationships. In this case, the aggregate or metropolitan area relationship between unemployment and education is stronger than the individual relationship between unemployment and education. Social multipliers may occur when one person’s actions, like being unemployment or getting educated, influence everyone else. If one layoff reduces the demand for another person’s work and that leads to another layoff, then the impact of anything that increases unemployment will be multiplied. This is a standard Keynesian argument, but there are reasons to suspect that this isn’t the story behind the overly strong relationship between local unemployment and local education.

David N.F. Bell, Robert A. Hart, Sterling: Retire Later or Work Harder? We compare two policies of increasing British state pension provision: (a) increase the pensionable age of men and women, (b) maintain the existing retirement age but require older workers to work longer per-period hours. There are reasons for policy makers to give serious consideration to the under-researched alternative (b). First, from wage - hours contract theory we know that there are potential gains to both workers and firms of allowing hours to rise in work experience. Second, there is strong evidence that job satisfaction rises in age. Third, there has in any case been a significant overall increase in the hours supplied by older workers in the last two decades. We review the relevant theory, model the trade-off between later retirement versus increased work intensity, produce relevant background facts, and provide estimates of the policy trade-offs.

Dirk Antonczyk, Thomas DeLeire, Bernd Fitzenberger, IZA: Polarization and Rising Wage Inequality: Comparing the U.S. and Germany. Between 1979 and 2004, wage inequality increased strongly in both the U.S. and Germany but there were various country specific aspects of this increase. For the U.S., we find faster wage growth since the 1990s at the top (80% quantile) and the bottom (20% quantile) compared to the median of the wage distribution, which is evidence for polarization in the U.S. labor market. In contrast, we find little evidence for wage polarization in Germany. Moreover, we see a large role played by cohort effects in Germany, while we find only small cohort effects in the U.S. Employment trends in both countries are consistent with polarization since the 1990s. We conclude that although there is evidence in both the U.S. and Germany which is consistent with a technology-driven polarization of the labor market, the patterns of t! rends in wage inequality differ strongly enough that technology effects alone cannot explain the empirical findings.

Nina Smith, Valdemar Smith, Mette Verner, IZA: The Gender Pay Gap in Top Corporate Jobs in Denmark: Glass Ceilings, Sticky Floors or Both? This paper analyses the gender gap in compensation for CEOs, Vice-Directors, and potential top executives in the 2000 largest Danish private companies based on a panel data set of employer-employees data covering the period 1996-2005. During the period, the overall gender gap in compensation for top executives and potential top executives decreased from 35 percent to 31 percent. However, contrary to many other studies, we do not find that the gender gap for Danish top executives disappears when controlling for observed individual and firm characteristics and unobserved individual heterogeneity. For CEOs, the raw compensation gap is 28 percent during the period while the estimated compensation gap after controlling for observed and unobserved characteristics increases to 30 percent. For executives below the CEO level, the estimated compensation gap is lower, ranging from 15 to 20 percent. Thus, we find evidence of both glass ceilings and sticky floors in Danish private firms.

Reyer Gerlagh, Tilburg University: Too Much Oil. Fear for oil exhaustion and its consequences on economic growth has been a driver of a rich literature on exhaustible resources from the 1970s onwards. But our view on oil has remarkably changed and we now worry how we should constrain climate change damages associated with oil and other fossil fuel use. In this climate change debate, economists have pointed to a green paradox: when policy makers stimulate the development of non-carbon energy sources to (partly) replace fossil fuels in the future, oil markets may anticipate a future reduction in demand and increase current supply. The availability of ‘green’ technologies may increase damages. The insight comes from the basic exhaustible resource model. We reproduce the green paradox and to facilitate discussion differentiate between a weak and a strong version, related to short-term and long-term effects, respectively. Then we analyze the green paradox in 2 standard modifications of the exhaustible resource model. We find that increasing fossil fuel extraction costs counteracts the strong green paradox, while with imperfect energy substitutes both the weak and strong green paradox may vanish.

A. Ross Otto and Bradley C. Love, University of Texas: You don’t want to know what you’re missing. When people learn to make decisions from experience, a reasonable intuition is that additional relevant information should improve their performance. In contrast, we find that additional information about foregone rewards (i.e., what could have gained at each point by making a different choice) severely hinders participants’ ability to repeatedly make choices that maximize long-term gains. We conclude that foregone reward information accentuates the local superiority of short-term options (e.g., consumption) and consequently biases choice away from productive long-term options (e.g., exercise). These conclusions are consistent with a standard reinforcement-learning mechanism that processes information about experienced and forgone rewards. In contrast to related contributions using delay-of-gratification paradigms, we do not posit separate top-down and emotion-driven systems to explain performance. We find that individual and group data are well characterized by a single reinforcement-learning mechanism that combines information about experienced and foregone rewards.

Roland Sturm, RAND: Soda Taxes, Soft Drink Consumption, And Children’s Body Mass Index. Taxes on sugar-sweetened beverages have been proposed to combat obesity. Using data on state sales taxes for soda and individual-level data on children, we examine whether small taxes are likely to change consumption and weight gain or whether larger tax increases would be needed. We find that existing taxes on soda, which are typically not much higher than 4 percent in grocery stores, do not substantially affect overall levels of soda consumption or obesity rates. We do find, however, that subgroups of at-risk children—children who are already overweight, come from low-income families, or are African American—may be more sensitive than others to soda taxes, especially when soda is available at school. A greater impact of these small taxes could come from the dedication of the revenues they generate to other obesity prevention efforts rather than through their direct effect on consumption.

Dalton Conley, Emily Rauscher, NBER: The Effect of Daughters on Partisanship. Washington (2008) finds that, controlling for total number of children, each additional daughter makes a member of Congress more likely to vote liberally and attributes this finding to socialization. However, daughters influence could manifest differently for elite politicians and the general citizenry, thanks to the selection gradient particular to the political process. This study asks whether the proportion of female biological offspring affects political party identification. Using nationally-representative data from the General Social Survey, we find that female offspring induce more conservative political identification. We hypothesize that this results from the change in reproductive fitness strategy that daughters may evince.

Francesco Cinnirella et al, CESifo: Why Does Height Matter for Educational Attainment? Evidence from German Pre-Teen Children. Several studies have shown that body height is positively associated with educational attainment. We show that (i) taller children are more likely to enroll in ‘Gymnasium’, the most academic secondary school track, and that (ii) primary school teachers give better recommendations to taller students. This holds even when controlling for academic achievement and parental background. In addition, we present some evidence that height and social skills are positively associated already at age 2-3. Our results imply that controlling for social skills would significantly reduce estimates of the height-school premium. With respect to education policy, our findings suggest that early school tracking might increase disadvantages for students with low social skills.

APRIL 2 2010

Alan Greenspan, Brookings: The Crisis. The bubble started to unravel in the summer of 2007. But unlike the debt-lite deflation of the earlier dotcom boom, heavy leveraging set off serial defaults, culminating in what is likely to be viewed as the most virulent financial crisis ever. The major failure of both private risk management and official regulation was to significantly misjudge the size of tail risks that were exposed in the aftermath of the Lehman default. Had capital and liquidity provisions to absorb losses been significantly higher going into the crisis, contagious defaults surely would have been far less. This paper argues accordingly that the primary imperative going forward has to be (1) increased regulatory capital and liquidity requirements on banks and (2) significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades.

S. Pelin Berkmen et al, VoxEU: The global financial crisis: Why were some countries hit harder? Despite the global reach of the financial crisis, some countries fared better than others. This column argues that this was due to differences in trade or financial openness, underlying vulnerabilities to external forces, or the strength of their economic policies. The evidence suggests drawing some – preliminary – policy lessons: Exchange-rate flexibility is crucial to dampen the impact of large shocks. Prudential regulation and supervision need to focus on preventing the build-up of vulnerabilities that are particularly associated with credit booms, such as excessive bank leverage. A solid fiscal position during “good times” creates some buffers to conduct countercyclical fiscal policies during shocks.

Steven B. Kamin, Laurie Pounder DeMarco, Fed: How Did a Domestic Housing Slump Turn into a Global Financial Crisis? Was the direct exposure of foreigners to the U.S. financial system a key driver of the crisis, or did other factors account for its rapid contagion across the world? To answer this question, we assessed whether countries that held large amounts of U.S. mortgage-backed securities (MBS) and were highly dependent on dollar funding experienced a greater degree of financial distress during the crisis. We found little evidence of such “direct contagion” from the United States to abroad. Although CDS spreads generally rose higher and bank stocks generally fell lower in countries with more exposure to U.S. MBS and greater dollar funding needs, these correlations were not robust, and they fail to explain the lion’s share of the deterioration in asset prices that took place during the crisis. Accordingly, channels of “indirect contagion” may have played a more important role in the global spread of the crisis: a generalized run on global financial institutions, given the opacity of their balance sheets; excessive dependence on short-term funding; vicious cycles of mark-to-market losses driving fire sales of MBS; the realization that financial firms around the world were pursuing similar (flawed) business models; and global swings in risk aversion. The U.S. subprime crisis, rather than being a fundamental driver of the global crisis, may have been merely a trigger for a global bank run and for disillusionment with a risky business model that already had spread around the world.

Lucian Bebchuk, Alma Cohen, Holger Spamann, Project Syndicate: Paid to Fail. After Bear Stearns and Lehman Brothers melted down, ushering in a worldwide crisis, media reports largely assumed that the wealth of these firms’ executives was wiped out, together with that of the firms they navigated into disaster. This “standard narrative” led commentators to downplay the role of flawed compensation arrangements and the importance of reforming the structures of executive pay. In our study, “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman Brothers 2000-2008,” we examine this standard narrative and find it to be incorrect. We piece together the cash flows derived by the firms’ top five executives using data from Securities and Exchange Commission filings. We find that, notwithstanding the 2008 collapse of the firms, the bottom lines of those executives for the period 2000-2008 were positive and substantial.

N. Gregory Mankiw, NYT: Trying to Tame the Unknowable. THE economy is recovering, in baby steps, from the financial crisis and deep recession of 2008 and 2009.What can policy makers do to prevent this kind of thing from happening again? One thing we cannot do very well is forecast the economy. Another thing we cannot do very well is regulate financial institutions. So where does this leave us? We should certainly aim for better financial regulation, especially for institutions with government-insured deposits. More transparency and more accurate assessment of risks are admirable goals. Higher capital requirements would be a step in the right direction. Whatever we do, let’s not be overoptimistic. We should plan for future financial crises, to occur at some unknown date for some unknown reason, and arm ourselves with better tools to clean up the mess. My favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital.

David Brooks, NYT: The Return of History. Economics achieved coherence as a science by amputating most of human nature. Now economists are starting with those parts of emotional life that they can count and model (the activities that make them economists). But once they’re in this terrain, they’ll surely find that the processes that make up the inner life are not amenable to the methodologies of social science. The moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics. Once this is accepted, economics would again become a subsection of history and moral philosophy. Economics will be realistic, but it will be an art, not a science.

Joshua Angrist, Jörn-Steffen Pischke, NBER: The Credibility Revolution In Empirical Economics: How Better Research Design Is Taking The Con Out Of Econometrics. This essay reviews progress in empirical economics since Leamer’s (1983) critique. As we see it, the credibility revolution in empirical work can be traced

to the rise of a design-based approach that emphasizes the identification of causal effects. Design-based studies typically feature either real or natural experiments and are distinguished by their prima facie credibility and by the attention investigators devote to making the case for a causal interpretation of the findings their designs generate. Design-based studies are most often found in the microeconomic fields of Development, Education, Environment, Labor, Health, and Public Finance, but are still rare in Industrial Organization and Macroeconomics. We explain why IO and Macro would do well to embrace a design-based approach. Finally, we respond to the charge that the design-based revolution has overreached.

Jan C. van Ours, Lenny Stoeldraijer Age, CESIfo: Wage and Productivity.

Previous empirical studies on the effect of age on productivity and wages find contradicting results. Some studies find that if workers grow older there is an increasing gap between productivity and wages, i.e. wages increase with age while productivity does not or does not increase at the same pace. However, other studies find no evidence of such an age related pay productivity gap. We perform an analysis of the relationship between age, wage and productivity using a matched worker-firm panel dataset from Dutch manufacturing covering the period 2000-2005. We find little evidence of an age related pay-productivity gap.

Carl Gaigné et al, INRA-ESR: Are compact cities environmentally friendly? The concentration of activities decreases the ecological footprint stemming from commodity shipping between cities, but it increases emissions of greenhouse gas by inducing longer worktrips. What matters for the ecological footprint of cities is the mix between urban density and the global pattern of activities. As expected, when both the intercity and intraurban distributions of activities are given, a higher urban density makes cities more environmentally friendly and raises global welfare. However, once we account for the fact that cities may be either monocentric or polycentric as well as for the relocation of activities between cities, the relationship between density and the ecological footprints appears to be much more involved. Indeed, because changes in urban density affect land rents and wages, firms are incited to relocate, thus leading to new commuting patterns. We show policies that favor the decentralization of jobs in big cities may reduce global pollution and improve global welfare.