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.