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.