MAY 28 2010

Adam Posen, BoE: The Realities and Relevance of Japan’s Great Recession. Neither Ran Nor Rashomon. Ultimately, my main analytic point is for people to stop thinking of “turning Japanese” as a syndrome, some sort of strange condition into which an economy can fall. Instead, we should think of Japan’s Great Recession as largely demonstrating the validity of much textbook, even old fashioned Keynesian, macroeconomics – and thus amenable both to comprehension and, within limits, avoidance, or at least amelioration. As a result, while our economies in Europe and the US may not ever “turn Japanese,” we all share some risks and problems in common with Japan circa 1995. The sense of exoticism of the Japanese economy, shared by many scholars let alone commentators, inside and outside Japan is even more misleading now than it was when Americans and Europeans looked wonderingly at Japan’s miraculous economic performance of the 1950s-1980s.

Pragmatic Capitalism Blog: Are We Headed For Another Lehman? I would venture to argue that the potential is there for a crisis far worse than Lehman. The global economy, arguably, has never confronted such massive hurdles. The Euro appears fundamentally broken. As I’ve repeatedly stated the problems in the Euro are inherent within the currency. The solvency crisis is simply a byproduct of an inherently flawed currency system. In addition, investor sentiment is incredibly fragile. And finally, those in charge don’t appear to have a grasp on the actual problems at hand and have failed to provide a viable solution despite two years of constant meddling. It’s impossible to know whether these issues will turn into something larger than Lehman or whether they will simply go away quietly only to meet us at a later date. But the one thing that appears certain is that the risks in this market remain extraordinarily high and the very fact that there is the potential for another Lehman (or something worse) should have us all concerned – not to mention furious.

Bill Gross, PIMCO: Three Will Get You Two (or) Two Will Get You Three. You load sixteen tons, what do you get? Another day older and deeper in debt. Saint Peter, don’t you call me ‘cause I can’t go; I owe my soul to the company store. Common sense observation tells you, though, that the debt super cycle trend in the U.S. shown in the following chart is reaching unsustainable proportions and that the “growth” required to service it if real interest rates were ever to go up instead of down would be insufficient. That is why lenders balked 18 months ago during events surrounding the Lehman liquidity crisis and why they’re beginning to balk once again. Too much debt/too little growth makes for a “three will get you two” moment, and they refuse to extend credit under those circumstances.

Mark Thoma, Money Watch: Growth Policy versus Stabilization Policy. Hopefully, recent events will begin to shift our thinking away from the “growth above all else” policies we’ve pursued since the early 1980s, and that we will devote more attention to stabilization policy. We can put people back to work faster than we did this time around, and we can do a better job of increasing aggregate demand early in the recession (thereby reducing the fall in GDP and employment). But to do so we have to realize that stabilization is an important policy goal, and that it does not always lead to the same policies that are needed to maximize growth. People’s lives, or at least their livelihoods, depend on it.

Guido Tabellini, VoxEU: The ECB: Gestures and credibility. Improvisation in handling the crisis in Greece has given the impression that governments and European institutions are not capable of facing the toughest challenges. This column reminds us that in times like these, the credibility of institutions is essential and rests on consistency. The ECB decision to "sterilise" the purchase of bonds with inverse operations to drain liquidity puts this credibility at risk.

Daniel Gros, VoxEU: Are the Barbarians at the EU Gates? The Greek crisis poses an almost existential challenge – and has required such huge sums – because it poses the key question of European governance: can a member state of the EU be allowed to fail? As long as EU leaders cannot answer that question, financial markets will continue to harbor doubts about the euro’s long-term stability.

James Surowiecki, The New Yorker: The Age of Political Risk. The fact is, this kind of volatility isn’t going away, because we now live in an environment dominated by what economists call “political risk”—the uncertainty that businesses face as a result of government actions. Of course, government actions always affect the economy, but usually in an undramatic way: an interest-rate cut here, a new regulation there. The economic downturn and the debt crisis have given us instead a world where governments are among the most important players in markets—injecting money into economies on a colossal scale and routinely propping up, or even nationalizing, troubled companies.

Paul De Grauwe, VoxEU: Greece: The start of a systemic crisis of the Eurozone? This column, first published 15 December 2009, shows the main outlines of the crisis were clear months ago and suggests actions that – had they been taken early – would have mitigated problems facing the Eurozone today. The column concludes: "All this leads to the conclusion that the Eurozone governments should make clear where they stand on this issue. Not doing so implies that each time one member country gets into financial problems the future of the system is put into doubt." If only those words had been heeded months ago.

Robert Barro, Jong-Wha Lee, VoxU: Educational attainment in the world, 1950–2010. Empirical investigations of the role of human capital require accurate measures across countries and over time. This column describes a new dataset on educational attainment for 146 countries at 5-year intervals from 1950 to 2010. The new data, freely available online, use more information and better methodology than existing datasets. Among the many new results is that the rate of return to an additional year of schooling on output is quite high – ranging from 5% to 12%.

Price V. Fishback, NBER: Social Welfare Expenditures in the United States and the Nordic Countries: 1900-2003. The extent of social expenditures in the U.S. and the Nordic Countries is compared in the early 1900s and again in the early 2000s. The common view that America spends much less on social welfare than the Nordic countries does not survive closer inspection when we consider the differences in the structures of social expenditures. The standard comparison examines gross social expenditures. After adjustments for direct and indirect taxes paid, the net social expenditures in the Nordic countries are much closer to American levels. Inclusion of mandatory and private social expenditures raises the American share of GDP devoted to social expenditures to rank among the middle of the Nordic countries. Per capita net public social expenditures in the U.S. rank behind only Sweden. Add in the private spending, and per capita spending in the U.S. is higher than in all of the Nordic countries. Finally, I document the enormous diversity across time and place in public social expenditures in the U.S. in the early 1900s and circa 1990.

Tommaso Nannicini, Andrea Stella, Guido Tabellini and Ugo Troiano, CEPR: Social Capital and Political Accountability.In this paper, we empirically investigate a channel through which social capital may improve economic wellbeing and the functioning of institutions: political accountability. The main idea is that voters who share norms of generalized morality demand higher standards of behavior on their elected representavtives, are more willing to bear the cost of acquiring information, and are more likely to base their vote on criteria of social welfare rather than (narrow) personal interest. We take this conjecture to the data using information on the Italian members of Parliament in the postwar period (1948-2001). The empirical evidence shows that the electoral punishment of political misbehavior is considerably larger in electoral districts with high social capital, where social capital is measured by blood donation, and political misbehavior refers to receiving a request of criminal prosecution or shirking in parliamentary activity. Accordingly, episodes of political misbehavior are less frequent in electoral districts with high social capital.

Qingyuan Du, Shang-Jin Wei, NBER: A Sexually Unbalanced Model of Current Account Imbalances. Large savings and current account surpluses by China and other countries are said to be a contributor to the global current account imbalances and possibly to the recent global financial crisis. This paper proposes a theory of excess savings based on a major, albeit insufficiently recognized by macroeconomists, transformation in many of these societies, namely, a steady increase in the surplus of men relative to women. We construct an OLG model with two sexes and a desire to marry. We show conditions under which an intensified competition in the marriage market can induce men to raise their savings rate, and produce a rise in the aggregate savings and current account surplus. This effect is economically significant if the biological desire to have a partner of the opposite sex is strong. A calibration of the model suggests that this factor could generate economically significant current account responses, or more than ½ of the actual current account imbalances observed in the data.

David Leonhardt, NYT Blog: Do Video Games Equal Less Crime? The fact that crime has continued to fall is one of the more surprising aspects of the Great Recession. The Federal Bureau of Investigation reported the latest numbers today: violent crimes fell 5.5 percent last year and property crimes declined 4.9 percent. One factor for the decline seems to be the sheer number of people who have been locked up in recent decades. Another factor is the spread of smart, data-driven police strategies. Lawrence Katz, a labor economist, has an intriguing item to add to the list of potential causes: video games. Video games and Web sites may have kept the young and idle busy during this recession, thus explaining the surprising lack of an uptick in crime.