SEPTEMBER 10 2010

Rong Qian, Carmen M. Reinhart, Kenneth Rogoff, VoxEU: Do countries “graduate” from crises? Some historical perspective. Are declarations of victory against the global crisis premature? This column argues that “graduation” – the emergence from recurrent crisis bouts – is a long and painful process which neither developed nor developing countries look close to completing. Two centuries of evidence suggests that most countries need 50 years before the chances of further crises subside.

Garry Tang, Christian Upper, BIS: Debt reduction after crises. A possible concern is that a sustained period of debt reduction might lead to low growth in the future. Our analysis casts doubt on this. Growth rebounds rather quickly in most of our episodes, even though debt ratios continue to fall. We take this as indication that it is possible to reduce debt and still experience healthy growth. For this to be the case, policymakers have first to fix the problems in the banking system that led to the financial crisis. The experience of Japan, but also that of other crises, indicates that this requires essentially two things: to (i) recognize losses, and (ii) rebuild bank capital.

Marco Bassetto, R. Andrew Butters, Chicago Fed: What is the relationship between large deficits and inflation in industrialized countries? The evidence presented in this article shows that large fiscal deficits in industrialized countries did not coincide with higher inflation, nor did large deficits precede higher inflation. Facing sizable fiscal imbalances, central banks in these countries were nonetheless able to maintain an orderly monetary policy. A tempting interpretation is that these central banks stood fast because their independence allowed them to do so and they wanted to preserve their solid reputations; at the same time, central bank independence shielded governments from the temptation to force the monetization of debt, and led fiscal authorities to revert quickly to a sustainable debt path. However, a full account of the institutions that supported price stability in the face of large fiscal shocks is beyond the scope of this article.

Pietro Catte el al, Bank of Italy: The role of macroeconomic policies in the global crisis. We focus on 2002-07 and perform a number of counterfactual simulations to investigate two central elements of the story, namely: (a) an over-expansionary US monetary policy and the absence of effective macro-prudential supervision, which permitted a prolonged expansion of debt-financed consumer spending; (b) the decision of China and other emerging countries to pursue an export-led growth strategy supported by pegging their currencies to the US dollar, resulting in a huge build-up of their official reserves, in conjunction with sluggish domestic demand in surplus advanced economies characterized by low potential output growth. The results of the simulations lend support to the view that if substantial, globally coordinated demand rebalancing had been undertaken in a timely manner, the macroeconomic and financial imbalances would not have accumulated to the extent that they did and the financial turmoil might have had less drastic global consequences.

Christian Merkl, Dennis Wesselbaum, IZA: Extensive vs. Intensive Margin in Germany and the United States: Any Differences? We provide an update of older U.S. studies and confirm the view that the extensive margin (i.e., the adjustment in the number of workers) explains the largest part in the overall variability in aggregate hours. Second, although the German labor market structure is very different from its U.S. counterpart, the quantitative importance of the extensive margin is of similar magnitude.

Ana Rute Cardoso, Paulo Guimaraes, José Varejão, IZA: Are Older Workers Worthy of Their Pay? An Empirical Investigation of Age-Productivity and Age-Wage Nexuses. Using longitudinal employer-employee data spanning over a 22-year period, we compare age-wage and age-productivity profiles and find that productivity increases until the age range of 50-54, whereas wages peak around the age 40-44. At younger ages, wages increase in line with productivity gains but as prime-age approaches, wage increases lag behind productivity gains. As a result, older workers are, in fact, worthy of their pay, in the sense that their contribution to firm-level productivity exceeds their contribution to the wage bill. On the methodological side, we note that failure to account for the endogenous nature of the regressors in the estimation of the wage and productivity equations biases the results towards a pattern consistent with underpayment followed by overpayment type of policies.

Ron Kaniel, Cade Massey, David T. Robinson, NBER: The Importance of Being an Optimist: Evidence from Labor Markets. Dispositional optimism is a personality trait associated with individuals who believe, either rightly or wrongly, that in general good things tend to happen to them more often than bad things. Using a novel longitudinal data set that tracks the job search performance of MBA students, we show that dispositional optimists experience significantly better job search outcomes than pessimists with similar skills. During the job search process, they spend less effort searching and are offered jobs more quickly. They are choosier and are more likely to be promoted than others. Although we find optimists are more charismatic and are perceived by others to be more likely to succeed, these factors alone do not explain away the findings. Most of the effect of optimism on economic outcomes stems from the part that is not readily observed by one's peers.

Eric P. Bettinger, NBER: Paying to Learn: The Effect of Financial Incentives on Elementary School Test Scores. Policymakers and academics are increasingly interested in applying financial incentives to individuals in education. This paper presents evidence from a pay for performance program taking place in Coshocton, Ohio. Since 2004, Coshocton has provided cash payments to students in grades three through six for successful completion of their standardized testing. Coshocton determined eligibility for the program using randomization, and using this randomization, this paper identifies the effects of the program on students' academic behavior. We find that math scores improved about 0.15 standard deviations but that reading, social science, and science test scores did not improve.

Noelia Duchovny, Colin Baker, CBO: How Does Obesity in Adults Affect Spending on Health Care? From 1987 to 2007, the fraction of adults who were overweight or obese increased from 44 percent to 63 percent; almost two-thirds of the adult population now falls into one of those categories. The share of obese adults rose particularly rapidly, more than doubling from 13 percent to 28 percent. Health care spending per adult grew substantially in all weight categories between 1987 and 2007, but the rate of growth was much more rapid among the obese (defined as those with a body-mass index greater than or equal to 30). Spending per capita for obese adults exceeded spending for adults of normal weight by about 8 percent in 1987 and by about 38 percent in 2007. If the distribution of adults by weight between 1987 and 2007 had changed only to reflect demographic changes, such as the aging of the population, then health care spending per adult in 2007 would have been roughly 3 percent below the actual 2007 amount.

Raquel Fernández, NBER: Does Culture Matter? The evidence that culture matters for a large variety of economic outcomes is by now sufficiently strong that most readers would find it convincing. The evidence presented in this paper shows that cultural preferences and beliefs have a life of their own in the sense that, even when removed from the environment in which they originated, they continue to exercise influence over individual outcomes. Culture plays a quantitatively significant role in explaining variation in women’s work and fertility outcomes. Second-generation Americans whose parents come from countries with stronger family ties tend to have lower geographic mobility, a higher probability of unemployment, and lower hourly wages even after controlling for individual characteristics such as age, education, marital status, gender, and number of children as well as state fixed effects.

SEPTEMBER 3 2010

Carmen M. Reinhart, Vincent R. Reinhart, Jackson Hole: After the Fall. This paper examines the behavior of real GDP (levels and growth rates), unemployment, inflation, bank credit, and real estate prices in a twenty one-year window surrounding selected adverse global and country-specific shocks or events. The episodes include the 1929 stock market crash, the 1973 oil shock, the 2007 U.S. subprime collapse and fifteen severe post-World War II financial crises. The focus is not on the immediate antecedents and aftermath of these events but on longer horizons that compare decades rather than years. While evidence of lost decades, as in the depression of the 1930s, 1980s Latin America and 1990s Japan are not ubiquitous, GDP growth and housing prices are significantly lower and unemployment higher in the ten-year window following the crisis when compared to the decade that preceded it. Inflation is lower after 1929 and in the post-financial crisis decade episodes but notoriously higher after the oil shock. We present evidence that the decade of relative prosperity prior to the fall was importantly fueled by an expansion in credit and rising leverage that spans about 10 years; it is followed by a lengthy period of retrenchment that most often only begins after the crisis and lasts almost as long as the credit surge.

Ricardo Caballero, VoxEU: A helicopter drop for the Treasury. The US may be near a liquidity trap. This column argues that the ineffectiveness of monetary policy can be turned on its head by using money creation to finance fiscal policy stimulus – such as a large but temporary cut in sales taxes. To avoid future problems, the Treasury could commit to transfer resources back to the Fed when the economy is back to full employment. This would be a helicopter drop with a drainage contingency.

Arnaud Mares, Morgan Stanley: Ask Not Whether Governments Will Default, but How. It is not GDP but government revenues that matter: Whatever the size of a government's liabilities, what matters ultimately is how they compare to the resources available to service them. One benefit of sovereignty is that governments can unilaterally increase their income by raising taxes, but they will only ever be able to acquire in this way a fraction of GDP. Debt/GDP therefore provides a flattering image of government finances. A better approach is to scale debt against actual government revenues. An even better approach would be to scale debt against the maximum level of revenues that governments can realistically obtain from using their tax-raising power to the full. It is not whether to default, but how, and vis-à-vis whom. What this means is that - as indicated above - governments will impose a loss on some of their stakeholders and have in fact started to do so (across Europe at least). The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take. From the perspective of sovereign debt holders, this translates in two questions: Does their claim on governments rank senior enough relative to other claims to fully shelter them from losses? If it does not, what form will this loss take?

Lawrence J. Christiano, Martin Eichenbaum, Sergio Rebelo, Fed Atlanta: When Is the Government Spending Multiplier Large? We argue that the government spending multiplier can be very large when the nominal interest rate is constant. We focus on a natural case in which the interest rate is constant, which is when the zero lower bound on nominal interest rates binds. For the economies that we consider it is optimal to increase government spending in response to shocks that make the zero bound binding.

Christina D. Romer, Council of Economic Advisers: Not My Father’s Recession: The Extraordinary Challenges and Policy Responses of the First Twenty Months of the Obama Administration. In her farewell speech, Christina Romer notes that the current recession has been fundamentally different from other postwar recessions. This is not my father’s recession. Rather than being caused by deliberate monetary policy actions, it began with interest rates at low levels. It is a recession born of regulatory failures and unsound practices that contributed to a housing bubble and eventually a full-fledged financial crisis. Precisely what has made it so terrifying and so difficult to cure is that we have been in largely uncharted territory. An all-out financial meltdown in the world’s largest economy and the center of the world’s financial system is something the world has experienced only once in the past century — in the 1930s. Thus, the President took office in the midst of a recession of historic proportions, but for which history provided little guidance.

Jose M. Berrospide, Rochelle M. Edge, Fed: The Effects of Bank Capital on Lending: What Do We Know, and What Does it Mean? We use panel-regression techniques---following Bernanke and Lown (1991) and Hancock and Wilcox (1993, 1994)---to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. We then consider the effect of capital ratios on lending using a variant of Lown and Morgan's (2006) VAR model, and again find modest effects of bank capital ratio changes on lending. These results are in marked contrast to estimates obtained using simple empirical relations between aggregate commercial-bank assets and leverage growth, which have recently been very influential in shaping forecasters' and policymakers' views regarding the effects of bank capital on loan growth.

BIS: An assessment of the long-term economic impact of stronger capital and liquidity requirements. The main benefits of a stronger financial system reflect a lower probability of banking crises and their associated output losses. Another benefit reflects a reduction in the amplitude of fluctuations in output during non-crisis periods. In this analysis, the costs are mainly related to the possibility that higher lending rates lead to a downward adjustment in the level of output while leaving its trend rate of growth unaffected. While empirical estimates of the costs and benefits are subject to uncertainty, the analysis suggests that in terms of the impact on output there is considerable room to tighten capital and liquidity requirements while still yielding positive net benefits.

Robert Barro, WSJ: The Folly of Subsidizing Unemployment. To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and—I assume—the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%. My calculations suggest the jobless rate could be as low as 6.8%, instead of 9.5%, if jobless benefits hadn't been extended to 99 weeks.

Conor Dougherty, WSJ Blog: Cities Where Women Outearn Male Counterparts. In 2008, single, childless women between 22 and 30 were earning more than their male counterparts in most U.S. cities, with incomes that were 8% greater on average, according to an analysis of Census data by Reach Advisors, a consumer research firm in Slingerlands, N.Y. The trend was first identified several years ago in the country’s biggest cities, but has broadened out to smaller places and across more industries. Beyond major cities such as San Francisco and New York, the income imbalance is pronounced in blue collar hubs and the fast-growing metros that have large immigrant populations.

Dylan Matthews, Washington Post: Interview with James Heckman. 'It’s just a question of using the same dollars wisely'. President Eisenhower built the highway system. President Obama could build the child production system if he wanted to. It would have a much higher payoff than a lot of the programs that are currently there. If you do a cost/benefit analysis of the rate of return for job training, if you talk about early convict rehabilitation programs or literacy training for adults, the rates of return on those programs are generally quite low, very low. It’s just a question of using the same dollars wisely. We’re spending billions, $8.2 billion a year on Head Start, and Head Start is not a very effective program.

Marty Gaynor, Carol Propper, VoxEU: Healthcare competition saves lives. Governments faced with rising costs and growing demand are constantly searching for methods of delivering higher productivity in healthcare. This column suggests that the introduction of competition among UK hospitals – yet with a fixed price – has increased quality, as measured by lower death rates, and this without a commensurate increase in costs.

Efraim Benmelech, Claude Berrebi, Esteban F. Klor, NBER: Economic Conditions and the Quality of Suicide Terrorism. While the existing empirical literature shows that poverty and economic conditions are not correlated with the quantity of terror, theory predicts that poverty and poor economic conditions may affect the quality of terror. Poor economic conditions may lead more able, better-educated individuals to participate in terror attacks, allowing terror organizations to send better-qualified terrorists to more complex, higher-impact, terror missions. Using the universe of Palestinian suicide terrorists against Israeli targets between the years 2000 and 2006 we provide evidence on the correlation between economic conditions, the characteristics of suicide terrorists and the targets they attack. High levels of unemployment enable terror organizations to recruit more educated, mature and experienced suicide terrorists who in turn attack more important Israeli targets.

Randall Akee et al, IZA: Does More Money Make You Fat? The Effects of Quasi-experimental Income Transfers on Adolescent and Young Adult Obesity. We use quasi-experimental evidence from a government transfer program which exogenously increased incomes for one group of children while leaving the comparison group unaffected. The government transfer is a per capita disbursement to adult members of an American Indian tribe; non-Indians in the community do not receive these disbursements. Youths who resided in families that had high pre-treatment annual incomes experience no change in young adult obesity rates as a result of the income transfers, while the BMI of poorer children increases. Part of this effect is due to differential increases in height, as well as weight. An exogenous annual transfer of $4,000 per adult family member results in an almost 4 cm gain in height-for-age. The cumulative effects of the increase in household income persist for several years into young adulthood.

AUGUST 27 2010

Kathleen Madigan, WSJ: How An Even Slower Recovery Would Feel. The recent spate of bad numbers gives ammunition to those worried about a double-dip recession. One negative shock could cause real GDP to contract again. And while the consensus view discounts that scenario, economists are increasingly assigning the probability of a double-dip within their forecasts. Economists at Goldman Sachs, for instance, put chances of a return to contracting GDP between 25% and 30%. Forecasters at IHS Global Insight have a probability of 25%. While a one-in-four chance is significant, the forecasters point out double dips are extremely rate and are almost always triggered by an external shock or bad policy move.

John P. Hussman, Hussman Funds: Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar. A week ago, the Federal Reserve initiated a new program of "quantitative easing" (QE), with the Fed purchasing U.S. Treasury securities and paying for those securities by creating billions of dollars in new monetary base. Treasury bond prices surged on the action. With the U.S. economy predictably weakening, this second round of quantitative easing appears likely to continue. Unfortunately, the unintended side effect of this policy shift is likely to be an abrupt collapse in the foreign exchange value of the U.S. dollar.

Raghuram Rajan, NYT Blog: Why We Should Exit Ultra-Low Rates. Before concluding, let me emphasize that even though I discussed the direct costs of ultra-low rates above, my greater concern is with the indirect costs. The way low interest rates work (apart from the direct cost of capital effect) is by raising asset prices and incentivizing investment in riskier assets. Even as corporations proved unwilling to invest last time, house prices rose, households could borrow more and lending became increasingly crazy. Of course, bond prices aside, there are not many hints of asset bubbles in industrial countries today. But by the time a central banker stares a bubble in its face, it is too late.

Alan S. Blinder, WSJ: The Fed Is Running Low on Ammo. Chairman Ben Bernanke has told the world that the Fed is not out of ammunition. It still has easing options, should it need to deploy them. The good news is that he's right. The bad news is that the Fed has already spent its most powerful ammunition; only the weak stuff is left. Mr. Bernanke has mentioned three options in particular: expanding the Fed's balance sheet again, changing the now-famous "extended period" language in its statement, and lowering the interest rate paid on bank reserves. So that's the menu. The Fed had better study it carefully, for if the economy doesn't perk up, it will soon be time to fire the weak ammunition.

John Kitchen, Menzie Chinn, U.S. Treasury,: Financing U.S. Debt: Is There Enough Money in the World – and At What Cost? This paper examines the potential role for foreign official holdings of U.S. Treasury securities and the associated implications for Treasury security interest rates, international portfolio allocations, net international income flows, and the U.S. net international debt position, using a baseline outlook of current and projected U.S. budget deficits and growing debt. The analysis applies empirical results regarding the role of U.S. structural budget deficits and foreign official holdings of U.S. Treasuries in determining Treasury security interest rates. Although initial review of information suggests that the world portfolio could potentially accommodate financing requirements over the intermediate horizon, substantial uncertainty remains about the relationships among foreign official holdings, exchange rates, and trade; the potential effects of “crowding out” in the international portfolio; and how and whether world portfolio allocations would adjust to accommodate higher shares of U.S. assets.

Kristopher S. Gerardi, Christopher L. Foote, and Paul S. Willen, Boston Fed: Reasonable People Did Disagree: Optimism and Pessimism. About the U.S. Housing Market Before the Crash. We revisit the boom years and show that the economics profession provided little countervailing evidence at the time. Many economists, skeptical that a bubble existed, attempted to justify the historic run-up in housing prices based on housing fundamentals. Other economists were more uncertain, pointing to some evidence of bubble-like behavior in certain regional housing markets. Even these more skeptical economists, however, refused to take a conclusive position on whether a bubble existed. The small number of economists who argued forcefully for a bubble often did so years before the housing market peak, and thus lost a fair amount of credibility, or they make arguments fundamentally at odds with the data even ex post. For example, some economists suggested that cities where new construction was limited by zoning regulations or geography were particularly “bubble-prone,” yet the data shows that the cities with the biggest gyrations in house prices were often those at the epicenter of the new construction boom. We conclude by arguing that economic theory provides little guidance as to what should be the “correct” level of asset prices —including housing prices. Thus, while optimistic forecasts held by many market participants in 2005 turned out to be inaccurate, they were not ex ante unreasonable

Mathias Dolls, Clemens Fuest, Andreas Peichl, NBER: Automatic Stabilizers and Economic Crisis: US vs. Europe. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 47 percent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of up to 30 per cent in the EU and up to 20 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view

David Altig, Atlanta Fed: Just how curious is that Beveridge curve? One of the observations made in my previous post was that the apparent shifting of the Beveridge curve—in other words, the observation that given recent experience the number of unemployed individuals seems high relative to the number of available jobs—might be explained by extended unemployment benefits, but only if you are willing to accept estimates of the policy's impact that are on the high end. "The Economic Effects of Unemployment Insurance" by Shigeru Fujita, estimates that extended unemployment benefits raise the unemployment rate by 1.5 percentage points, enough to explain the lion's share of the Beveridge curve shift. Another view: A longer-term look at the Beveridge curve shows that the dynamics we have seen recently are not an exception, but are common during the recovery phase of business cycles. As the economy starts improving, it takes time to deplete unemployment, even though job openings are relatively quick to adjust.

Bas van der Klaauw, Jan van Ours, VoxEU: Welfare to work: Sticks rather than carrots. Rising unemployment has forced policymakers to look for ways to get the unemployed back to work – to raise the “reemployment” rate of the unemployed. This column provides new evidence from the Netherlands suggesting that the stick of benefit sanctions is much more effective than the carrot of reemployment bonuses.

Emmanuel Saez, Joel B. Slemrod, Seth H. Giertz, NBER: The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review. This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates (ETI) using tax return data. Income tax rates cause taxpayers to respond on a wide range of margins and, under some conditions, all of these responses reflect inefficiency, because they would not have been undertaken absent the tax rates. This is especially true of high-income, financially savvy taxpayers who in most countries have access to sophisticated tax avoidance techniques. There is clear evidence of responses that would fall in the first two tiers of the Slemrod (1995) hierarchy - timing, shifting, avoidance - based on U.S. evidence since 1980, but only at the top end of the income distribution. Given this finding, it is especially critical to understand the mechanisms and efficiency consequences of any given tax change - legal structure, taxpayer information, and so on.

Julie L. Hotchkiss, Menbere Shiferaw, Atlanta Fed: Decomposing the Education Wage Gap: Everything but the Kitchen Sink. Wage gains from increased demand for college graduates, in both decades, flowed through their increased use of technology (and technological investments by their employers), rather than from merely an increase in demand for educated workers. However, the main rewards from technology to high school graduates flowed through increased demand for their particular skills (which are theorized to be complementary to technological advancements), rather than through the use of technology itself. These results provide empirical evidence in support of the theoretical arguments of Autor et al. (2006) that the labor market of the 1990s experienced a polarization; the marginal productivity of manual task input (supplied by less-educated workers) is complementary with a rise in routine task input (primarily by lower cost computer capital).

John M. MacDonald et al, American Journal of Preventive Medicine: The Effect of Light Rail Transit on Body Mass Index and Physical Activity. Increasing the availability of public transit systems is one among a number of modifications to the built environment that offers opportunities for increasing physical activity and reducing the prevalence of obesity and its associated problems. Construction of a light-rail system (LRT) resulted in increased physical activity (walking) and subsequent weight loss by people served by the LRT. Using two surveys, one collecting data prior to the completion of an LRT in Charlotte, North Carolina, the second after completion, investigators found that using light rail for commuting was associated with reductions in body mass index (BMI) over time. Specifically, LRT reduced BMI by an average of 1.18 kg/m2 compared to non-LRT users in the same area over a 12-18 month follow-up period. These findings suggest that improving neighborhood environments and increasing the public's use of LRT systems could improve health outcomes and potentially impact millions of individuals.

Tony Schwartz, Harvard Business Review: Six Keys to Being Excellent at Anything. We've found, in our work with executives at dozens of organizations, that it's possible to build any given skill or capacity in the same systematic way we do a muscle: push past your comfort zone, and then rest. Aristotle had it exactly right 2000 years ago: "We are what we repeatedly do." By relying on highly specific practices, we've seen our clients dramatically improve skills ranging from empathy, to focus, to creativity, to summoning positive emotions, to deeply relaxing. Like everyone who studies performance, I'm indebted to the extraordinary Anders Ericsson, arguably the world's leading researcher into high performance. For more than two decades, Ericsson has been making the case that it's not inherited talent which determines how good we become at something, but rather how hard we're willing to work — something he calls "deliberate practice." Numerous researchers now agree that 10,000 hours of such practice as the minimum necessary to achieve expertise in any complex domain.

AUGUST 20 2010

Ny Fed: Quarterly Report on Household Debt and Credit. The report shows that households steadily reduced aggregate consumer indebtedness over the past seven quarters. In the second quarter of 2010, they owed 6.4 percent less than they did in 2008, the peak year for indebtedness. Additionally, for the first time since early 2006, the share of total household debt in some stage of delinquency declined, from 11.9 percent to 11.2 percent. However, the number of people with a new bankruptcy noted on their credit reports rose 34 percent during the second quarter, considerably higher than the 20 percent increase typical of the second quarter in recent years.

Jason Saving, Dallas Fed: Can the Nation Stimulate Its Way to Prosperity? Compared with no stimulus, the stimulus plan in 2009 alone was expected to increase GDP by 1 to 3 percentage points, raise payroll employment by 500,000 to 1 million jobs and lower the unemployment rate by half a percentage point. At first glance, it doesn’t appear the stimulus achieved these objectives. In the year after the plan’s passage, the labor market continued to hemorrhage jobs and unemployment climbed above 10 percent. Indeed, the unemployment rate is now higher than it was expected to be without the stimulus plan—and has been every month since the plan’s passage. This seems inconsistent with official estimates of the plan’s performance. The first quarterly report, including data through September 2009, found that the plan had created or saved about 1 million jobs and boosted GDP 2 to 3 percentage points in the second and third quarters. Subsequent analysis from the Council of Economic Advisers and several private forecasting firms found even more favorable results, seeing the stimulus on track to save or create the 3.5 million jobs that were originally forecast for the 2009–10 period. How can this be?

Laurence Kotlikoff, Bloomberg: U.S. Is Bankrupt and We Don't Even Know It. Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.” But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance

Thorvaldur Gylfason, VoxEU: Mel Brooks and the bankers. In Mel Brooks’ hit film and Broadway musical The Producers, those charged with making their musical a success instead try to profit from making it a spectacular failure. This column argues that some bankers may have been playing the same game in the run up to the global crisis. If so, just as in The Producers, the perpetrators should be heading to jail.

Chris Willow, Stumbling and Mumbling Blog: Welfare states & public debt. Low public debt requires a generous welfare state. This sounds paradoxical. But it’s not. InFault Lines, Raghuram Rajan says that one reason why the US engages in big Keynesian counter-cyclical policy is precisely that it has a weak welfare state. The absence of significant protection against unemployment means that there’s greater demand upon governments to do something about recessions. The absence of a strong safety net…has made every one of the recent recessions “truly severe” from a political perspective. This has created tremendous pressure on governments to stimulate, both through fiscal means - tax cuts and spending increases - and through easy money policy. Although Rajan’s story focuses on the US, there is cross-country support for it. My chart shows that, across 21 major OECD nations, there has been a strong negative correlation (-0.41) between the size of the welfare state in the 90s and 00s and in the rise in the government debt-GDP ratio between 2007 and 2010. Countries with small welfare states - Ireland, Iceland, the US and UK - saw bigger rises in public debt than countries with more generous welfare states, such as Sweden

Stephen S. Roach, Foreign Policy: The Consumption Gap. They thought Asia would save the world economy. They were wrong. Developing Asia hasn't done enough. Most importantly, it has failed to wean itself from the export-led growth model that has long defined its economic character. It actually increased its dependence on external demand, boosting the export share of pan-regional GDP from 35 percent in 1997 to 45 percent by early 2007. That leaves the region in a very uncomfortable place in this post-crisis era -- more dependent on external demand than ever before. And, unfortunately, this dependence comes at precisely the time when the crisis-battered economies of the developed world are least equipped to deliver the external demand that export-led Asia needs as fuel for its growth machine.

Edmund S. Phelps, NYT: The Economy Needs a Bit of Ingenuity. The steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is “constrained” by a deficiency of aggregate demand. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall. The prescription will fail because the diagnosis is wrong. There are no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address — our skater has broken some bones and needs real attention. The decline in American dynamism is not the only problem. It has been accompanied by a decline of what I call inclusion. Not only were low-wage workers largely cut out of the economic gains of the 1990s and 2000s — much of the middle class was, too

David Card, Jochen Kluve, Andrea Weber, NBER: Active Labor Market Policy Evaluations: A Meta-Analysis. Our sample contains 199 separate “program estimates” – estimates of the impact of a particular program on a specific subgroup of participants – drawn from 97 studies conducted between 1995 and 2007. We find that job search assistance programs are more likely to yield positive impacts, whereas public sector employment programs are less likely. Classroom and on-the-job training programs yield relatively positive impacts in the medium term, although in the short-term these programs often have insignificant or negative impacts. We also find that the outcome variable used to measure program impact matters. In particular, studies based on registered unemployment are more likely to yield positive program impacts than those based on other outcomes (like employment or earnings).

Grading The Teachers, Who's teaching L.A.'s kids? Jason Felch, Jason Song, Doug Smith, Los Angeles Times: The Times obtained seven years of math and English test scores from the Los Angeles Unified School District and used the information to estimate the effectiveness of L.A. teachers — something the district could do but has not. The Times used a statistical approach known as value-added analysis. The Times will publish a series of articles and a database analyzing individual teachers' effectiveness in the nation's second-largest school district — the first time, experts say, such information has been made public anywhere in the country. Among the findings: Highly effective teachers routinely propel students from below grade level to advanced in a single year. There is a substantial gap at year's end between students whose teachers were in the top 10% in effectiveness and the bottom 10%. The fortunate students ranked 17 percentile points higher in English and 25 points higher in math. Contrary to popular belief, the best teachers were not concentrated in schools in the most affluent neighborhoods, nor were the weakest instructors bunched in poor areas. Rather, these teachers were scattered throughout the district. The quality of instruction typically varied far more within a school than between schools.

Ludger Woessmann, IZA: Cross-Country Evidence on Teacher Performance Pay. Combining country-level performance-pay measures with rich PISA-2003 international achievement micro data, this paper estimates student-level international education production functions. The use of teacher salary adjustments for outstanding performance is significantly associated with math, science, and reading achievement across countries. Scores in countries with performance-related pay are about one quarter standard deviations higher. Results avoid bias from within-country selection and are robust to continental fixed effects and to controlling for non-performance-based forms of teacher salary adjustments.

Christopher Honts et al, Central Michigan University: Manager's best friend. New research seems to indicate that just having a dog around can boost human cooperation levels—potentially altering well known game theory results. In the experiment, which used 13 groups, the researchers explored how the presence of an animal altered players’ behaviour in a game known as the prisoner’s dilemma. In the version of this game played by the volunteers, all four members of each group had been “charged” with a crime. Individually, they could choose (without being able to talk to the others) either to snitch on their team-mates or to stand by them. Each individual’s decision affected the outcomes for the other three as well as for himself in a way that was explained in advance. The lightest putative sentence would be given to someone who chose to snitch while the other three did not; the heaviest penalty would be borne by a lone non-snitch. The second-best outcome came when all four decided not to snitch. And so on. Having a dog around made volunteers 30% less likely to snitch than those who played without one. Fascinating to think through the implications. Are couples who get a dog more trusting of each other? And does this work with other animals? Do cats increase snitching?

Nancy Folbre, Economix Blog: Why Girly Jobs Don’t Pay Well. In a careful analysis of longitudinal data on earnings that includes survey questions regarding attitudes related to work preferences, Nicole Fortin, at economist at the University of British Columbia, finds that women tend to place less importance on money and more importance on people and family than men do. Those preferences help explain why women often choose to care for children and other family members, knowing full well that this will limit their career opportunities, lower their earnings and increase their economic vulnerability. Both biological and cultural factors can explain attitudinal differences between women and men. What’s striking is the high cost of femininity. A factor is women’s affinity for services that aren’t rewarded by a market-based economy. Indeed, market failures in the provision of these services help explain why we rely heavily on a welfare state that is, not incidentally, often dubbed a nanny state.

AUGUST 13 2010

Paul Krugman, NYT: America Goes Dark. The lights are going out all over America — literally. Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights, but similar things are either happening or being contemplated across the nation, from Philadelphia to Fresno. And a nation that once prized education — that was among the first to provide basic schooling to all its children — is now cutting back. Teachers are being laid off; programs are being canceled. The federal government is spending more. But state and local governments are cutting back. If you look at government spending as a whole you see hardly any stimulus at all. A large part of our political class is showing its priorities: given the choice between asking the richest 2 percent or so of Americans to go back to paying the tax rates they paid during the Clinton-era boom, or allowing the nation’s foundations to crumble — literally in the case of roads, figuratively in the case of education — they’re choosing the latter. America is now on the unlit, unpaved road to nowhere.

Travis J. Berge And Òscar Jordà, San Francisco Fed: Future Recession Risks. An unstable economic environment has rekindled talk of a double-dip recession. The Conference Board’s Leading Economic Index provides data for predicting the probability of a recession but is limited by the weight assigned to its indicators and the varying efficacy of those indicators over different time horizons. Statistical experiments with LEI data can mitigate these limitations and suggest that a recessionary relapse is a significant possibility sometime in the next two years.

Nelson D. Schwartz, NYT: 2 Top Economists Differ Sharply on Risk of Deflation. Mr. Hatzius is arguably Wall Street’s most prominent pessimist. He warns that the American economy is poised for a sharp slowdown in the second half of the year. That would send unemployment higher again and raise the risk of deflation. A rare occurrence, deflation can have a devastating effect on a struggling economy as prices and wages fall. He says he may be compelled to downgrade his already anemic growth predictions for the economy. Mr. Berner and his deputy, David Greenlaw, still expect a pickup in the second half of the year, which would help gradually bring down unemployment. They play down the danger posed by deflation, the malady that deepened the Great Depression and contributed to Japan’s lost decade of the 1990s. Their sharp disagreement over that question adds yet another twist to the fierce rivalry between the firms, Wall Street’s version of the New York Yankees and the Boston Red Sox.

Kenneth Rogoff, Project Syndicate: An Age of Diminished Expectations? In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese-style deflation, which would only exacerbate debt problems by lowering incomes relative to debts. With credit markets impaired, further quantitative easing may still be needed. As for fiscal policy, it is already in high gear and needs gradual tightening over several years, lest already troubling government-debt levels deteriorate even faster. Those who believe – often with quasi-religious conviction – that we need even more Keynesian fiscal stimulus, and should ignore government debt, seem to me to be panicking. Last but not least, however, it is important to try to preserve dynamism in the US and European economies through productivity-enhancing measures – for example, by being vigilant about anti-trust policy, and by streamlining and simplifying tax systems.

Dylan Matthews, Washington Post: Where does the Laffer curve bend? I decided to ask some tax experts and political activists where, in the current personal income tax, and particularly in the top tax bracket, they think that Laffer curve peaks -- that is, what that revenue-maximizing rate is. The responses were varied, to say the least.

Flavio Cunha, James J. Heckman, IZA: Investing in Our Young People. This paper reviews the recent literature on the production of skills of young persons. The literature features the multiplicity of skills that explain success in a variety of life outcomes. Noncognitive skills play a fundamental role in successful lives. The dynamics of skill formation reveal the interplay of cognitive and noncognitive skills, and the presence of critical and sensitive periods in the life-cycle. We discuss the optimal timing of investment over the life-cycle.

Előd Takáts, BIS: Ageing and asset prices. A small model is used to show that economic and demographic factors drive asset, and in particular house, prices. These factors are estimated in a panel regression framework encompassing BIS real house price data from 22 advanced economies between 1970 and 2009. The estimates show that demographic factors affect real house prices significantly. Combining the results with UN population projections suggests that ageing will lower real house prices substantially over the next forty years. The headwind is around 80 basis points per annum in the United States and much stronger in Europe and Japan. Based on the analysis, global asset prices are likely to face substantial headwinds from ageing.

Roland G. Fryer, Jr, NBER: Racial Inequality in the 21st Century: The Declining Significance of Discrimination. Relative to the 20th century, the significance of discrimination as an explanation for racial inequality across economic and social indicators has declined. Analyzing ten large datasets that include children ranging in age from eight months old to seventeen years old, I demonstrate that the racial achievement gap is remarkably robust across time, samples, and particular assessments used. The gap does not exist in the first year of life, but black students fall behind quickly thereafter and observables cannot explain differences between racial groups after kindergarten. There are several programs -- various early childhood interventions, more flexibility and stricter accountability for schools, data-driven instruction, smaller class sizes, certain student incentives, and bonuses for effective teachers to teach in high-need schools, which have a positive return on investment, but they cannot close the achievement gap in isolation. More promising are results from a handful of high-performing charter schools, which combine many of the investments above in a comprehensive framework and provide an "existence proof" -- demonstrating that a few simple investments can dramatically increase the achievement of even the poorest minority students.

Catherine Rampell, NYT: Was Today’s Poverty Determined in 1000 B.C.? Technology in A.D. 1500 is an extraordinarily reliable predictor of wealth today. 78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 A.D. – even BEFORE the slave trade and colonialism. What’s more, these differences in technological development between regions had actually appeared as far back as 1000 B.C.

AUGUST 6 2010

Martin Feldstein, Project Syndicate: The Hidden Future of the US Economy. Recent US data have clearly raised the probability that the economy will run out of steam and decline during the next 12 months. The key reason for increased pessimism is that the government stimulus programs that raised spending since the summer of 2009 are now coming to an end. As they have wound down, spending has declined. The government programs failed to provide the “pump-priming” role that was intended.

Alan S. Blinder, Mark Zandi: How the Great Recession Was Brought to an End. When we divide these effects into two components—one attributable to the fiscal stimulus and the other attributable to financial-market policies such as the TARP, the bank stress tests and the Fed’s quantitative easing—we estimate that the latter was substantially more powerful than the former. Nonetheless, the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are broadly consistent with those made by the CBO and the Obama administration. To our knowledge, however, our comprehensive estimates of the effects of the financial-market policies are the first of their kind.

J. Bradford DeLong, Project Syndicate: John Stuart Mill vs. the European Central Bank. The ECB contends that the core economies of the global North – Germany, France, Britain, the United States, and Japan – are now at the point where they need rapid fiscal retrenchment and austerity, because financial markets’ confidence in the quality of their debt is shaken, and may collapse at any moment. I see a very different picture – one in which markets’ trust in the quality of government liabilities of the global North’s core economies most certainly is not on the brink of collapse. I see production 10% below capacity, and I see unemployment rates approaching 10%. More importantly for near-term economic policy, I see a world in which investors have enormous confidence in core economies’ government debt – for many, the only safe port in this storm. In these circumstances, we can be sure of what Mill would have recommended.

Andrew K. Rose, Mark M. Spiegel, VoxEU: What do we know about the causes of the crisis? Despite a broad search, we have been unable to find consistent strong linkages between pre-existing variables that are plausible causes of the Great Recession and the actual intensity of the recession. It is natural for economists to generalise from experiences of a few particularly salient countries to make generalisations, though it is often inappropriate. Our poor results are simply telling us that the pre-conditions for the crisis in the US (or Iceland, or Latvia …) often do not describe other countries particularly well. Credit growth was high before 2008 in Australia, Canada, and South Africa, yet these countries seemed to have weathered the crisis well. Real housing prices actually fell in Japan, Germany and Portugal, yet these countries were hard hit. Since it is difficult to understand the cross-country incidence of the great recession even in retrospect, we are dubious about the potential for a comparable early warning forecasting model going forward.

CBO: Federal Debt and the Risk of a Fiscal Crisis. A sudden increase in interest rates would reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail. Foreign investors, who owned nearly half of U.S. debt held by the public in May 2010 (or about $4.0 trillion, $1.7 trillion of which was held by Japan and China alone), would also face substantial losses. If a fiscal crisis occurred in the United States, policy options for responding to it would be limited and unattractive.

Manmohan S. Kumar, Jaejoon Woo, IMF: Public Debt and Growth. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. There is some evidence of nonlinearity with higher levels of initial debt having a proportionately larger negative effect on subsequent growth. Analysis of the components of growth suggests that the adverse effect largely reflects a slowdown in labor productivity growth mainly due to reduced investment and slower growth of capital stock.

William T. Dickens, Brookings: A New Approach to Estimating the Natural Rate of Unemployment. This paper has presented a new method for estimating time variation in the NAIRU using the vacancy-unemployment relationship. A simple theory of this relationship based on a matching model suggests equations that do an uncannily good job of fitting transformed vacancy and unemployment data. When the Beveridge curve model is estimated simultaneously with a Phillips curve, the parameter estimates for both equations are reasonable and the parameters of the Beveridge curve are estimated with particular accuracy. The estimates suggest that the NAIRU is nearly exactly proportional to the residual in the Beveridge curve. Olivier Blanchard: Dickens’s paper offers a promising strategy to identify shifts in the natural rate of unemployment by looking jointly at the Beveridge curve and the Phillips curve.

Bas van der Klaauw, Jan C. van Ours, IZA: Carrot and Stick: How Reemployment Bonuses and Benefit Sanctions Affect Job Finding Rates. To increase their transition from welfare to work, benefit recipients in the municipality of Rotterdam were exposed to various financial incentives, including both carrots to sticks. Once their benefit spell exceeded one year, welfare recipients were entitled to a reemployment bonus if they found a job that lasted at least six months. However, they could also be punished for noncompliance with eligibility requirements and face a sanction, i.e. a temporary reducing of their benefits. In this paper we investigate how benefit sanctions and reemployment bonuses affect job finding rates of welfare recipients. We find that benefit sanctions were effective in bringing unemployed from welfare to work more quickly while reemployment bonuses were not.

David Leonhardt, NYT: The Case for $320,000 Kindergarten Teachers. Great teachers and early childhood programs can have a big short-term effect. However, research on the fade-out effect was based mainly on test scores, not on a broader set of measures, like a child’s health or eventual earnings. Mr. Chetty and five other researchers examined the life paths of almost 12,000 children who had been part of a well-known education experiment in Tennessee in the 1980s. The children are now about 30, well started on their adult lives. Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.

Yi Wen, St Louise Fed: Why Aren’t the Chinese Buying More American Goods? The important point is that both the Chinese trade surplus with the United States and the amassed foreign reserves result from the savings decisions of Chinese consumers. If consumers want to spend more on American goods, they can sell their government bonds and thus siphon some U.S. dollars from the Chinese government’s foreign reserves. This analysis suggests that lack of financial development in China—not the fixed exchange rate—has created the huge trade imbalance between China and the rest of the world. Hence, only financial development within China will ultimately resolve it.

Daniele Checchi, Vitorocco Peragine, Laura Serlenga, IZA: Fair and Unfair Income Inequalities in Europe. This paper analyses the extent of income inequality and opportunity inequality in 25 European countries. The present work contributes to understanding the origin of standard income inequality, helping to identify potential institutional setups that are associated to opportunity inequality. We distinguish between ex ante and ex post opportunity inequality. We find that ex ante equality of opportunity exhibits positive correlation with public expenditure in education, whereas ex post equality of opportunity is also positively associated to union presence and to fiscal redistribution.

Stephen Machin, Olivier Marie, Sunčica Vujić, IZA: The Crime Reducing Effect of Education. In this paper, we present evidence on empirical connections between crime and education, using various data sources from Britain. A robust finding is that criminal activity is negatively associated with higher levels of education. However, it is essential to ensure that the direction of causation flows from education to crime. Therefore, we identify the effect of education on participation in criminal activity using changes in compulsory school leaving age laws over time to account for the endogeneity of education. In this causal approach, for property crimes, the negative crime-education relationship remains strong and significant. The implications of these findings are unambiguous and clear. They show that improving education can yield significant social benefits and can be a key policy tool in the drive to reduce crime.

Torben M. Andersen, Allan Sørensen, Aarhus University: Globalization, tax distortions and public sector retrenchment. It is widely perceived that globalization is a threat to tax financed public sector activities. The argument is that public activities (public consumption and transfers) financed by income taxes distort labour markets and cause higher wages and thus a loss of competitiveness. Since this link is strengthened by globalization, it is inferred that the marginal costs of public funds increase and a retrenchment of the public sector follows. We challenge whether these conclusions have support in a general equilibrium model featuring standard effects from open macroeconomics and trade theory. Even though income taxation unambiguously worsens wage competitiveness, it does not follow that marginal costs of public funds increase with product market integration due to gains from trade. Moreover, non-cooperative fiscal policies do not have a race-to-the-bottom bias despite that taxes harm competitiveness. In fact we identify an expansionary bias in fiscal policies that is likely to increase with globalization when taxes finance either public consumption or transfers

JUNE 24 2010

Claudio Borio, Bent Vale and Goetz von Peter, BIS: Resolving the financial crisis: are we heeding the lessons from the Nordics? How does the management and resolution of the current crisis compare with the response of the Nordic countries in the early 1990s, widely regarded as exemplary? We argue that, while intervention has been prompter, the measures taken so far remain less comprehensive and in-depth. In particular, the cleansing of balance sheets has proceeded more slowly, and less attention has been paid to reducing excess capacity and avoiding competitive distortions. In general, policymakers have given higher priority to sustaining aggregate demand in the short term than to encouraging adjustment in the financial sector and containing moral hazard. We argue that three factors largely explain this outcome: the more international nature of the crisis; the complexity of the instruments involved; and, hardly appreciated so far, the effect of accounting practices on the dynamics of the events, reflecting in particular the prominent role of fair value accounting (and mark to market losses) in relation to amortised cost accounting for loan books. There is a risk that the policies followed so far may delay the establishment of the basis for a sustainably profitable and less risk-prone financial sector.

Niko Dötz, Christoph Fischer, Buba: What can EMU countries’ sovereign bond spreads tell us about market perceptions of default probabilities during the recent financial crisis? This paper presents a new approach for analysing the recent development of EMU sovereign bond spreads. Based on a GARCH-in-mean model originally used in the exchange rate target zone literature, spreads are decomposed into a risk premium, an expected loss component and a liquidity premium. Time-varying default probabilities are derived. The results suggest that the rise in sovereign spreads during the recent financial crisis mainly reflects an increased expected loss component. In addition, the rescue of Bear Stearns in March 2008 seems to mark a change in market perceptions of sovereign bond risk. The government bonds of some countries lost their former role as a safe haven. While price competitiveness always helps to explain sovereign spreads, it increasingly moved into investors’ focus as financial sector soundness weakened."

Jacopo Carmassi, Stefano Micossi, VoxEU, How politicians excited financial markets’ attack on the Eurozone. As the recent austerity measures can testify, Europe’s leaders are acutely concerned about government debt. This column tracks policy announcements from the start of the Eurozone crisis in December 2009, arguing that governments may have contributed to turmoil with their public display of confusion – ultimately undermining credibility. But if Eurozone governments show unity of purpose, this credibility can be restored.

John Taylor, Stanford University: Macroeconomic Lessons from the Great Deviation. You may not have heard much about the Great Deviation. I define it as the recent period during which macroeconomic policy became more interventionist, less rules-based, and less predictable. It is a period during which policy deviated from the practice of at least the previous two decades, and from the recommendations of most macroeconomic theory and models. My general theme is that the Great Deviation killed the Great Moderation, gave birth to the Great Recession, and left a troublesome legacy for the future.

Francis Warnock, CFR: How dangerous is US government debt? The dollar’s status as the world’s reserve currency has become a facet of U.S. power, allowing the United States to borrow effortlessly and sustain an assertive foreign policy. But the capital inflows associated with the dollar’s reserve-currency status have created a vulnerability, too, opening the door to a foreign sell-off of U.S. securities that could drive up U.S. interest rates. A sell-off came close to happening in 2009. How the United States uses this reprieve will affect the nation’s ability to borrow for years to come, with broad implications for the sustainability of an active U.S. foreign policy.

Michael D. Bordo, Thomas F. Helbling, NBER: International Business Cycle Synchronization in Historical Perspective. In this paper, we review and attempt to explain the changes in business cycle synchronization among 16 industrial countries and the over the past century and a quarter, demarcated into four exchange rate regimes. We find that there is a secular trend towards increased synchronization for much of the twentieth century and that it occurs across diverse exchange rate regimes. This finding is in marked contrast to much of the recent literature, which has focused primarily on the evidence for the past 20 or 30 years and which has produced mixed results. We then examine the role of global shocks and shock transmission in the trend toward synchronization. Our key finding here is that global (common) shocks generally are the dominant influence

Raven Molloy, Hui Shan, Fed: The Effect of Gasoline Prices on Household Location. Gasoline prices influence where households decide to locate by changing the cost of commuting. Consequently, the substantial increase in gas prices since 2003 may have reduced the demand for housing in areas far from employment centers, leading to a decrease in the price and/or quantity of housing in those locations relative to locations closer to jobs. Using annual panel data on ZIP codes and municipalities in a large number of metropolitan areas of the United States from 1981 to 2008, we find that a 10 percent increase in gas prices leads to a 10 percent decrease in construction after 4 years in locations with a long average commute relative to locations closer to jobs, but to no significant change in house prices. Thus, the supply response may prevent the change in housing demand from capitalizing in house prices. Because housing is durable, the resulting change in construction has a long-lived impact on the spatial distribution of housing units

Alicia H. Munnell et al, Center for Retirement Research: Valuing Liabilities in State and Local Plans. State and local plans generally follow an actuarial model and discount their liabilities by the long-term yield on the assets held in the pension fund, roughly 8 percent. Most economists contend that the discount rate should reflect the risk associated with the liabilities, and given that benefits are guaranteed under most state laws, the appropriate discount factor is a riskless rate, roughly 5 percent, as discussed below. Thus, the economists’ model would produce much higher liabilities than those currentlyreported on the books of states and localities. This brief attempts to separate the question of valuing liabilities from the questions of funding and investment. As background, it explains the current approach to valuing liabilities in the private and public sectors. Second, it discusses why, given their guaranteed status, state and local pension liabilities should be discounted at a riskless rate and shows how much measured liabilities would increase by applying such a rate. Third, it argues that valuing liabilities is only one factor entering the funding calculation, and that using a riskless discount rate does not necessarily mean that contributions should increase immediately.

Ryan D. Edwards, NBER: Trends in World Inequality in Life Span Since 1970. Previous research has revealed much global convergence over the past several decades in life expectancy at birth and in infant mortality. I examine life-span inequality in a broad, balanced panel of 180 rich and poor countries observed in 1970 and 2000. Convergence in infant mortality has unambiguously reduced world inequality in total length of life starting from birth, but world inequality in length of adult life has remained stagnant. Underlying both of these trends is a growing share of total inequality that is attributable to between-country variation. Especially among developed countries, the absolute level of between-country inequality has risen over time. The sources of widening inequality in length of life between countries remain unclear, but signs point away from trends in income, leaving patterns of knowledge diffusion as a potential candidate.

Andrew Leigh, Christine Neill, IZA: Do Gun Buybacks Save Lives? Evidence from Panel Data. In 1997, Australia implemented a gun buyback program that reduced the stock of firearms by around one-fifth. Using differences across states in the number of firearms withdrawn, we test whether the reduction in firearms availability affected firearm homicide and suicide rates. We find that the buyback led to a drop in the firearm suicide rates of almost 80 per cent, with no statistically significant effect on non-firearm death rates. The estimated effect on firearm homicides is of similar magnitude, but is less precise. The results are robust to a variety of specification checks, and to instrumenting the state-level buyback rate.

Edward L. Glaeser, NYT Blog: The Health of the Cities. For centuries, cities have been killing fields – places where proximity led to death and disease. In the 17th century, life expectancy at birth was 20 years lower in London than in the English countryside. Yet now, the average life expectancy in New York City is one and a half years higher than in the nation as a whole. How did city living get so healthy?