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.