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.