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.