JUNE 11 2010

Goldman Sachs: The World Cup and economics 2010. There seems to be a relationship between the improvement in FIFA ranking since the last World Cup and the improvement in Growth Environment Scores (GES) over the same period, particularly for developing countries. This correlation is 0.28 if we include all the participating countries (except North Korea), and without Brazil and Argentina, it is even higher at 0.34. The relationship is stronger if we look at the developing countries only (0.51).

Commerzbank: Football crazy: The Economics of World Cup 2010. The World Cup captures the imagination like no other sporting event. You either love football or hate it, but throughout June, it will be impossible to ignore. Irrespective of one's personal preferences, it is undeniable that football today is more than just a game. It is a cultural and economic phenomenon and has become an industry in its own right. In this note, we look at some of these aspects and, as is now de rigueur, we offer a statistical analysis of who we believe is likely to win the 2010 World Cup.

Economist Intelligence Unit: World economy: Will euro woes spark global contagion? A full-scale double-dip recession in Europe, with renewed financial strains, would be a serious matter even for other regions. It would lead to renewed sharp capital outflows from emerging markets. And while a moderate weakening of emerging-market GDP growth might be welcome, there is substantial uncertainty about the underlying momentum of the recovery. In the US, Japan and many other developed economies, uncertainty about the momentum of autonomous private demand is high, as it is difficult to separate the impact of stimulus and the genuine recovery. In most countries, developed and emerging, the room for fiscal stimulus has largely been exhausted, so policymakers would have little room to combat a renewed sharp downturn. Moreover, the fiscal crisis in Europe has increased the risk that markets will force other countries with high deficits, including the US and Japan, to tighten fiscal policy abruptly.

Sylvester Eijffinger, Edin Mujagic, Project Syndicate: Our Deep Debt Future. The 1980’s was the decade in which high inflation was supposedly consigned to the dustbin of history, while the 1990’s were all about the so-called new economy. Governor Mervyn King of the Bank of England once called it the NICE decade (No Inflation, Continuing Expansion) – a time when the economy reached the promised land of high growth and price stability. During the last 20 years, economic growth has been based on rising asset prices and declining borrowing costs for consumers and companies. That mechanism is broken beyond repair. In the absence of some miraculous improvement in productivity growth of the same order as the Internet or globalization, the world can expect a lengthy period of low growth and exceedingly difficult fiscal consolidation. The NICE era is well and truly over. Welcome to the BAD (Big Annual Deficits) decade of public debt.

Robert Price, OECD: The political economy of fiscal consolidation. A number of factors will aggravate the difficulty of consolidating. Interest rates on government debt are currently low and if they were to stay low while growth picked up, debt dynamics would be favourable. But monetary policy is more likely to have to turn towards restraint than to be available to assist consolidation, both globally and, especially, in those countries which have experienced substantial quantitative easing. At the same time, the synchronisation of the consolidation after the crisis will complicate its implementation. Usually, smaller open economies face fewer costs in consolidating because of the relatively high import-content of supplies, but this benign situation will not hold where the OECD area at large is consolidating. That may not augur well for the peer pressure on which the momentum to consolidate will depend, since countries could see delayed adjustment in its trading partners as being to their own advantage.

Jack Ewing, NYT: Debtors’ Prism: Who Has Europe’s Loans? It’s obvious that Greek and Spanish banks hold large amounts of their own government’s bonds. Guessing also falls heavily on public and quasipublic institutions like the German Landesbanks, which are owned by German states sometimes in conjunction with local savings banks. According to the Royal Bank of Scotland study, banks in France have the largest exposure to debt from Greece, Spain and Portugal, with 229 billion euros; German banks are second, with 226 billion euros. British and Dutch banks are next, at about 100 billion euros each, with American banks at 54 billion euros and Italian banks at 31 billion euros.

Dani Rodrik, Project Syndicate: Who Lost Europe? Financial meltdown has been averted in Europe – for now. But the future of the European Union and the fate of the eurozone still hang in the balance. If Europe doesn’t find a way to reactivate the continent’s economy soon, it will be doomed to years of gloom and endless mutual recrimination about “who sabotaged the European project. If Germany wants the rest of Europe to swallow the bitter pill of fiscal retrenchment, it will eventually have to recognize the implicit quid pro quo. It must pledge to boost domestic expenditures, reduce its external surplus, and accept an increase in the ECB’s inflation target. The sooner Germany fulfills its side of the bargain, the better it will be for everyone.

Stefano Scarpetta, Anne Sonnet, Thomas Manfredi, OECD: Rising Youth Unemployment During the Crisis: How to Prevent Negative Long-Term Consequences on a Generation? A promising avenue is to promote more extensively apprenticeship contracts for low-skilled youth where they can acquire at the same time skills and work experience. In fact, apprenticeships could pay a “double dividend”: securing the transition towards employment and lowering labour costs compensated by a training commitment from the employer. The jobs crisis may also be an opportunity to tackle underlying factors affecting the school-to-work transition. Further efforts should be made in many countries to ensure that no youth enters the labour market without a recognised and valued qualification.

Sagiri Kitao, Ayşegül Şahin, Joseph Song, NY Fed: Subsidizing Job Creation in the Great Recession. We consider the equilibrium effects of a hiring subsidy, a payroll tax reduction, and an employment subsidy. While calibrating parameters that characterize these policies, we try to mimic the policies in the Hiring Incentives to Restore Employment (HIRE) Act of 2010. We find that a hiring subsidy and a payroll tax deduction, as in the HIRE Act, can stimulate job creation in the short term, but can cause a higher equilibrium unemployment rate in the long term. Employment subsidies succeed in lowering the unemployment rate permanently, but the policy entails high fiscal costs.

Wat Tyler, Burning Our Money Blog: How The Poor Got Richer. A standard measure of poverty is net income of the poorest 25% of households (specifically, the bottom quartile point). And as it happens, the Institute for Fiscal Studies have recently published a compilation of the official figures going back to 1961. The figures show that the real income of this poorest group has approximately doubled since 1961, an average annual growth rate of 1.4% pa (ie the growth in income at the bottom quartile point). In fact, it turns out that in real terms the bottom 25% are now considerable richer than were the top 25% in 1961.

Nicholas Bloom et al, Stanford University: The Impact of Competition on Management Quality: Evidence from Public Hospitals. We analyze the hospital sector where geographic proximity is a key determinant of competition, and English public hospitals where political competition can be used to instrument for market structure. We develop a new survey tool to measure management quality and implement this in 61% of all acute hospitals. Our measure of management quality is strongly correlated with financial and clinical outcomes (e.g. survival rates from heart-attacks). More importantly, we find that higher competition (as indicated by a greater number of neighboring hospitals) is positively correlated with increased management quality, and this relationship strengthens when we instrument with local political competition. Adding three more rival hospitals increases the index of management quality by over a standard deviation, which is associated with a 6% reduction in heart-attack mortality rates.

N. Gregory Mankiw, NYT: Can a Soda Tax Save Us From Ourselves? To what extent should we use the power of the state to protect us from ourselves? If we go down that route, where do we stop? Taxing soda may encourage better nutrition and benefit our future selves. But so could taxing candy, ice cream and fried foods. Subsidizing broccoli, gym memberships and dental floss comes next. Taxing mindless television shows and subsidizing serious literature cannot be far behind. Even as adults, we sometimes wish for parents to be looking over our shoulders and guiding us to the right decisions. The question is, do you trust the government enough to appoint it your guardian?