JUNE 4 2010

Paul Krugman, NYT: The Pain Caucus. What’s the greatest threat to our still-fragile economic recovery? Dangers abound, of course. But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain. the O.E.C.D. declares that interest rates in the United States and other nations should rise sharply over the next year and a half, so as to head off inflation. Yet inflation is low and declining, and the O.E.C.D.’s own forecasts show no hint of an inflationary threat. So why raise rates? The answer, as best I can make it out, is that the organization believes that we must worry about the chance that markets might start expecting inflation, even though they shouldn’t and currently don’t. A similar argument is used to justify fiscal austerity. O.E.C.D. predicts that high unemployment will persist for years. Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year. What’s particularly remarkable about this recommendation is that it seems disconnected not only from the real needs of the world economy, but from the organization’s own economic projections.

Felix Salmon, Reuters: How soon might Greece default? I spent most of this afternoon attending a fascinating discussion looking at Greece from the perspective of emerging-market veterans who are used to sovereign debt default and restructurings. There was quite a lot of consensus on the panel, and not in a good way: everybody agreed that the bailout of Greece was only postponing the inevitable, and many people reckoned that it wasn’t going to postpone it very long. It won’t happen during the World Cup. But once that’s over, it might happen any time — and Europe will respond by turning its liquidity firehose on the Spanish banks, to try to contain the problem.

Peter Boone, Simon Johnson, NYT Blog: Maginot Lines and Illusions. Investors have already begun to extrapolate from euro-zone problems, recognizing that the world remains a highly dangerous place. The latent dangers include our overreliance on rapid Asian growth that might falter, the pressure for sharp fiscal tightening in nations with high deficits, and highly leveraged banks that continue to own toxic real estate, weak sovereign debt and other assets. If world financial markets once again decide their risk appetite is low, many unsustainable leveraged institutions and governments are in for a tough ride. Spain has a fighting chance for survival without serious economic disruption, but only if the world economy remains at the least benign. To get out of its difficulties, the Spanish government needs to be far more determined than the light approach taken by its Irish and Portuguese counterparts (which face far worse problems).

John Robertson, Atlanta Fed: The recovery: Job rich or job poor? Okun's law has underpredicted the rise in unemployment, and some commentators call for a jobless recovery. The fastest way to employment growth is faster GDP growth—recessions that are immediately followed by very strong GDP growth also tend to have strong employment growth. But productivity remains an important contributor to growth, and that contribution has been especially large during the early phases of the past three recessions.

Kenneth Rogoff, Project Syndicate: The BP Oil Spill’s Lessons for Regulation. The disaster poses a much deeper challenge to how modern societies deal with regulating complex technologies. The accelerating speed of innovation seems to be outstripping government regulators’ capacity to deal with risks, much less anticipate them. The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency. Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures. Economics teaches us that when there is huge uncertainty about catastrophic risks, it is dangerous to rely too much on the price mechanism to get incentives right. Unfortunately, economists know much less about how to adapt regulation over time to complex systems with constantly evolving risks, much less how to design regulatory resilient institutions. Until these problems are better understood, we may be doomed to a world of regulation that perpetually overshoots or undershoots its goals.

OECD: Prospects for Growth and Imbalances Beyond the Short Term. This scenario builds in additional fiscal consolidation from 2011 onwards, over and above that built into the baseline scenario, in order to bring government debt-to-GDP ratios back close to pre-crisis levels by 2025, except for Japan where debt is reduced by half that amount. The effects of the additional fiscal consolidation are evaluated using simulations of the OECD Global Model. GDP growth rate would be lowered in 2011 and 2012, depending on the extent of the required consolidation, with beneficial effects from lower interest rates gaining the upper hand and leading to a boost in growth (relative to the baseline scenario) in 2013 and beyond. It is likely that the recovery would be more seriously delayed in a number of euro area countries (including Portugal, Ireland, Spain and Greece) which would have to undergo substantial fiscal consolidation to reduce debt to pre-crisis levels and which would receive little support from a more accommodative monetary policy which is set to reflect area-wide conditions.

Qianying Chen et al, IMF: International Transmission of Bank and Corporate Distress. The paper evaluates how increases in banks’ and nonfinancial corporates’ default risk are transmitted in the global economy, using in a vector autoregression model for 30 advanced and emerging economies for the period from January 1996 to December 2008. The results point to two-way causality between bank and corporate distress and to significant global macroeconomic and financial spillovers from either type of distress when it originates in a systemic economy. Corporate distress in advanced economies has a larger impact on economic growth in emerging economies than bank distress in advanced economies has. In contrast, activity in advanced economies is more vulnerable to bank distress than to corporate distress

Prakash Loungani, IMF: On Seven Questions about House Price Cycles. On average, the previous housing slumps lasted 18 quarters, with prices dropping 22% from peak to trough. By contrast, the current housing slump has lasted only 14 quarters, during which prices have dropped just 15%. But the latest boom was so much bigger than the previous ones that it’s logical to anticipate an even more brutal downturn, Prices rose 113% over 41 quarters, compared with 39% average price increase over 39 quarters seen in the previous booms. The current cycle is like a rollercoaster which has roared up a steep hump and now needs to come down again.

Steven R. Kopits, Econobrowser: EIA: Hard Core Peak Oil Forecast. The EIA, the statistics arm of the US Department of Energy, recently released its International Energy Outlook (IEO) for 2010. This is an important document for forecasters, as it represents the EIA's integrated view of the global energy markets in the years to come and contains a long term forecast on the range of energy sources and CO2. Like it or hate it, the IEO is a touchstone for the energy industry and is treated as the authoritative government forecast in the press and in capital raising documents like prospectuses. It influences policy-makers, the media, public opinion and investors. What it says matters. And what does it say? That peak oil is all but on us. And that's new. In its forecast, the EIA, normally the cheerleader for production growth, has become amongst the most pessimistic forecasters around.

Robert J. Shapiro, Jiwon Vellucci, NPI: The Impact of Immigration and Immigration Reform on the Wages of American Workers. A careful review shows that high levels of immigration have not slowed overall wage gains by average, native-born American workers. Most studies suggest that recent waves of new immigrants are associated with increases in the average wage of native-born Americans in the short-run and with even larger increases in the long term as capital investment rises to take account of the larger number of workers. Studies have found that immigrants are 30 percent more likely to start new businesses than native-born Americans; and even immigrants without high school diplomas, who account for 31 percent of all immigrants, comprise 27 percent of immigrant business owners. Studies show that immigrants have a net positive effect on the federal budget.

Damon Clark, Heather Royer, NBER: The Effect of Education on Adult Health and Mortality: Evidence from Britain. There is a strong, positive and well-documented correlation between education and health outcomes. Our approach exploits two changes to British compulsory schooling laws that generated sharp differences in educational attainment among individuals born just months apart. The cohorts affected by these changes completed significantly more education. We find little evidence that this additional education improved health outcomes or changed health behaviors.

Sam Allgood et al, NY Fed: Is Economics Coursework, or Majoring in Economics, Associated with Different Civic Behaviors? We find that undergraduate coursework in economics is strongly associated with political party affiliation and with donations to candidates or parties, but not with the decision to vote or not vote. Nor is studying economics correlated with the likelihood (or intensity of) volunteerism. While we find that the civic behavior of economics majors and business majors is similar, it appears that business majors are less likely than general majors to engage in time-consuming behaviors such as voting and volunteering. Finally, we extend earlier studies that address the link between economics coursework and attitudes on public policy issues, finding that graduates who studied more economics usually reported attitudes closer to those expressed in national surveys of U.S. economists. Interestingly, we find the public policy attitudes of business majors to be more like those of general majors than of economics majors.