OCTOBER 8 2010

Barry Eichengreen, Foreign Affairs: Financial Shock and Awe. The world's central banks are at war. What does that mean for the rest of us? In popular histories of World War I, the outbreak of hostilities is portrayed as essentially inadvertent. Rather than resulting from the struggle for dominance between a rising power and its established rivals, the war was a byproduct of a series of misunderstandings. Today, the flashpoint may be currencies rather than the Balkans, but the danger -- of misunderstanding leading to escalation and retaliation -- is fundamentally the same.

Mark Whitehouse, WSJ Blog: Pregaming the Economics Nobel: Don’t Bet On It. If the awarding of the Nobel prize in economics proves anything, it’s that people are subject to overconfidence: The economists they most expect to win almost never do. This time around, that could be bad news for University of Chicago economist Richard Thaler, who as of Wednesday was leading a betting pool run by a New Zealand-based outfit called iPredict. The market put a 34% probability on a win for Mr. Thaler and Yale economist Robert Shiller, whose work has helped economists wrap their minds around peoples’ often-irrational behavior.

J. Bradford DeLong, Project Syndicate: Economics for Parrots. It is said that the early nineteenth-century British economist J.R. McCulloch originated the old joke that the only training a parrot needs to be a passable political economist is one phrase: “supply and demand, supply and demand.” When economic historians examine the Great Recession, their overwhelming consensus is likely to be that its depth and duration reflected governments’ refusal to try to do more, not that they tried to do too much. They will agree with the parrots that falling inflation showed that the macroeconomic problem was insufficient demand for currently produced goods and services, and that the low level of interest rates on safe, high-quality government liabilities showed that the supply of safe assets – whether money provided by the central bank, guarantees provided by banking policy, or government debt provided through deficit spending – was too low. The question that will be a mystery to them is why so many economists of our day did not know how to say: “supply and demand, supply and demand.”

Angela Maddaloni, José-Luis Peydró, ECB: Bank Risk-Taking, Securitization, Supervision and Low Interest Rates Evidence From The Euro Area and the U.S. Lending Standards. Using a unique dataset of the Euro area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards, for household and corporate loans. This softening – especially for mortgages – is amplified by securitization activity, weak supervision for bank capital and too low for too long monetary policy rates. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor-rule residuals experienced a worse economic performance afterwards. These results help shed light on the origins of the crisis and have important policy implications.

Cronqvist, Henrik, Siegel, Stephan, University of Washington: The Origins of Savings Behavior. Using data on identical and fraternal twins matched with data on their savings behavior, we find that an individual's savings propensity is governed by both genetic predispositions, social transmission from parents to their children, and gene-environment interplay where certain environments moderate genetic influences. Genetic variation explains about 35 percent of the variation in savings rates across individuals, and this genetic effect is stronger in less constraining, high socioeconomic status environments. Parent-child transmission influences savings for young individuals and those who grew up in a family environment with less competition for parental resources. Individual-specific life experiences is a very important explanation for behavior in the savings domain, and strongest in urban communities.

Arjun Jayadev, Mike Konczal, The Roosevelt Institute: The Stagnating Labor Market. Although the unemployment number remains high it isn’t a full picture of the terrible situation in the labor market. The population that is out of the labor force and no longer trying to find a job is steadily increasing, and the normal mechanisms for those people to reenter employment have collapsed. Starting at the beginning of 2009 it is now more likely that someone who is unemployed will drop out of the labor force than find a job. This is a new problem for our economy, as this hasn’t happened as far back as data can be found (1967). These workers need targeted intervention before they become completely lost to the normal labor market. Underemployment, or those employed working parttime for economic reasons, has increase greatly, often more than doubling. This is across all analyzed sectors and occupations and is negatively correlated with capacity underutilization. The underemployed have the skills to work the jobs they have and their incentives aren’t distorted by unemployment insurance.

Rajashri Chakrabarti, NY Fed: Program Design, Incentives, and Response: Evidence from Educational Interventions. In an effort to reform K-12 education, policymakers have introduced school vouchers—scholarships that make students eligible to transfer from public to private schools—in some U.S. school districts. This article analyzes two such educational interventions in the United States: the Milwaukee and Florida voucher programs. Under the Milwaukee program, vouchers were imposed from the outset, so that all low-income public school students became eligible for vouchers to transfer to private schools. In contrast, schools in the Florida program were only threatened with vouchers, with students of a particular school becoming eligible for vouchers only if the school received two “F” grades in a period of four years. Unlike the Milwaukee schools, Florida schools therefore had an incentive to avoid vouchers. Using school-level data from Florida and Wisconsin, this study shows that the performance effects of the threatened public schools under the Florida program have exceeded those of corresponding schools in Milwaukee. The lessons of the study are broadly applicable to New York City's educational reform efforts.

Paco Martorell, Damon Clark, Princeton: The Signaling Value of a High School Diploma. Although economists acknowledge that various indicators of educational attainment (e.g., highest grade completed, credentials earned) might serve as signals of a worker’s productivity, the practical importance of education-based signaling is not clear. In this paper we estimate the signaling value of a high school diploma, the most commonly held credential in the U.S. To do so, we compare the earnings of workers that barely passed and barely failed high school exit exams, standardized tests that, in some states, students must pass to earn a high school diploma. Since these groups should, on average, look the same to firms (the only difference being that "barely passers" have a diploma while "barely failers" do not), this earnings comparison should identify the signaling value of the diploma. Using linked administrative data on earnings and education from two states that use high school exit exams (Florida and Texas), we estimate that a diploma has little effect on earnings. For both states, we can reject that individuals with a diploma earn eight percent more than otherwise-identical individuals without one; combining the state-specific estimates, we can reject signaling values larger than five or six percent. While these confidence intervals include economically important signaling values, they exclude both the raw earnings difference between workers with and without a diploma and the regression-adjusted estimates reported in the previous literature.

Laura Blow et al, Institute for Fiscal Studies: Who Benefits from Child Benefit? The UK is an excellent laboratory to address this issue because such transfers, known as Child Benefit (CB) have been simple lump sum universal payments for a continuous period of more than 20 years. We do indeed find that CB is spent differently from other income – paradoxically, it appears to be spent disproportionately on adult-assignable goods. In fact we estimate that as much as half of a marginal pound of CB is spent on alcohol. We resolve this puzzle by showing that the effect is confined to unanticipated variation in CB so we infer that parents are sufficiently altruistic towards their children that they completely insure them against shocks

Martha McCubbin, Project Sydicate: Empowering women economically: 2010 Women’s Economic Opportunity Index. Women’s economic empowerment has been a defining feature of the last century. Yet while women today comprise more than half of the global workforce, their wages and economic opportunities still lag behind those of men. This column takes a closer look at the economic landscape for women and how it compares across countries, using the Economist Intelligence Unit’s new Women’s Economic Opportunity Index as a guide. Sweden, Belgium, and Norway occupy the top spots. These countries have particularly open labour markets for women, high levels of educational achievement, and liberal legal and social regimes.

Nathan J. Kelly, Peter K. Enns, University of Tennessee: Inequality and the Dynamics of Public Opinion: The Self-Reinforcing Link Between Economic Inequality and Mass Preferences. This article assesses the influence of income inequality on the public’s policy mood. Recent work has produced divergent perspectives on the relationship between inequality, public opinion, and government redistribution. One group of scholars suggests that unequal representation of different income groups reproduces inequality as politicians respond to the preferences of the rich. Another group of scholars pays relatively little attention to distributional outcomes but shows that government is generally just as responsive to the poor as to the rich. Utilizing theoretical insights from comparative political economy and time series data from 1952-2006, supplemented with cross-sectional analysis where appropriate, we show that economic inequality is, in fact, self-reinforcing, but that this is fully consistent with the idea that government tends to respond equally to rich and poor in its policy enactments.

OCTOBER 1 2010

Edward Hugh Blog: And Then There Were None. According to one popular analogy currently circulating , the EuroArea countries could be likened to a group of 16 Alpine climbers scaling the Matterhorn who find themselves tightly roped together in appalling weather conditions. One of the climbers - Greece – has lost his footing and slipped over the edge of a dangerous precipice. As things stand, the other 15 can easily take the strain of holding him dangling there, however uncomfortable it may be for them, but they cannot quite manage to pull their colleague back up again. So, as the day advances, others, wearied by all the effort required, start themselves to slide. First it is Ireland who moves closest to the edge, getting nearer and nearer to the abysss with each passing moment. And just behind Ireland comes Portugal, while some way further back Spain lies Spain, busily consoling itself that it is in no way as badly off as the others who have already lost there footing. But for heavens sake, the only thing we don't need while we sit here biting our nails is to be told by someone who manifestly has no idea what he is talking about that the danger has already past, even as we slide, inch by inch, onwards and downwards towards the chasm that gapes beneath.

David Lang, Kevin J. Lansing, San Francisco Fed: Forecasting Growth over the Next Year with a Business Cycle Index. Forecasts derived from business cycle indicators produced by the Chicago and Philadelphia Federal Reserve Banks predict that real U.S. GDP growth through the first half of 2011 will remain at or below potential growth. If these forecasts prove accurate, then the historical relationship between real GDP growth and the labor market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period.

Jordi Galí, NBER: Are Central Banks' Projections Meaningful? Central banks' projections–i.e. forecasts conditional on a given interest rate path–are often criticized on the grounds that their underlying policy assumptions are inconsistent with the existence of a unique equilibrium in many forward-looking models. Here I describe three alternative approaches to constructing projections that are not subject to the above criticism, using two different versions of New Keynesian model as reference frameworks. Most importantly, I show how the three approaches generate different projections for inflation and output, even though they imply an identical path for the interest rate. The latter result calls into question the meaning and usefulness of such projections.

Martin Feldstein, Project Syndicate: Japan’s Savings Crisis. Japan is heading toward a savings crisis. The potential future clash between larger fiscal deficits and a low household saving rate could have powerful negative effects on both Japan and the global economy. Japan’s ability to sustain high fiscal deficits, low interest rates, and net capital exports has been possible because of its high private saving rate, which has kept national saving positive. But, with the current low rate of household saving, the cycle of rising deficits and debt will soon make national saving negative. A shift from deflation to low inflation would accelerate this process. If Japan’s domestic net saving surplus vanishes, the current $175 billion of capital outflow would no longer be available to other countries, while Japan might itself become a net drain on global savings.

Alan Auerbach, Yuriy Gorodnichenko, University of California: Measuring the Output Responses to Fiscal Policy.A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. Using a variety of methods and data sources, we provide three insights. First, using regime-switching models, we estimate effects of tax and spending policies that can vary over the business cycle; we find large differences in the size of fiscal multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions. Second, we estimate multipliers for more disaggregate spending variables which behave differently in relation to aggregate fiscal policy shocks, with military spending having the largest multiplier. Third, we show that controlling for predictable components of fiscal shocks tends to increase the size of the multipliers.

Christiane Nickel, Philipp Rother, Lilli Zimmermann, ECB: Major public debt reductions: Lessons from the past, lessons for the future. Our findings suggest that, first, major debt reductions are mainly driven by decisive and lasting (rather than timid and short-lived) fiscal consolidation efforts focused on reducing government expenditure, in particular, cuts in social benefits and public wages. Second, robust real GDP growth also increases the likelihood of a major debt reduction because it helps countries to "grow their way out" of indebtedness. Third, high debt servicing costs play a disciplinary role strengthened by market forces and require governments to set up credible plans to stop and reverse the increasing debt ratios.

Raj Chetty et al, NBER: How Does Your Kindergarten Classroom Affect Your Earnings? Evidence From Project STAR. In Project STAR, 11,571 students in Tennessee and their teachers were randomly assigned to different classrooms within their schools from kindergarten to third grade. This paper evaluates the long-term impacts of STAR using administrative records. We obtain five results. First, kindergarten test scores are highly correlated with outcomes such as earnings at age 27, college attendance, home ownership, and retirement savings. Second, students in small classes are significantly more likely to attend college, attend a higher-ranked college, and perform better on a variety of other outcomes. Class size does not have a significant effect on earnings at age 27, but this effect is imprecisely estimated. Third, students who had a more experienced teacher in kindergarten have higher earnings. Fourth, an analysis of variance reveals significant kindergarten class effects on earnings. Higher kindergarten class quality – as measured by classmates' end-of-class test scores – increases earnings, college attendance rates, and other outcomes. Finally, the effects of kindergarten class quality fade out on test scores in later grades but gains in non-cognitive measures persist. We conclude that early childhood education has substantial long-term impacts, potentially through non-cognitive channels. Our analysis suggests that improving the quality of schools in disadvantaged areas may reduce poverty and raise earnings and tax revenue in the long run.

Charles I. Jones, Peter J. Klenow, NBER: Beyond GDP? Welfare Across Countries And Time. We propose a simple summary statistic for a nation's flow of welfare, measured as a consumption equivalent, and compute its level and growth rate for a broad set of countries. This welfare metric combines data on consumption, leisure, inequality, and mortality. Although it is highly correlated with per capita GDP, deviations are often economically significant: Western Europe looks considerably closer to U.S. living standards, emerging Asia has not caught up as much, and many African and Latin American countries are farther behind due to lower levels of life expectancy and higher levels of inequality. In recent decades, rising life expectancy boosts annual growth in welfare by more than a full percentage point throughout much of the world. The notable exception is sub-Saharan Africa, where life expectancy actually declines.

David Card, Alexandre Mas, Enrico Moretti, Emmanuel Saez, NBER: Inequality at Work: The Effect of Peer Salaries on Job Satisfaction. A randomly chosen subset of employees of the University of California was informed about a new website listing the pay of all University employees. All employees were then surveyed about their job satisfaction and job search intentions. Our information treatment doubles the fraction of employees using the website, with the vast majority of new users accessing data on the pay of colleagues in their own department. We find an asymmetric response to the information treatment: workers with salaries below the median for their pay unit and occupation report lower pay and job satisfaction, while those earning above the median report no higher satisfaction. Likewise, below-median earners report a significant increase in the likelihood of looking for a new job, while above-median earners are unaffected. Our findings indicate that utility depends directly on relative pay comparisons, and that this relationship is non-linear.

Bryan Caplan, WSJ: The Breeders' Cup. Father's Day is a time to reflect on whether you want to be a parent—or want to be a parent again. If you simply don't like kids, research has little to say to you. If however you're interested in kids, but scared of the sacrifices, research has two big lessons. First, parents' sacrifice is much smaller than it looks, and childless and single is far inferior to married with children. Second, parents' sacrifice is much larger than it has to be. Twin and adoption research shows that you don't have to go the extra mile to prepare your kids for the future. Instead of trying to mold your children into perfect adults, you can safely kick back, relax and enjoy your journey together—and seriously consider adding another passenger.

SEPTEMBER 24 2010

Robert J. Shiller, Project Syndicate: Seven More Years of Hard Times? In that case perhaps all of those crisis-induced bad decades are no longer relevant. But any such hopes that the aftermath of the current crisis will turn out better are still in the category of thoughts, theories, and dreams, not science. It is not true that if you break a mirror, you will have seven years’ bad luck. That is a superstition. But if you allow a financial market to spin wildly until it breaks down, it really does seem that you run the risk of years of economic malaise. That is a historical pattern.

Joseph G. Haubrich, Timothy Bianco, Cleveland Fed: Yield Curve and Predicted GDP Growth. Projecting forward using past values of the spread and GDP growth suggests that US real GDP will grow at about a 1.0 percent rate over the next year, the same numbers as August and just down from July’s 1.14 percent. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.

Mark Thoma, The Fiscal Times: The U.S. Needs a New and Improved New Deal. This recession has been particularly unkind to labor markets, and indications are that a full recovery of employment is still years away. But even after the recession finally ends, worrisome structural trends that were present before the recession began will continue to cause considerable uncertainty for working class households. The rapid pace of structural change in recent years due to technological innovation and globalization has increased the risk of worker displacement in a wide variety of industries. Additional factors such as the decline in employer support for health care, the decline in employer-provided pensions, threats to Social Security, stagnant wages, and highly flexible labor markets compound the uncertainty. The social contract of bygone days has faded in the face of globalization and other pressures. What the country needs is a “new and improved new deal” that reduces the risks associated with structural change, and does a better job of preventing and easing cyclical downturns.

Mehmet Caner, Thomas J. Grennes et al, North Carolina State University: Finding the Tipping Point - When Sovereign Debt Turns Bad. Does a tipping point in public debt exist? How severe would the impact of public debt be on growth beyond this threshold? The present study addresses these questions with the help of threshold estimations based on a yearly dataset of 99 developing and developed economies spanning a time period from 1980 to 2008. The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio.

Davide Furceri, Aleksandra Zdzienicka, OECD: The Consequences of Banking Crises for Public Debt. The aim of this paper is to assess the consequences of banking crises for public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises are associated with a significant and long-lasting increase in government debt.

Daniel Wilson, San Francisco Fed: Is the Recent Productivity Boom Over? Productivity growth has been quite strong over the past 2½ years, despite a drop in the second quarter of 2010. Many analysts believe that productivity growth must slow sharply in order for the labor market to recover robustly. However, looking at the observable factors underlying recent productivity growth and the patterns of productivity over past recessions and recoveries, a sharp slowdown appears unlikely.

Regis Barnichon, Andrew Figura, Fed: What Drives Movements in the Unemployment Rate? A Decomposition of the Beveridge Curve. We decompose the unemployment rate into three main components: (1) a component driven by changes in labor demand--movements along the Beveridge curve and shifts in the Beveridge curve due to layoffs--(2) a component driven by changes in labor supply--shifts in the Beveridge curve due to quits, movements in-and-out of the labor force and demographics--and (3) a component driven by changes in the efficiency of matching unemployed workers to jobs. We find that cyclical movements in unemployment are dominated by changes in labor demand, but that changes in labor supply due to movements in-and-out of the labor force also play an important role. Further, cyclical changes in labor demand lead cyclical changes in labor supply. Changes in matching efficiency generally play a small role but can decline substantially in recessions. At low-frequencies, labor demand displays no trend, and changes in labor supply explain virtually all of the secular trend in unemployment since 1976.

Joyce Kwok, Mary Daly, And Bart Hobijn, San Francisco Fed: Labor Force Participation and the Future Path of Unemployment. Although the labor market has slowly begun to recover, unemployment remains stubbornly high. The pace at which unemployment comes down over the next two years depends in part on the cyclical recovery of labor force participation and the extent to which that offsets or adds to ongoing structural changes in labor force behavior related to increased school enrollment, access to disability benefits, and movement of baby boomers into retirement. Forecasts from the CBO, the Bureau of Labor Statistics (BLS), and the Social Security Administration (SSA) suggest that, absent cyclical movements, labor force participation will trace a downward course driven by the aging of the baby boom generation. However, forecasters disagree over the trajectory participation will take. Average job growth during the last economic expansion was about 142,000 per month. If the SSA is right and labor force participation falls to 64.6% in 2012, we will need to create an average of 208,000 jobs per month over the over the 22 months beginning in September 2010 to bring the unemployment rate down to 8% in June 2012. But if the labor force participation rate rises to 65.5%, as the BLS predicts, we will need to add 294,000 jobs per month in order to reach that level.

John Haltiwanger, Ron S. Jarmin, Javier Miranda, US Census: Who Creates Jobs? Small vs. Large vs. Young. Our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an “up or out” dynamic of young firms. These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation.

Axel Tabbarok, Marginal Revolution: Winner take-all economics. In a winner-take all economy, however, small differences in skills can mean large differences in returns and we have moved towards a winner take-all economy because technology has increased the size of the market that can be served by a single person or firm. Sherwin Rosen laid this out in a 1981 classic, The Economics of Superstars and Robert Frank and Robin Cook have a good popular account, The Winner Take All Society. Rowling's success brings with it inequality. Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component. Thus, greater leverage brings greater inequality.

SEPTEMBER 17 2010

Nouriel Roubini, Project Syndicate: The Eurozone’s Autumn Hangover. So a eurozone that needs fiscal austerity, structural reforms, and appropriate macroeconomic and financial policies is weakened politically at both the EU and national levels. That is why my best-case scenario is that the eurozone somehow muddles through in the next few years; at worst (and with a probability of more than one-third), the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies.

Carmen M. Reinhart, Vincent Reinhart, VoxEU: Diminished expectations, double dips, and external shocks: The decade after the fall. The media is filled with concerns about a “double dip,” or that the economic recovery will stall out after only a few quarters of growth. Our analysis is based on annual data, so brief spurts of growth bracketed by output declines might be smoothed away in yearly observations. But a more general pattern, often applied to Japan’s experience in the late 1990s (which actually stretches the window to encompass the 5th and 6th year after the crisis), is documented in Table 2. Of the 15 post World War II episodes examined, nearly one half of these (seven episodes) involved a broadly-defined double dip. Growth rates often became negative once more after the crisis. The magnitude of the slowdown (measured as the highest post-crisis growth rate less the lowest recorded subsequently) also provides a sense of the loss of momentum. These post-crisis downturns help explain why growth rates are significantly lower and unemployment rates higher in the decade after the crisis and why these results are not driven by weak economic performance that is common in the vicinity of the crisis.

Paul Krugman, NYT: Oops At The OECD. So here’s how I see it: what we’re really seeing here is a sort of intellectual Wile E. Coyote moment. Back in May, the OECD was responding to social pressure, not economic logic. All the right people wanted austerity now now now, because, well, because, and the OECD went along. Now a bit of bad economic news has led the organization to look down, and realize that there’s nothing supporting its position. But there never was.

Robert Alan Feldman et al., Morgan Stanley: Deflation: Will America and Europe Follow Japan? However, it is equally clear that traditional monetary and fiscal policies might not do the job, just as they failed to do in Japan, due to structural rigidities. Should the structural rigidities in the US and Europe in debt markets, housing markets and the financial regulatory systems fester, Japan-like deflation would become more likely. That is, as in Japan, policy errors of omission could turn a recession into a deflation. Examining these various factors for the US and Europe, we find that the US is least likely to fall into inflation; Europe also seems unlikely to do so, but risks are higher than for the US. Finally, Japan seems likely to stay mired in deflation, barring unforeseeable changes in institutional arrangements in the legislative system and the monetary policy system.

Edward L. Glaeser, NYT Blog: Sizing Up Obama’s Nominee as Chief Economist. Professor Goolsbee’s work on competition and the pitfalls of policy fit solidly into the stereotype of University of Chicago economist. His work on taxing the rich does not. While earlier work, focusing on the 1980s, found that taxable incomes of the rich rose dramatically when tax rates are cut and that “probably one-quarter, of the revenue ascribable to the rate reductions was recouped by changes in taxpayer behavior.” More recently, he looked at a longer time horizon and found much less sensitivity between tax rates and reported incomes. He also found that much of the observed responsiveness to tax hikes was short term and disappeared after a year.

Ananth Ramanarayanan, Fed Dallas: Sovereign Debt: A Matter of Willingness, Not Ability, to Pay. The sovereign default situation is very different because there is no legal framework that governs such debt and specifies creditor rights.[1] Therefore, a government will repay its debt only if it faces negative consequences for defaulting. Those costs include the possibility that a government will be unable to borrow in the future. Argentina, for example, defaulted in 2001 and still hasn’t fully regained access to international financial markets. Other costs may include disruption to international trade flows because such transactions require financing that may be cut off. Sovereign debt repayment depends more on avoiding these default costs and is less linked to solvency per se.

Council of Foreign Relations, Center for Geoeconomic Studies: Greek Debt Crisis – Apocalypse Later. Yet if Greece is successful in eliminating its primary deficit, its temptation to default will actually grow, as it can wipe out huge amounts of accumulated debt without any longer needing the financial markets to fund current expenditures. If faced with the choice between paying Greek debts and letting Greece default, its northern neighbors may, once their banks are on more solid footing, find it more attractive simply to let Greece default. This is the story line that the markets are now pricing into government bond spreads.

Michael Lewis, Vanity Fair: Beware of Greeks Bearing Bonds. Lewis chronicles a country accustomed to corruption, handouts, and breathtaking inefficiency. Where waste ends and theft begins almost doesn’t matter; the one masks and thus enables the other. It’s simply assumed, for instance, that anyone who is working for the government is meant to be bribed. People who go to public health clinics assume they will need to bribe doctors to actually take care of them. Government ministers who have spent their lives in public service emerge from office able to afford multi-million-dollar mansions and two or three country homes.

Atif Mian, Amir Sufi, NBER: The Effects of Fiscal Stimulus: Evidence from the 2009 'Cash for Clunkers'. A key rationale for fiscal stimulus is to boost consumption when aggregate demand is perceived to be inefficiently low. We examine the ability of the government to increase consumption by evaluating the impact of the 2009 “Cash for Clunkers” program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. The effect of the program on auto purchases was significantly more short-lived than previously suggested. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

Douglas A. Irwin, NBER: Did France Cause the Great Depression? The gold standard was a key factor behind the Great Depression, but why did it produce such an intense worldwide deflation and associated economic contraction? While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33. The deflation could have been avoided if central banks had simply maintained their 1928 cover ratios.

Giovanni Peri, San Francisco Fed: The Effect of Immigrants on U.S. Employment and Productivity. The effects of immigration on the total output and income of the U.S. economy can be studied by comparing output per worker and employment in states that have had large immigrant inflows with data from states that have few new foreign-born workers. Statistical analysis of state-level data shows that immigrants expand the economy's productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.

Jonah E. Rockoff, Douglas O. Staiger, Thomas J. Kane, Eric S. Taylor, NBER: Information and Employee Evaluation: Evidence from a Randomized Intervention in Public Schools. We examine the results of a randomized pilot program in which school principals were provided with estimates of the performance of individual teachers in raising their students’ test scores in math and English. Objective teacher performance estimates based on student data and principals’ prior beliefs are positively correlated, and the strength of this relationship rises with the precision of the objective estimates and the precision of subjective priors. Principals who are provided with objective performance data incorporate this information into their posterior beliefs, and do so to a greater extent when the data are more precise and when their priors are less precise. The probability of job separation rises for teachers with low performance estimates, and, in line with this change in attrition patterns, student achievement exhibits small improvements the following year. These results suggest that objective performance data provides useful information to principals in constructing employee evaluations and using these evaluations to improve productivity.

Robert J. Samuelson, Washington Post: School reform's meager results. The larger cause of failure is almost unmentionable: shrunken student motivation. Motivation comes from many sources: curiosity and ambition; parental expectations; the desire to get into a ‘good’ college; inspiring or intimidating teachers; peer pressure. The unstated assumption of much school ‘reform’ is that if students aren’t motivated, it’s mainly the fault of schools and teachers. But motivation is weak because more students (of all races and economic classes, let it be added) don’t like school, don’t work hard and don’t do well. In a 2008 survey of public high school teachers, 21 percent judged student absenteeism a serious problem; 29 percent cited ‘student apathy.

Andreas Kuhn, Jean-Philippe Wuellrich, Josef Zweimüller, IZA: Fatal Attraction? Access to Early Retirement and Mortality. We estimate the causal effect of early retirement on mortality for blue-collar workers. To overcome the problem of endogenous selection, we exploit an exogenous change in unemployment insurance rules in Austria that allowed workers in eligible regions to withdraw from the workforce up to 3.5 years earlier than those in non-eligible regions. For males, instrumental-variable estimates show a significant 2.4 percentage points (about 13%) increase in the probability of dying before age 67. We do not find any adverse effect of early retirement on mortality for females. Death causes indicate a significantly higher incidence of cardiovascular disorders among eligible workers, suggesting that changes in health-related behavior explain increased mortality among male early retirees.

Scott E. Carrell, Mark Hoekstra, James E. West, NBER: Does Drinking Impair College Performance? Evidence From a Regression Discontinuity Approach. This paper examines the effect of alcohol consumption on student achievement. To do so, we exploit the discontinuity in drinking at age 21 at a college in which the minimum legal drinking age is strictly enforced. We find that drinking causes significant reductions in academic performance, particularly for the highest-performing students. This suggests that the negative consequences of alcohol consumption extend beyond the narrow segment of the population at risk of more severe, low-frequency, outcomes.

Charles M. Blow, NYT: Religious Outlier. Gallup surveyed people in more than 100 countries in 2009 and found that religiosity was highly correlated to poverty. Richer countries in general are less religious. But that doesn’t hold true for the United States. Sixty-five percent of Americans say that religion is an important part of their daily lives. That is compared with just 30 percent of the French, 27 percent of the British and 24 percent of the Japanese. I used Gallup’s data to chart religiosity against gross domestic product per capita, and to group countries by their size and dominant religions.