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.