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.