DECEMBER 3 2010

Martin Feldstein, Project Syndicate: Quantitative Easing and the Renminbi. Greater scope for renminbi appreciation comes at a good time for China. A stronger renminbi would help to reduce rising inflationary pressure in China by reducing the cost of imports, which would also increase Chinese households’ real incomes – a key goal of China’s new five-year plan. In short, the Fed’s policy of quantitative easing is likely to accelerate the rise of the renminbi – an outcome that is in China’s interest no less than it is in America’s. But don’t expect US officials to proclaim that goal openly, or Chinese officials to express their gratitude.

Robert Barro, Free exchange Blog: Thoughts on QE2. My conclusion is that QE2 may be a short-term expansionary force, thereby lessening concerns about deflation. However, the Treasury can produce identical effects by changing the maturity structure of its outstanding debts. The downside of QE2 is that it intensifies the problems of an exit strategy aimed at avoiding the inflationary consequences of the Fed’s vast monetary expansion. The Fed is over-confident about its ability to manage the exit strategy; in particular, it is wrong to view increases in interest rates paid on reserves as a new and more effective instrument for accomplishing a painless exit.

Paul Krugman, NYT: Eating the Irish. Most people know Swift as the author of “Gulliver’s Travels.” But recent events have me thinking of his 1729 essay “A Modest Proposal,” in which he observed the dire poverty of the Irish, and offered a solution: sell the children as food. “I grant this food will be somewhat dear,” he admitted, but this would make it “very proper for landlords, who, as they have already devoured most of the parents, seem to have the best title to the children.” O.K., these days it’s not the landlords, it’s the bankers — and they’re just impoverishing the populace, not eating it. But only a satirist — and one with a very savage pen — could do justice to what’s happening to Ireland now.

J. Bradford DeLong, Project Syndicate: The Retreat of Macroeconomic Policy. I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc were over in the rich world. No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent without doing something major about it. I was wrong. That is precisely what is happening. How can the US have a large political movement – the Tea Party – pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote. Economic questions abound, too. Why are the principles of nominal income determination, which I thought largely settled since 1829, now being questioned?

Bastani, Spencer, Blomquist, Sören, Micheletto, Luca, Uppsala Center for Fiscal Studies: The Welfare Gains of Age Related Optimal Income Taxation. Using a calibrated overlapping generations model we quantify the welfare gains of an age dependent income tax. Agents face uncertainty regarding future abilities and can by saving transfer consumption across periods. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax amounts in our benchmark model to around three percent of GDP. The gains are particularly high when there are restrictions on debt policy. The gains of using a nonlinear- as opposed to a linear tax are even larger. Surprisingly, it is of secondary importance to optimally choose the tax on interest income.

Alberto Alesina, Paola Giuliano, Nathan Nunn, Harvard: The Origins of Gender Roles: Women and the Plough. This paper studies the historic origins of current differences in norms and beliefs about the role of women in society. We show that, consistent with anthropological hypotheses, societies with a tradition of plough agriculture tend to have the belief that the natural place for women is inside the home and the natural place for men is outside the home. Looking across countries, subnational districts, ethnic groups and individuals, we identify a link between historic plough-use and a number of outcomes today, including female labor force participation, female participation in politics, female ownership of firms, the sex ratio and self-expressed attitudes about the role of women in society. Our identification exploits variation in the historic suitability of the environment of ancestors for growing crops that differentially benefitted from the adoption of the plough. We examine culture as a mechanism by looking at first and second generation immigrants with different cultural backgrounds living within the US.

Jeffrey A. Flory, Andreas Leibbrandt, John A. List, NBER: Do Competitive Work Places Deter Female Workers? A Large-Scale. Natural Field Experiment on Gender Differences in Job-Entry Decisions. Recently an important line of research using laboratory experiments has provided a new potential reason for why we observe gender imbalances in labor markets: men are more competitively inclined than women. Whether, and to what extent, such preferences yield differences in naturally-occurring labor market outcomes remains an open issue. We address this question by exploring job-entry decisions in a natural field experiment where we randomized nearly 7,000 interested job-seekers into different compensation regimes. By varying the role that individual competition plays in setting the wage, we are able to explore whether competition, by itself, can cause differential job entry. The data highlight the power of the compensation regime in that women disproportionately shy away from competitive work settings.

Martin Marshall, McLoughlin, BMJ Blog: How do patients use information on health providers? In this paper, we present a significant challenge to those who believe that providing information to patients to enable them to make choices between providers will be a major driver for improvement in the near or medium term," they write. We suggest that, for the foreseeable future, presenting high quality information to patients should be seen as having the softer and longer term benefit of creating a new dynamic between patients and providers, rather than one with the concrete and more immediate outcome of directly driving improvements in quality of care.

Tigran Melkonyan, Mark Pingle, University of Nevada: To Believe or Not Believe… or Not Decide: A Decision-Theoretic Model of Agnosticism. Using basic decision-theory, we construct a theory of agnosticism, where agnosticism is defined as choosing not to choose a religion. The theory indicates agnosticism can be supported as a rational choice if (a) adopting agnosticism provides in-life benefits relative to any religion, (b) the perceived payoff for agnosticism after death is not too much less than any religion, (c) no religion has a high perceived likelihood of truth, (d) probability of death is neither too high nor too low, or (e) it is less costly to switch from agnosticism to a given religion than from one religion to another, while at the same time there is a reasonable likelihood an informative signal may be received in life as to the truth of various religions.

Bradley J. Ruffle, Ze'ev Shtudiner, Ben-Gurion University: Are Good-Looking People More Employable? Job applicants in Europe and in Israel increasingly imbed a headshot of themselves in the top corner of their CVs. We sent 5312 CVs in pairs to 2656 advertised job openings. In each pair, one CV was without a picture while the second, otherwise almost identical CV contained a picture of either an attractive male/female or a plain-looking male/female. Employer callbacks to attractive men are significantly higher than to men with no picture and to plain-looking men, nearly doubling the latter group. Strikingly, attractive women do not enjoy the same beauty premium. In fact, women with no picture have a significantly higher rate of callbacks than attractive or plain-looking women. We explore a number of explanations and provide evidence that female jealousy of attractive women in the workplace is a primary reason for the punishment of attractive women.

NOVEMBER 26 2010

Carlo Cottarelli, Lorenzo Forni, Jan Gottschalk, Paolo Mauro, IMF: Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely. This note summarizes the main arguments put forward by some market commentators who argue that default is inevitable, and presents a rebuttal for each argument in turn. Their main arguments focus on the size of the adjustment and continued market concerns reflected in government bond spreads. The essence of our reasoning is that the challenge stems mainly from the advanced economies’ large primary deficits, not from a high average interest rate on debt. Thus, default would not significantly reduce the need for major fiscal adjustment. In contrast, the economies that defaulted in recent decades did so primarily as a result of high debt servicing costs, often in the context of major external shocks. We conclude that default would not be in the interest of the citizens of the countries in question. Fiscal adjustment supported by reforms that enhance economic growth is a more effective response.

The Pragmatic Capitalism Blog: Here’s a longer perspective of the chart I’ve often referenced in the past showing how similar our current inflation trend is to Japan’s in the 90′s. As the housing double dip takes hold in the coming months it’s likely that inflation will remain very low and concerns about deflation will reemerge. The latest figures, released this week, showed that overall inflation in consumer prices was 1.2 percent in the 12 months through October, while the core inflation rate — excluding food and energy — rose just 0.6 percent. The previous low for that index, of 0.7 percent, came in the 12 months through February 1961, when the economy was in recession.

Gauti B. Eggertsson (NY Fed) Paul Krugman (Princeton): Debt, Deleveraging, and the Liquidity Trap. A Fisher-Minsky-Koo approach. In this paper we present a simple New Keynesian-style model of debt-driven slumps – that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption: Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.

Sylvain Leduc, San Francisco Fed: Confidence and the Business Cycle. The idea that business cycle fluctuations may stem partly from changes in consumer and business confidence is controversial. One way to test the idea is to use professional economic forecasts to measure confidence at specific points in time and correlate the results with future economic activity. Such an analysis suggests that changes in expectations regarding future economic performance are important drivers of economic fluctuations. Moreover, periods of heightened optimism are followed by a tightening of monetary policy.

Alessandro Vercelli, University of Siena: Economy and economics: the twin crises. This paper explores the interaction between the Great recession triggered by the US subprime mortgages crisis and the twin crisis of macroeconomics. We argue that a major determinant of the subprime crisis and its dire consequences has been an approach to economics that is unable to deal with irregular phenomena. On the other hand, the unexpectedly deep financial crisis that has heavily affected the real economy makes clear that we need a major redirection of macroeconomic theory to make it able to explain, forecast and control irregular phenomena. The recent interaction between the crisis of the economy and the crisis of macroeconomics is analyzed in the light of similar preceding episodes in the 20th century: the Great contraction of the 1930s and the Great stagflation of the 1970s.

George Selgin, William D. Lastrapes, Lawrence H. White, CATO: Has the Fed Been a Failure? As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation‘s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed‘s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed‘s establishment. (2) While the Fed‘s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.

Shigeru Fujita, Philadelphia Fed: Effects of the UI Benefit Extensions: Evidence from the Monthly CPS. Using the monthly CPS, I estimate unemployment-to-employment (UE) transition rates and unemployment-to-inactivity (UN) transition rates by unemployment duration for male workers. When estimated for the period of 2004-2007, during which no extended benefits are available, both of the transition-rate profiles show clear patterns consistent with the expiration of regular benefits at 26 weeks. These patterns largely disappear in the profiles for the period of 2009-2010, during which large-scale extensions have become available. I conduct counterfactual experiments in which the estimated profiles for 2009-2010 are replaced by the hypothetical profiles inferred from the ones for 2004-2007. The results indicate that the benefit extensions in recent years have raised male workers’ unemployment rate by 0.9-1.7 percentage points. Roughly 50-60% of the total increase is attributed to the effects on UE transition rates and the remaining part is accounted for by the effects on UN transition rates.

Camille Landais, Pascal Michaillat, Emmanuel Saez, NBER: Optimal Unemployment Insurance over the Business Cycle. Job rationing during recessions introduces two novel effects ignored in previous studies of optimal unemployment insurance. First, job-search efforts have little effect on aggregate unemployment because the number of jobs available is limited, independently of matching frictions. Second, while job-search efforts increase the individual probability of finding a job, they create a negative externality by reducing other jobseekers’ probability of finding one of the few available jobs. Both effects are captured by the positive and countercyclical wedge between micro-elasticity and macro-elasticity of unemployment with respect to net rewards from work. We derive a simple optimal unemployment insurance formula expressed in terms of those two elasticities and risk aversion. The formula coincides with the classical Baily-Chetty formula only when unemployment is low, and macro- and micro-elasticity are (almost) equal. The formula implies that the generosity of unemployment insurance should be countercyclical. We illustrate this result by simulating the optimal unemployment insurance over the business cycle in a dynamic stochastic general equilibrium model calibrated with US data.

Andreas Knabe, Ronnie Schöb, Joachim Weimann, VoxEU: Unemployment and happiness: A new take on an old problem. “We were happy in those days… Because we were poor”, goes the old Monty Python sketch. This column suggests there might be some shred of truth in this joke. It finds that while unemployed people report being less satisfied with their life in general, their emotional wellbeing experienced during day-to-day activities does not seem to suffer at all.

Eric A. Hanushek, Ludger Woessmann, NBER How Much Do Educational Outcomes Matter in OECD Countries? We show that cognitive skills can account for growth differences within the OECD, whereas a range of economic institutions and quantitative measures of tertiary education cannot. Under the growth model estimates and plausible projection parameters, school improvements falling within currently observed performance levels yield very large gains. The present value of OECD aggregate gains through 2090 could be as much as $275 trillion, or 13.8 percent of the discounted value of future GDP. Extensive sensitivity analyses indicate that, while differences between model frameworks and alternative parameter choices make a difference, the economic impact of improved educational outcomes remains enormous. Interestingly, the quantitative difference between an endogenous and neoclassical model framework – with improved skills affecting the long-run growth rate versus just the steady-state income level – matters less than academic discussions suggest. We close by discussing evidence on which education policy reforms may be able to bring about the simulated improvements in educational outcomes.

Ernesto Reuben, Pedro Rey-Biel, Paola Sapienza, Luigi Zingales, IZA: The Emergence of Male Leadership in Competitive Environments. We present evidence from an experiment in which groups select a leader to compete against the leaders of other groups in a real-effort task that they have all performed in the past. We find that women are selected much less often as leaders than is suggested by their individual past performance. We study three potential explanations for the underrepresentation of women, namely, gender differences in overconfidence concerning past performance, in the willingness to exaggerate past performance to the group, and in the reaction to monetary incentives. We find that men’s overconfidence is the driving force behind the observed prevalence of male representation.

Lane Kenworthy, Consider the Evidence Blog: When is economic growth good for the poor? The following charts show what happened in the United States and Sweden from the late 1970s to the mid 2000s. On the vertical axes is the income of households at the tenth percentile of the distribution — near, though not quite at, the bottom. On the horizontal axes is GDP per capita. The data points are years for which there are cross-nationally comparable household income data. Both countries enjoyed significant economic growth. But in the U.S. the incomes of low-end households didn’t improve much, apart from a brief period in the late 1990s. In Sweden growth was much more helpful to the poor.

Dani Rodrik's weblog: Are high food prices good or bad for poverty? It depends on whether the poor are selling or buying, of course. High food prices benefit poor farmers who are net food sellers, and hurt poor food consumers in urban areas. Low food prices have the opposite effects. In each case, the net effect on poverty depends on the balance between these two effects. But you would hardly know it from reading what NGOs and international organizations have produced on the topic. Why do NGO institutions always accentuate the negative? Swinnen argues the reason has to do with international organizations’ incentives to capture media attention, capitalize on “sudden shocks,” and emphasize the negative in the “news” (to which people seem to pay more attention). Whatever the reason, it makes for bad public policy.

Shankar Vedantam, Slate: Parents Are Junkies. If parenthood sucks, why do we love it? Because we're addicted. The unexpected, kind, and loving things that children do produce chemical surges in their parents’ brains like the rush of the pipe or the needle. Like addicts, parents will sacrifice anything for the glimpses of heaven that their offspring periodically provide. Furthermore, the roller coaster of parenting seems designed to ensure addiction. The unpredictability of those moments of bliss is an important factor in their addictiveness. If you give animals a predictable reward — say, a shot of sugar every time they press a lever — you can get them to press that lever quite regularly. But if you want irrational and addictive behavior, you make the reward unpredictable.

NOVEMBER 19 2010

Tom Stark, Philadelphia Fed: Forecasters Predict Further Slowdown in Economic Recovery. The pace of recovery in output and employment in the U.S. economy looks a little slower now than it did three months ago, according to 43 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The panel expects real GDP to grow at an annual rate of 2.2 percent this quarter, down from the previous estimate of 2.8 percent. The forecasters also predict weaker recovery in the labor market. Unemployment is projected to be an annual average of 9.7 percent in 2010, before falling to 9.3 percent in 2011, 8.7 percent in 2012, and 7.9 percent in 2013. The current outlook for the headline and core measures of CPI and PCE inflation in 2011 and 2012 is lower than it was in the last survey.

The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, WSJ Blog: We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

Gary Becker, Becker Posner Blog: Why I Do Not Like QE2. One justification frequently given for further Fed open market operations is that it will increase bank lending through raising bank reserves (“high powered” money). The reluctance of banks to lend has clearly been a factor in the slow down in the US recovery. Yet the Fed’s creation during the past couple of years of well over trillion dollars in additional reserves through open market operations has not induced rapid increases in bank lending. Instead, banks have accumulated huge amounts of excess reserves; that is, reserves above the amount they are required to keep as collateral for their deposit liabilities. Given that banks already are holding such large reserves that carry low interest rates, it is hard to see why creating additional reserves will stimulate much additional lending. In justifying the planned purchase of hundreds of billions of dollars of long-term bonds, Chairman Bernanke indicated that the goal is partly to lower long term interest rates relative to short term rates- which are already close to zero- and thereby stimulate longer term investments. A large purchase of long-term bonds would indeed lower long term rates relative to short -term rates, but the effect is not likely to be large. The Fed should curtail, and better yet, eliminate its plans for QE2.

Simon Johnson, Peter Boone, Project Syndicate: Europe’s Monetary Cordon Sanitaire. The Germans, responding to the understandable public backlash against taxpayer-financed bailouts for banks and indebted countries, are sensibly calling for mechanisms to permit “wider burden sharing” – meaning losses for creditors. Yet their new proposals, which bizarrely imply that defaults can happen only after mid-2013, defy the basic economics of debt defaults. Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels.

Aiyar, Shekhar, Ramcharan, Rodney, IMF: What Can International Cricket Teach Us About the Role of Luck in Labor Markets? How important is luck in determining labor market outcomes? We address this question using a new dataset of all international test cricketers who debuted between 1950 and 1985. We present evidence that a player’s debut performance is strongly affected by an exogenous source of variation: whether the debut series is played at home or abroad. This allows us to identify the role of luck - factors unrelated to ability - in shaping future career outcomes. We find that players lucky enough to debut at home perform significantly better on debut. Moreover, debut performance has a large and persistent impact on long run career outcomes. We also make headway in empirically distinguishing between competing explanations for why exogenous initial conditions exercise a persistent impact on career performance.

Assaf Razin, VoxEU: The ageing, crisis-prone welfare state is bad news for welfare migration. We explore the root causes of restrictions on migration, particularly how age- and skill-dependent restrictions on migration are shaped by the political process. A welfare state, with a heterogeneous (by age, skill, etc.) population, typically does not have a commonly accepted attitude towards migration. For instance, a skilled (rich) and young native-born who expects to bear more than an average share of the cost of providing the benefits of the welfare state is likely to oppose admitting unskilled migrants on such grounds. On the other hand, the same native-born may favour unskilled migrants to the extent that a larger supply of unskilled workers boosts skilled workers’ wages. The native-born older voters may favour migration, even low-skilled, on the ground that it could help finance their old-age benefits. Indeed, Canada decided to keep its borders open and even to speed up acceptance procedures for some highly skilled arrivals. While migrants have lost some ground recently, they're still twice as likely as native Canadians to hold doctorates or master's degrees. Another example is Sweden, where policymakers weren't satisfied with merely implementing a new, skills-based immigration policy. Sweden actually upgraded its integration efforts, including language and vocational training for existing immigrants – right in the middle of the financial crisis

Eric French, John Jones, Chicago Fed: Public Pensions and Labor Supply Over the Life Cycle. We find that labor supply decisions are mainly participation decisions, and that these participation decisions are most sensitive to financial incentives when workers are old. Several forms of evidence suggest that public pension plans have large effects on the labor supply of older workers. This suggests that recent pension reforms encouraging later retirement should significantly increase work at older ages. Our findings suggest that labor income should be taxed at different rates over the life cycle. One of the key insights from the theory of optimal taxation is that elastically supplied goods should be taxed less than inelastically supplied goods. Thus, if labor supply elasticities rise with age, labor income earned when old should be taxed at a lower rate than income earned when young. We conclude by considering how to implement such an age-dependent tax structure.

Graziella Bertocchi, Arcangelo Dimico, VoxEU: The historical roots of inequality. US commentators regularly lament the country’s racial and ethnic inequality. This column presents data from 1870 and 1940-2000 to argue that the divide has its roots in the slave trade and that its legacy persists today through the racial inequality in education.

BBC News: Government 'planning to measure people's happiness'. The government will attempt to measure the happiness of UK citizens, it is expected to announce later this month. The Office for National Statistics is to devise questions for a household survey, to be carried out up to four times a year. This follows calls by David Cameron, when leader of the opposition, to look at "general wellbeing", arguing there was "more to life than money". Downing Street promised an announcement "reasonably soon". Happiness measuring is expected to begin as soon as next spring with the results published regularly, possibly on a quarterly basis. Such a move has been proposed by two Nobel Prize-winning economists and is being considered by the governments of France and Canada.

J. Kenji Lopez-Alt, The Burger Lab: Revisiting the Myth of The 12-Year Old McDonald's Burger That Just Won't Rot (Testing Results!). A few weeks back, I started an experiment designed to prove or disprove whether or not the magic, non-decomposing McDonald's hamburgers that have been making their way around the internet are indeed worthy of disgust or even interest. Things we know so far. A plain McDonald's Hamburger, when left out in the open air, does not mold or decompose.

NOVEMBER 12 2010

Elga Bartsch, Daniele Antonucci, Morgan Stanley: Life on the Edge of the EFSF. Financial markets in the periphery have become rather volatile in recent days. This escalation follows several weeks of spread widening in the three smaller peripheral markets (notably Ireland and, to a lesser degree, Portugal and Greece). On balance, we believe that the sharp rise in market tensions over the last few weeks has increased the chances of the EFSF being tapped. This is in particular true for Ireland, in our view, where it seems increasingly difficult for the government to effectively backstop the problems in the banking system. We would stress, however, that no country will apply to the EFSF lightly or ‘just' to reduce debt-servicing costs: tapping the EFSF is a monumental decision that will shape economic, fiscal and financial policies in that country for many years to come. It is a step that a government would only take in case of no other viable alternative, in our view.

Morgan Kelly, Irish Times: If you thought the bank bailout was bad, wait until the mortgage defaults hit home. THE BIG PICTURE: Ireland is effectively insolvent – the next crisis will be mass home mortgage default. SAD NEWS just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover. With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life . .

Wes Goodman, Bloomberg: Goldman Says Bernanke Engineers `Substantial Pickup'. Goldman Sachs Group Inc. defended Federal Reserve Chairman Ben S. Bernanke’s decision to pump money into the U.S. economy after officials in Germany, China and Brazil criticized the plan. The move will spur gross domestic product growth and reduce the risk of deflation. The widespread hostility to the Fed’s actions is misplaced, ”Hatzius wrote. “Downside risks to the economic outlook have declined significantly. U.S. inflation is unlikely to become a problem for years”.

Ambrose Evans-Pritchard, Daily Telegraph: QE2 risks currency wars and the end of dollar hegemony. The Fed's "QE2" risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines proposed by John Maynard Keynes in the 1940s. China's commerce ministry fired an irate broadside against Washington on Monday. "The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a 'currency war'. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate," it said.

Fiscal Monitor, IMF: Fiscal Exit. From Strategy to Implementation. Fiscal policy is beginning a gradual shift from supporting demand to reducing deficits, but at different speeds depending on country circumstances. Deficits are falling this year in most emerging market and low-income countries, mostly because of improved cyclical conditions. Deficits are also falling in several advanced economies, in some cases because market pressures have dictated an early fiscal exit. Tightening will become broader and driven by discretionary measures in both advanced and emerging economies in 2011. However, public debt ratios are still rising rapidly in advanced economies, and fiscal risks remain elevated. Further clarity on exit plans and reforms to address long-term fiscal costs would help.

Rob Valletta, Katherine Kuang, San Francisco Fed: Is Structural Unemployment on the Rise? An increase in U.S. aggregate labor demand reflected in rising job vacancies has not been accompanied by a similar decline in the unemployment rate. Some analysts maintain that unemployed workers lack the skills to fill available jobs, a mismatch that contributes to an elevated level of structural unemployment. However, analysis of data on employment growth and jobless rates across industries, occupations, and states suggests only a limited increase in structural unemployment, indicating that cyclical factors account for most of the rise in the unemployment rate.

Wiji Arulampalam, Michael P. Devereux, Giorgia Maffini, IZA: The Direct Incidence of Corporate Income Tax on Wages. We examine the extent to which taxes on corporate income are directly shifted onto the workforce. We use data on 55,082 companies located in nine European countries over the period 1996-2003. We identify this direct shifting through cross-company variation in tax liabilities, conditional on value added per employee. Our central estimate is that the long run elasticity of the wage bill with respect to taxation is -0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents. We find only weak evidence of a difference for multinational companies.

Pedro Carneiro, James J. Heckman, Edward Vytlacil, IZA: Estimating Marginal Returns to Education. This paper estimates the marginal returns to college for individuals induced to enroll in college by different marginal policy changes. The recent instrumental variables literature seeks to estimate this parameter, but in general it does so only under strong assumptions that are tested and found wanting. We show how to utilize economic theory and local instrumental variables estimators to estimate the effect of marginal policy changes. Our empirical analysis shows that returns are higher for individuals more likely to attend college. We contrast the returns to well-defined marginal policy changes with IV estimates of the return to schooling. Some marginal policy changes inducing students into college produce very low returns.

Scott E. Carrell, Mark Hoekstra, James E. West, NBER: Is Poor Fitness Contagious? Evidence from Randomly Assigned Friends. We estimate the impact of friends’ fitness on own physical fitness by exploiting a unique data set in which college students are randomly assigned to a group of 30 students with whom they spend the majority of their time. We find strong evidence that friends’ fitness affects own fitness as well as the probability of failing the fitness requirements. The magnitude of the effect is large, as the effect of peer high school fitness is approximately 40 to 70 percent as large as the effect of own high school fitness. Thus, our findings are broadly consistent with the provocative notion that poor physical fitnesss spreads on a person-to-person basis.

Carlos Bozzoli, Climent Quintana-Domeque, Fedea: The Weight of the Crisis: Evidence From Newborns in Argentina. Argentina hit world news headlines in 2002 due to the largest debt-default in history and a sudden economic collapse reminiscent of economic statistics from the Great Depression. In this article, we focus on other consequences of the crisis that are not so obvious, but that may linger for decades on. Combining macroeconomic indicators with the Argentine national registry of live births, approximately 1.9 million live births occurring between 2001 and 2003, we show that the crisis led to an average birth weight loss of 30 grams. Our estimate is robust to different identification strategies. This deterioration in birth weight occurred in just about 6 months, and represents one sixth of the difference in average birth weight between American and Pakistani babies. We also find that the crisis affected particularly the weight of babies born from low-socioeconomic status mothers. In an attempt to estimate the long-lasting economic cost of the crisis, we simulate the average loss of future individual earnings due to the reduction in average birth weight: about 500 US dollars per live birth in present value.

Kirsten Häger, Friedrich Schiller University: Envy and Altruism in Children. Here, we report data from an experiment studying envious and altruistic behavior in children. We study a sample of German school children aged seven to ten in a natural setting. We run two treatments. One treatment investigates envy, the other one studies altruism. Additionally, we collect data on the children’s cognitive and social skills, and on their socio-demographic background. Controlling for these factors, we find that older children are significantly more altruistic. Boys care more about their relative position than girls. Socio-demographic information have limited predictive power in both treatments.

Philip J. Cook, Jens Ludwig, NBER: Economical Crime Control. The evidence presented in this edited volume suggests that a more efficient portfolio of crime-control strategies would involve greater attention to enhancing the certainty rather than the severity of punishment for criminal behavior, stimulating private-sector cooperation for controlling crime, and making strategic investments in the human capital of at-risk populations, including in particular efforts to improve the social-cognitive skills of justice-system-involved populations. To help illustrate the magnitude of the inefficiencies within the current system, the essay concludes with a thought experiment that considers how much additional crime-prevention could be obtained by reverting average sentence lengths back to 1984 levels (midway through the Reagan era) and redirecting the freed-up resources (on the order of $12 billion annually) to alternative uses.

Christian Jarrett, Research Digest Blog: Higher intelligence associated with "thinking like an economist". Prior research has established that the more time a person spends in education, the more likely their broad economic views are to match that of the typical economist. Caplan and his colleague Stephen Miller point out that these studies failed to take into account the influence of intelligence. Caplan and Miller's finding is that the link between educational background and 'thinking like an economist' is weakened when IQ is taken into account because IQ is the more important factor associated with economic beliefs. It's a complicated picture because IQ and education may be mutually influential. However, if one assumes that education is unable to raise IQ, but that IQ affects time spent in education, then the researchers said 'the net effect on economic beliefs of intelligence is more than double the net effect of education.

NOVEMBER 5 2010

Ben S. Bernanke, Washington Post: What the Fed did and why: supporting the recovery and sustaining price stability. Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation. Even absent such risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

Fernanda Nechio, San Francisco Fed: The Greek Crisis: Argentina Revisited? Greece’s enormous fiscal deficit and high debt level culminated earlier this year in the euro zone’s first sovereign debt crisis. High yields on Greece’s debt indicate that markets have priced in the possibility of default. Compared with Argentina, which defaulted on its debt in 2001, Greece’s fiscal position is much worse. However, unlike Argentina, Greece is supported by other euro zone countries and is not vulnerable to speculative currency attacks, advantages that offer it some protection from default.

Catherine Rampell, NYT Blog: Will Additional Fed Action Help the Economy? Some Fed officials had previously weighed in on the effectiveness of additional monetary policy action, as had economists from around the world. Here’s a brief run-down of some expert opinions on the issue written up before today’s announcement.

Kenneth Rogoff, Project Syndicate: Beware of Wounded Lions. G-20 leaders who scoff at the United States’ proposal for numerical trade-balance limits should know that they are playing with fire. The US is not making a demand as much as it is issuing a plea for help. According to a recent joint report by the International Monetary Fund and the International Labor Organization, fully 25% of the rise in unemployment since 2007, totaling 30 million people worldwide, has occurred in the US. If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions. The voter anger expressed in the US mid-term elections could prove to be only the tip of the iceberg.

Francesco D'Amuri, Giovanni Peri, VoxEU: Immigration and productive tasks: Can immigrant workers benefit native workers? Several studies find that immigrants do not harm the wages and job prospects of native workers. This column seeks to explain these somewhat counterintuitive findings by emphasizing the scope for complementarities between foreign-born and native workers. Examining 14 European countries from 1996 to 2007, it finds that immigrants often supply manual skills, leaving native workers to take up jobs that require more complex skills – even boosting demand for them. Immigrants replace “tasks”, not workers.

Tyler Cowen, NYT: How Immigrants Create More Jobs. When companies move production offshore, they pull away not only low-wage jobs but also many related jobs, which can include high-skilled managers, tech repairmen and others. But hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the United States. In fact, when immigration is rising as a share of employment in an economic sector, offshoring tends to be falling, and vice versa. In other words, immigrants may be competing more with offshored workers than with other laborers in America.

Sherrilyn M. Billger, Carlos Lamarche, IZA: Immigrant Heterogeneity and the Earnings Distribution in the United Kingdom and United States: New Evidence from a Panel Data Quantile Regression Analysis. We show that country of origin, country of residence, and gender are all important determinants of the earnings differential. For instance, a large wage penalty occurs in the U.S. among female immigrants from non-English speaking countries, and the penalty is most negative among the lowest (conditional) wages. On the other hand, women in Britain experience hardly any immigrant-native wage differential. We find evidence suggesting that immigrant men in the U.S. and the U.K. earn lower wages, but the most significant results are found for British workers emigrating from non-English speaking countries. The various differentials we report in this paper reveal the value of combining quantile regression with controls for individual heterogeneity in better understanding immigrant wage effects.

Dave Donaldson, NBER: Railroads of the Raj: Estimating the Impact of Transportation Infrastructure. How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, this paper uses archival data from colonial India to investigate the impact of India's vast railroad network. Guided by four predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) increased real income levels; and (4), that a sufficient statistic for the effect of railroads on welfare in the model (an effect that is purely due to newly exploited gains from trade) accounts for virtually all of the observed reduced-form impact of railroads on real income in the data. I find no spurious effects from over 40,000 km of lines that were approved but - for four different reasons - were never built.

Rebecca Allen, Simon Burgess, CMPO: Where do star teachers come from? Malcolm Gladwell writes: Who do we hire when we can’t tell who’s right for the job?’. He described the teaching profession as: “There are certain jobs where almost nothing you can learn about candidates before they start predicts how they’ll do once they’re hired.” US economists Kane and Staiger suggest that we need to try out four candidates to find one good teacher. Gladwell suggests that, given cognitive skills are relatively unimportant, we should lower entry standards to “having a pulse and a basic college education”. As he says: “We should be lowering [standards], because there is no point in raising standards if standards don’t track with what we care about.

Decio Coviello, Andrea Ichino, Nicola Persico, NBER: Don't Spread Yourself Too Thin: The Impact of Task Juggling on Workers' Speed of Job Completion. We show that task juggling, i.e., the spreading of effort across too many active projects, decreases the performance of workers, raising the chances of low throughput, long duration of projects and exploding backlogs. Individual speed of job completion cannot be explained only in terms of effort, ability and experience: work scheduling is a crucial “input” that cannot be omitted from the production function of individual workers. We provide a simple theoretical model to study the effects of increased task juggling on the duration of projects. Using a sample of Italian judges we show that those who are induced for exogenous reasons to work in a more parallel fashion on many trials at the same time, take longer to complete similar portfolios of cases. The exogenous variation that identifies this causal effect is constructed exploiting the lottery that assigns cases to judges together with the procedural prescription requiring judges to hold the first hearing of a case no later than 60 days from filing.

OCTOBER 29 2010

Derek Tang, Macroadvisor: Are We in Another Jobless Recovery? Are we in a jobless recovery? Yes, if one doesn’t quibble too much with semantics. While it is not the case that there have been no jobs gained in the last few months, the pace of job creation has been frustratingly meager given the severity of the recession and the time that has elapsed since the formal end of the recession, in June 2009. Private nonfarm payrolls rose in each of the first nine months of the year, by a total of some 860 thousand, but this is only a small fraction of the 8½ million private jobs that were lost during 2008 and 2009. We expect that the sluggish pace of recovery in employment will continue for some time. We anticipate that private payrolls will expand by just 90 thousand over the final three months of 2010, followed by an increase of about 2.7 million during 2011. In other words, according to the forecast, even 2½ years after the end of the recession, less than half of the jobs lost during the past two years will have been restored. Indeed, in our forecast, the previous peak in private employment, which occurred in December 2007, will not be reached until 2013, almost four years after the end of the recession.

Tamim Bayoumi, Trung Bui, IMF: Deconstructing the International Business Cycle: Why does a U.S. sneeze give the rest of the world a cold The 2008 crisis underscored the interconnectedness of the international business cycle, with U.S. shocks leading to the largest global slowdown since the 1930s. We estimate spillover effects across major advanced country regions in a structural VAR (SVAR) using pre-crisis data. Our new method freely estimates the contemporaneous correlation matrix for underlying shocks in the VAR and (uniquely, to our knowledge) the associated uncertainty. Our results suggest that the international business cycle is largely driven by U.S. financial shocks with a significant impact from global shocks, mainly reflecting commodity prices. Other advanced economic regions play a much smaller and regional role in growth spillovers. Our findings are consistent with the emerging evidence on the current crisis.

Christopher J. Erceg, Jesper Lindé, Fed: Is There a Fiscal Free Lunch in a Liquidity Trap. This paper uses a DSGE model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. But given this "fiscal free lunch," it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially at higher spending levels; thus, it is crucial to distinguish between the marginal and average responses of output and government debt.

Jens Christensen, San Francisco Fed: TIPS and the Risk of Deflation. The low level of inflation and the sluggish pace of economic recovery have raised concerns about sustained deflation—an inflation rate below zero with a general fall in prices. However, the relative prices of inflation-indexed and non-indexed Treasury bonds, which historically have proven to be good measures of inflation expectations, suggest that financial market participants consider the probability of deflation to be low.

J. Bradford DeLong, Project Syndicate: The Humiliation of Britain. What is humiliating is to have a government that cuts a half-million public-sector jobs and causes the loss of another half-million jobs in the private sector. In an economy of 30 million jobs, that translates into an increase in the unemployment rate of 3.5 percentage points – at a time when no sources of expanding private-sector demand exist to pick up the slack. Britain’s finest hour this is not.

Sergey Lychagin et al, VoxEU: You can raise productivity through R&D, but geography matters a lot. Why do local policymakers fight so hard to attract research and development labs to their area? This column provides a possible explanation. Using patent data, it finds a strong link between R&D and growth caused by knowledge spillovers between firms.

Christopher Cotton, Frank McIntyre, Joseph Price, VoxEU: Can gender differences in competition explain the achievement gap? Around the world, the pay and achievement gap between men and women remains significant, as shown by last week’s Global Gender Gap Report. This column explores whether this gap can be explained by attitudes towards competition. Using experimental evidence from math quiz competitions in primary schools, it finds that while males respond better to competition initially, this advantage is short-lived, as females are just as responsive over time.

Melissa Schettini Kearney et al, NBER: Making Savers Winners: An Overview of Prize-Linked Savings Products. For over three centuries and throughout the globe, people have enthusiastically bought savings products that incorporate lottery elements. In lieu of paying traditional interest to all investors proportional to their balances, these Prize Linked Savings (PLS) accounts distribute periodic sizeable payments to some investors using a lottery-like drawing where an investor’s chances of winning are proportional to one’s account balances. This paper describes these products, provides examples of their use, argues for their potential popularity in the United States —especially to low and moderate income non-savers—and discusses the laws and regulations in the United States that largely prohibit their issuance.

Daniel W. Sacks, Betsey Stevenson, Justin Wolfers, NBER: Subjective Well-Being, Income, Economic Development and Growth. We show that richer individuals in a given country are more satisfied with their lives than are poorer individuals, and establish that this relationship is similar in most countries around the world. Turning to the relationship between countries, we show that average life satisfaction is higher in countries with greater GDP per capita. The magnitude of the satisfaction-income gradient is roughly the same whether we compare individuals or countries, suggesting that absolute income plays an important role in influencing well- being. Finally, studying changes in satisfaction over time, we find that as countries experience economic growth, their citizens' life satisfaction typically grows, and that those countries experiencing more rapid economic growth also tend to experience more rapid growth in life satisfaction. These results together suggest that measured subjective well-being grows hand in hand with material living standards.

OCTOBER 22 2010

Daniel L. Thornton, Fed St Louis: Would QE2 Have a Significant Effect on Economic Growth, Employment, or Inflation? Recently Gagnon et al. used several methods to investigate the effect of the FOMC’s announced securities purchases ($1.725 trillion) on the 10-year Treasury yield, which they estimate to be in the range of 38 to 82 basis points. Some commentators (e.g., Narayana Kocherlakota, president of the Minneapolis Fed) have suggested QE2’s effect on Treasury yields may be “muted” because financial markets are functioning much better than they were in the spring of 2009. There is another reason that the effect on interest rates could be small. Banks are currently holding about $1 trillion in excess reserves rather than making loans and increasing the supply of credit to the non-banking segment of the credit market. It is possible—perhaps even likely—that almost all of any increase in the supply of credit associated with QE2 simply would be held by banks as excess reserves. Even if QE2 did affect interest rates, many believe that the effect on output or employment would be small. One reason is that even in normal times, investment spending is not particularly responsive to changes in interest rates: Investment spending depends more on the economic outlook. Consequently, some analysts believe that reducing interest rates modestly from their already historically low levels is unlikely to stimulate aggregate demand.

Edward Hugh, Fistful of Euros Blog: An Unusual But Interesting Argument Which May Help To Understand Why QE2 Is Now Almost Inevitable. Push to shove time has come, I fear, and if this reading is right then it is no exaggeration to say that a protracted and rigourously implemented round of QE2 in the United States could put so much pressure on the euro that the common currency would be put in danger of shattering under the pressure. Japan is already heading back into recession, as the yen is pushed to ever higher levels, and Germany, where the economy has been slowing since its June high, could easily follow Japan into recession as the fourth quarter advances.

Menzie D. Chinn, Kavan J. Kucko, NBER: The Predictive Power of the Yield Curve across Countries and Time. In recent years, there has been renewed interest in the yield curve (or alternatively, the term premium) as a predictor of future economic activity. In this paper, we re-examine the evidence for this predictor, both for the United States, as well as European countries. We examine the sensitivity of the results to the selection of countries, and time periods. We find that the predictive power of the yield curve has deteriorated in recent years. However there is reason to believe that European country models perform better than non-European countries when using more recent data. In addition, the yield curve proves to have predictive power even after accounting for other leading indicators of economic activity.

Yiping Huang, China Center for Economic Research: A currency war the US cannot win. A new currency war is looming. The US Congress has already passed a bill for imposing currency import tariffs, although becoming an actual policy is still a long shot. Tim Geithner is urging the IMF and the international community to play more active roles in promoting more flexible exchange-rate regimes. Martin Wolf, following up the ideas of Gros (2010), prefers capital market restrictions, such as preventing China from purchasing US Treasury bills, as a way of avoiding trade sanctions the fight with ‘stubborn’ China (Wolf 2010). Fred Bergsten proposed countervailing currency intervention for the US to sell dollars to offset China’s intervention in foreign exchange markets (Bergsten 2010). And Paul Krugman has long advised the US government to declare trade war with China (Krugman 2010a, 2010b). This column argues that the US did not emerge victorious from the last currency war with Japan, and against China the chances are even slimmer.

J. W. Mason, New Deal Blog: How Much Will Currency Policies Really Affect Our Economy? In recent years, US imports from China have run around 2 percent of GDP, and US exports to China a bit under 0.5 percent. So even if we assume that (1) a change in the nominal exchange rate is reflected one for one in the real exchange rate, i.e. that it doesn’t affect Chinese prices or wages at all; (2) a change in the real exchange rate is passed one for one into prices of Chinese imports in the US; (3) Chinese goods compete only with American-made goods, and not with those of other exporters; and (4) the price elasticity of US imports from China is an implausibly high 1.5; then a 20 percent appreciation of the Chinese currency only provides a boost to US demand of less than one half of one percent of GDP in total, spread out over several years.

Ricardo Caballero, VoxEU: Feasible global rebalancing: A case for monitored and temporary dual exchange rates. Emerging markets with large trade surpluses are reluctant to heed calls for them to help with global aggregate-demand rebalancing by appreciating their currencies. They fear harm to their export-led development and sudden reversals of capital inflows in the future. Here one of the world’s most innovative macroeconomists suggests a way to square the circle: A dual exchange-rate system that would shield their exporters while fostering imports.

Murat Tasci, Fed Cleveland: The Ins and Outs of Unemployment in the Long Run: A New Estimate for the Natural Rate? In this paper, we present a simple, reduced form model of comovements in real activity and unemployment flows and use it to uncover the trend changes in these flows, which determine the trend in the unemployment rate. We argue that this trend rate has several key features that are reminiscent of a “natural rate.” We show that the natural rate, measured this way, has been relatively stable in the last decade, even after the last recession hit the U.S. economy. This relatively muted change was due to two opposing trend changes: On one hand, the trend in the job-finding rate, after being relatively stable for decades, declined by a significant margin in the last decade, pushing trend unemployment up. On the other hand, the separation rate has somewhat offset this effect with a continued secular decline since the early 1980s. We also show that, contrary to businesscycle frequency movements, most of the low-frequency variation in the unemployment rate could be accounted for by changes in the trend of separation rates, not job-finding rates. The notable exception is the last decade, when clear trend changes in both flows imply opposing effects on the trend unemployment rate and slower worker reallocation in the U.S. economy.

DG ECFIN: Monitoring tax revenues and tax reforms in EU Member States 2010. The crisis has not only impacted on the level of tax revenue but also on its composition. In the period from 2007 to 2010, the tax composition in terms of the type of tax levied shifted towards social security contributions and away from direct taxes as the revenue from the latter has been most affected by the crisis. The shift in the tax structure has been rather modest in recent years in most Member States. This might partly be due to the distributional effects of potential tax shifts and political economy reasons. Some reforms may also have been held back by a lack of coordination at the EU level since cross-border spillover effects may constrain the taxing capacity of an individual Member State.

Katherine Mangu-Ward, Reason: Statistically Speaking, My High School Sucked. NBC, the Gates Foundation, and a bunch of other folks have put together a pretty nifty little school data project: The Education Nation Scorecard. Put in a school, and it spits out a handy-dandy graphical interface that tells you how the school stacks up against other schools, the district against other districts, the state against other states, and the country against other countries. You can get the comparisons for graduation rates, along with a variety of test scores for various grade levels.

Edward L. Glaeser, Boston Globe: Political power. Elected leaders can’t transform; the best they can do is muddle through. We don’t applaud today’s mayors, like Boston’s Thomas Menino, New York’s Michael Bloomberg, and Chicago’s Richard Daley, as charismatic paladins. We value them because they are urban mechanics, who get the snow plowed and the garbage cleared. Their political parties are almost an afterthought — we primarily value their competence. Cities are much the better because less colorful doers have replaced rhetorically-gifted dreamers. Our state and national governments would also benefit if elections held fewer promises of paradise, and more commitments to service-related benchmarks.

Olivier Bargain, IZA: Back to the Future: Decomposition Analysis of Distributive Policies Using Behavioural Simulations. When actual reforms are motivated by work incentives, it is also crucial to evaluate behavioural responses and the distributional consequences thereof. For that purpose, we embed counterfactual simulations in a formal framework based on the Shapley value decomposition and quantify the relative roles of (i) tax-benefit policy changes (direct policy effect), (ii) labour supply responses to the policy reforms (indirect effect) and (iii) all other factors affecting income distribution over time. An application to the UK shows that the redistributive reforms of the 1998-2001 period have offset the increase in inequality that would have occurred otherwise. They also contribute to a strong decline in child poverty and poverty amongst single parent households. In the latter group, a third of the headcount povert! y reduction (and half of the reduction in the depth of poverty) is on account of the very large incentive effect of policy changes.

Patricia Cohen, NY Times: Culture of Poverty’ Makes a Comeback. For more than 40 years, social scientists investigating the causes of poverty have tended to treat cultural explanations like Lord Voldemort: That Which Must Not Be Named. The reticence was a legacy of the ugly battles that erupted after Daniel Patrick Moynihan, then an assistant labor secretary in the Johnson administration, introduced the idea of a “culture of poverty” to the public in a startling 1965 report. Although Moynihan didn’t coin the phrase..., his description of the urban black family as caught in an inescapable “tangle of pathology” of unmarried mothers and welfare dependency was seen as attributing self-perpetuating moral deficiencies to black people, as if blaming them for their own misfortune. Now, after decades of silence, these scholars are speaking openly about you-know-what, conceding that culture and persistent poverty are enmeshed. With these studies come many new and varied definitions of culture, but they all differ from the ’60s-era model in these crucial respects: Today, social scientists are rejecting the notion of a monolithic and unchanging culture of poverty. And they attribute destructive attitudes and behavior not to inherent moral character but to sustained racism and isolation.

Chris Dillow, Stumbling and Mumbling Blog: Human nature & economic recovery. Norm alludes to the thesis that there is no such thing as human nature. Coincidentally, though, two recent papers suggest that a common nature might contain fewer features than generally thought. Joe Henrich and colleagues show that there is significant variation in behaviour across peoples. For example, whereas Americans are prone to the Mueller-Lyer illusion - which line is longer in my picture? - foragers in the Kalahari are not. Also, results of ultimatum game experiments differ hugely across tribes, with Americans making much higher offers than the Hadze in Tanzania or Tsimane in Bolivia. In many ways (not all), he shows, our idea of what is “human nature” is in fact drawn from a very unrepresentative sample of “weird” (western, educated, industrialized, rich and democratic) people. Roberta Dessi and Xiaojian Zhao contrasts North Americans to Japanese. North Americans value self-esteem and are prone to overconfidence, whereas the Japanese are much less so. To the Japanese, shame plays a bigger role than it does for North Americans. Could this be a reason to hope that the US can escape Japan’s “lost decade(s)“ fate?

OCTOBER 15 2010

C. Fred Bergsten, NYT Blog: Protectionism by China Is Biggest Since World War II. China’s currency manipulation represents the largest protectionist measure maintained by any major economy since the Second World War. China has intervened in the foreign exchange markets by an average of $1 billion a day for the last five years, buying dollars to keep them expensive and selling renminbi to keep them cheap, building a gigantic reserve of $2.5 trillion in the process. Largely as a result, the renminbi is undervalued by at least 20 percent relative to economic fundamentals. The largest trading country in the world is therfore subsidizing all exports by at least 20 percent and imposing an additional tariff of at least 20 percent on all imports.

Jan Hatzius, Goldman Sachs: Thoughts on the Macroeconomic Impact of Basel III. We interpret the Basel III agreement as equivalent, very approximately, to a 5-percentage point increase in the ratio of common equity to risk-weighted assets. Our best albeit highly uncertain estimate is that this implies a cumulative drag on GDP (relative to a baseline of no regulatory change) of 2½%. Of this, we believe one-third has already occurred as banks have pushed up their common equity ratios to a level 1½ points above the average of the past two decades. But two-thirds has yet to occur, and this could imply a cumulative drag of 1½%-2% on GDP over the next few years.

John Cochrane, University of Chicago; A Big Stick for the Fed. The Fed can target the thing it cares about – expected CPI inflation – rather than the price of gold. To do it, the Fed can target the spread between TIPS (Treasury Inflation Protected Securities) and regular Treasurys, or CPI futures prices. Here’s a simple example. Investors buy a CPI-linked security from the Fed for $10. If inflation comes out to the Fed’s target, they get their money back with interest, $10.10 at 1% interest. If inflation is 2 percent below target, the Fed pays $2 extra -- $12.10. This pumps new money into the economy, with no offsetting decline in government debt, just like the helicopter drop. If inflation is 2 percent above target, investors only get back $8.10 – the Fed sucks $2 out of the economy at the end of the year. If investors think inflation will be below the Fed’s target, they buy a lot of these securities, and the Fed will print up a lot of money, and vice versa.

Neil Irwin, Washington Post: Fed weighs a more focused response. As the Federal Reserve considers what steps it might take to try to boost growth, attention has focused on whether the Fed might buy an enormous quantity of bonds to flood the economy with some specific amount of money. But there's another option that economists at the central bank are examining that has attracted little notice. Instead of just announcing that it will create, say, $500 billion out of thin air and buy bonds with the money, the Fed could instead announce it will target a certain interest rate and then buy Treasury bonds so that rates in the marketplace reach that level. For example, the Fed could announce that it aims for three-year Treasury debt that now carries an interest rate of 0.56 percent to instead be 0.25 percent. It would then buy Treasury notes in whatever amounts were needed to get rates to the target level.

Stephanie Baker, Bloombergs: Black Swan' Author Says Investors Should Sue Nobel for Crisis. Nassim Nicholas Taleb, author of “The Black Swan,” said investors who lost money in the financial crisis should sue the Swedish Central Bank for awarding the Nobel Prize to economists whose theories he said brought down the global economy. “I want to make the Nobel accountable,” Taleb said today in an interview in London. “Citizens should sue if they lost their job or business owing to the breakdown in the financial system.” Taleb said that the Nobel Prize for Economics has conferred legitimacy on risk models that caused investors’ losses and taxpayer-funded bailouts.

Mark Thoma, Money Watch: Depression Economics Needs to Become a Regular Part of Macroeconomics. How to manage the economy during severe recessions and depressions — a time when fiscal policy is generally a key component of the policy response — needs to be an integral part of the research agenda in macroeconomics, and a larger part of the curriculum at the graduate and undergraduate levels. The economics at work in depressions is distinct from the economics at other times, and hence “depression economics” is worthy of its own area within macro (Paul Krugman likes to say that “when we’re experiencing depression economics,… virtue becomes vice and prudence is folly… The trouble in practice is that conventional modes of thought tend to prevail even when they shouldn’t…”).

Ricardo J. Caballero, NBER: Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome. In this paper I argue that the current core of macroeconomics—by which I mainly mean the so-called dynamic stochastic general equilibrium approach--has become so mesmerized with its own internal logic that it has began to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in "fine-tuning" mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in "broad-exploration" mode. We are too far from absolute truth to be so specialized and to

make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.

Guido Heineck, Bernd Süssmuth, IZA: A Different Look at Lenin's Legacy: Trust, Risk, Fairness and Cooperativeness in the Two Germanies. What are the long-term effects of Communism on economically relevant notions such as social trust? To answer this question, we use the reunification of Germany as a natural experiment and study the post-reunification trajectory of convergence with regard to individuals’ trust and risk, as well as perceived fairness and cooperativeness. Our hypotheses are derived from a model of German reunification that incorporates individual responses both to incentives and to values inherited from earlier generations as recently suggested in the literature. Using data from the German Socio-Economic Panel, we find that despite twenty years of reunification East Germans are still characterized by a persistent level of social distrust. In comparison to West Germans, they are also less inclined to see others as fair or helpful. Implied trajectories can be interpreted as evidence for the passing of cultural traits across generations and for cooperation being sustained by values rather than by ! reputation. Moreover, East Germans are found to be more risk loving than West Germans. In contrast to trust and fairness, full convergence in risk attitude is reached in recent years.

Craig James, CommSec: The iPod index. The Economist uses its Big Mac index to track the economic theory of purchasing power parity (PPP). The index works by dividing the local price of a Big Mac by the US price of a Big Mac. This gives the PPP exchange rate. If the actual exchange rate is above the PPP rate, the theory says that the currency is overvalued, and may need to fall to bring the goods in both countries in line. The problem is that Big Macs aren’t exchanged across country borders. The other problem is that the Big Mac index assumes a US base, and thus assumes that US goods are appropriately priced. When the US is used as a base for assessing PPP exchange rates, the CommSec iPod index finds that the Euro, Swiss franc, Norwegian kroner, Swedish krona and Australian dollar were over-valued against the US dollar.

N. Gregory Mankiw, NYT: I Can Afford Higher Taxes. But They’ll Make Me Work Less. HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?

Nicholas T. Longford, Catia Nicodemo, IZA: The Contribution of Social Transfers to the Reduction of Poverty. We interpret social transfers broadly as a set of measures to reduce or relieve poverty, and study how well this purpose is served in the countries that participated in the European Union Statistics on Income and Living Conditions in 2007. Motivated by the findings, we characterize a social transfer system in a country by its potential and effectiveness, and compare the countries for a range of definitions of the poverty threshold. In general, for any given value of the potential, the social transfers in the countries in the north and west of Europe are more effective than in the south and in the three former Soviet republics. The systems in the countries in the central Europe are about as effective as the systems in the Scandinavian countries, but have a smaller potential.

Gary Becker, Becker-Posner Blog: Incentives to Teachers and Students-Becker. Not surprisingly, teachers unions fight hardest against reforms that change the way teachers are paid, especially when they introduce incentives for teachers to perform more effectively. The disgraceful reaction of the LA teachers union to publication by the LA Times of the database that gives performance scores of the students of 6000 elementary school teachers is indicative of how teachers unions feel toward rewarding better teachers. The support by Arne Duncan, the US Secretary of Education, of the newspaper’s publication of this information is highly commendable. Not only should such information be published and publicized, but they should also be used to design a system where merit plays a sizable part in the monetary compensation of teachers.

Chris Herbst, Erdal Tekin, VoxEU: Childcare subsidies and child wellbeing. Do subsidies for childcare succeed in getting parents to work and improving the wellbeing of the children? This column presents evidence from the US suggesting that childcare subsidies have an unintended consequence. In the short run, children from low-income families are worse off as their parents go off to work and they receive low-quality childcare.