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.