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.