DECEMBER 10 2010

Tyler Durden, Zero Hedge Blog: Goldman Jumps Shark, "Fundamentally" Shifts Its "Bearish" Outlook On Economy: Goes Bullish, Hikes Outlook. This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years... Five years ago, we became very pessimistic about the US economic outlook. This was because we expected downturns in the housing and mortgage markets to trigger a substantial increase in the private sector financial balance—the gap between the total income and total spending of US households and businesses. So why do we now expect growth to pick up? In a nutshell, it is because underlying demand has strengthened significantly.

Bart Hobijn, Colin Gardiner, San Francisco Fed: The Breadth of Disinflation. In recent months, inflation as measured by the personal consumption expenditures price index has been trending lower. This slowdown, known as disinflation, has raised concerns that inflation might actually drop below zero and enter a period of deflation. An examination of the distribution of inflation rates across the range of goods and services that compose the index suggests that downward pressures on inflation are relatively high by historical standards.

Simon Johnson, Economix: How Likely Is Default in Europe? If it is decided your country is insolvent, rather than illiquid, then you have to restructure your debts. But who will decide? Here is the bombshell in the document: “On this basis, the Eurogroup Ministers will take a unanimous decision on providing assistance.” In other words, any one member of the euro zone can veto a country from being determined merely illiquid, thus cutting it off from cheap and endless credit (from the European Central Bank or European Stability Mechanism or any window to be named later). So now Germany effectively has a veto, as do other fiscally austere countries.

Barry Eichengreen, VoxEU: Ireland’s rescue package: Disaster for Ireland, bad omen for the Eurozone. Irish interest spreads did not fall and contagion continues. Here one of the world’s leading international economists explains why. Short-sighted, wishful thinking by EU and German leadership designed a package that is not economically feasible in the long run (it would trigger a vicious debt deflation spiral) and it is not politically sustainable in the short run. The Eurozone had better have a Plan B for when the new Irish government rejects the package next year and imposes a haircut on Irish bank bondholders.

Free exchange Blog: Europe's economy: How to devalue without devaluing. Spain needs to become more competitive relative to Germany, but it can't shift its nominal exchange rate with Germany, because they share the same currency. But if inflation rates in the two countries diverge—if German inflation rises faster than Spanish inflation—then the real effective exchange rate will move in Spain's favour despite the shared currency. Why might we expect German inflation to rise faster than that elsewhere? The main reason is the divergence in economic conditions between the two areas. Germany's economy has been booming in recent quarters, and unemployment there has fallen. In debt-stricken Europe, however, growth has been weak (or non-existent). Unemployment is high, real estate costs are falling, and so we'd expect inflation in such places to be subdued while prices in Germany face upward pressure. Voila; revaluation without abandoning the euro.

Daniel Gros, VoxEU: All together now? Arguments for a big-bang solution to Eurozone problems. Muddling through isn’t working. This column argues that troubled Eurozone nations should simultaneously open restructuring talks while continuing to service their debts normally. Germany, France, and other core Eurozone nations would have to stand ready to recapitalise the banks most exposed to the restructured debt. The ECB would then stabilise the banking system and the EFSF would stabilise sovereign debt. This big bang could be prepared in a weekend; the market already seems to be pricing it in.

Catherine Rampell, NYT Blog: Will Today’s Unemployed Become Tomorrow’s Unemployable? Cyclical unemployment can become structural unemployment because perfectly good workers become less employable the longer they are out of work. Economists have long known this to be the case, and have documented that the likelihood of finding a job falls drastically the longer a person has been unemployed. For workers with duration less than six months, the job finding probability averages 31 percent. It falls to 19 percent during the next six months and just 14 percent for workers who have been unemployed for over a year.

Marco Leonardi, Giovanni Pica, IZA: Who Pays for It? The Heterogeneous Wage Effects of Employment Protection Legislation. Theory predicts that the wage effects of government-mandated severance payments depend on workers' and firms' relative bargaining power. This paper estimates the effect of employment protection legislation (EPL) on workers' individual wages in a quasi-experimental setting, exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees and left firing costs unchanged for bigger firms. Accounting for the endogeneity of the treatment status, we find that high-bargaining power workers (stayers, white collar and workers above 45) are almost left unaffected by the increase in EPL, while low-bargaining power workers (movers, blue collar and young workers) suffer a drop both in the wage level and its growth rate.

Andreas Schick, Richard H. Steckel, NBER: Height as a Proxy for Cognitive and Non-Cognitive Ability.Taller workers receive a substantial wage premium. Studies extending back to the middle of the last century attribute the premium to non-cognitive abilities, which are associated with stature and rewarded in the labor market. More recent research argues that cognitive abilities explain the stature-wage relationship. This paper reconciles the competing views by recognizing that net nutrition, a major determinant of adult height, is integral to our cognitive and non-cognitive development. Using data from Britain’s National Childhood Development Study (NCDS), we show that taller children have higher average cognitive and non-cognitive test scores, and that each aptitude accounts for a substantial and roughly equal portion of the stature premium. Together these abilities explain why taller people have higher wages.

Andrew J. Rotherham, Time: School of Thought. Is the Golden Age of Education Spending Over? The more general problem with school funding is the lack of attention to productivity, i.e., thinking about outputs (student learning) in relation to inputs (spending). In education circles, productivity is a four-letter word. Cost and benefits? Never heard of 'em! Elementary and secondary education remains one of the last industries relatively untouched over the past few decades by productivity increases from new technologies. Schools still operate pretty much the same way they did when our parents were student. In fact, rather than becoming more productive, the opposite has happened in education: over the last 30 years, public schools have focused on strategies that decrease productivity.

Armine Yalnizyan, Canadian Centre for Policy Alternatives: The Rise of Canada’s Richest 1%. Surprisingly, the incomes of the richest Canadians are increasingly reliant on their jobs, just like the rest of us. That’s a big change from the past. In 1946, just after the end of the Second World War, their paycheques accounted for less than half their income (45.5%). Today over two-thirds of their incomes (67.6%) come from wages, with the balance mostly coming from professional fees, dividends, interest and investment income. In fact, the richest 0.01% rely on their jobs for almost three-quarters of their income (73.5%), just like the average Canadian. The difference is their work is much more richly rewarded. The richest 1% is increasingly like the average Canadian in another regard too: reliance on business income. In 1946, 24.3% of the incomes of the richest 1% came from running a business. That dropped to 3.1% in 2007 — the very same as for the average Canadian.

Maxim Pinkovskiy, Xavier Sala-i-Martin, VoxEU: African poverty is falling…much faster than you think. Sub-Saharan Africa has made little progress in reducing extreme poverty, according to the latest Millennium Development Report. This column presents evidence from 1970 to 2006 to the contrary.

James Mcwilliams, NYT Blog: The Rational War on Fat. The problem with taxing sodas alone is that the tax only works to lower obesity rates if consumers decrease overall caloric intake, not just of soda. When it comes to taxing carbonated beverages, what guarantee is there that consumers won’t compensate—or even overcompensate—elsewhere for the calories lost to soft drinks? Absolutely none. And thus it’s no surprise that a 2009 study found sales taxes to have had minimal impact on obesity. We can tax individual items until the coffers spill over, but until we can figure out how to tax excess calories rather than the sources of them, this approach to placing the nation on a much needed diet will have a sclerotic impact at best. When it comes to food, I would venture to say that we’re all irrational. Is it likely that we’ll consistently follow the perfectly rational incentives designed by benevolent governmental guardians? Fat chance.

Tyler Cowen, Marginal Revolution Blog: Why Timur Kuran is one of our most important thinkers. He now has a new book out -- The Long Divergence: How Islamic Law Held Back the Middle East. The book explains a large part of why the Middle East and Turkey fell behind the West and law and economics has a lot to do with it. Various laws in Islamic societies were not conducive to large-scale economic structures, at precisely the time when such structures were becoming profitable and indeed essential as drivers of economic growth. Here is a short excerpt from the book:” ...several institutions...blocked evolutionary paths in the direction of modern banking: the Islamic law of commercial partnerships, the Islamic inheritance system, the waqf system, and the individualism of Islamic law. All were introduced earlier as causes of the region's other handicaps. Like the region's previously discussed symptoms of underdevelopment, delayed financial modernization was an unintended consequence of institutional choices that served laudable objectives.”