JANUARY 14 2011

Douglas McWilliams, Centre for Economics and Business Research: Top ten predictions for 2011 include yet another euro crisis, slower growth, retirement at 75 (in Japan). Yet another eurozone crisis in the spring if not before, when Spain and Italy have to refinance in aggregate over €400 billion of bonds. The euro might break up at this point, though European politicians are normally able to respond to a crisis and I suspect that what will break up the euro will be the failure of most of the countries to take the tough medicine necessary to make their economies competitive over the longer term. We give it only a one in five chance of surviving in its present form for ten years. If the euro doesn’t break up, this could be the year when it weakens substantially towards parity with the dollar.

Zsolt Darvas, Jean Pisani-Ferry, Bruegel: The Threat of 'Currency Wars': A European Perspective. The so-called ‘currency war’ is manifested in three ways: 1) the inflexible pegs of undervalued currencies; 2) attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a ‘beggar-thy-neighbour’ policy as long as the Fed’s policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro’s exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.

Simon Johnson, Global Monitor: Why Can’t Europe Avoid Another Crisis? Why Can’t the U.S.? Most experienced watchers of the eurozone are expecting another serious crisis to break out in early 2011.  This projected crisis is tied to the rollover funding needs of weaker eurozone governments, i.e., debts falling due in March through May, and therefore seems much more predictable than what happened to Greece or Ireland in 2010.  The investment bankers who fell over themselves to lend to these countries on the way up, now lead the way in talking up the prospects for a serious crisis. This crisis is not more preventable for being predictable because its resolution will involve politically costly steps – which, given how Europe works, can only be taken under duress. And don’t smile as you read this, because this same logic points directly to a deep and morally disturbing crisis heading directly at the United States.

Kenneth Rogoff, Project Syndicate: Armageddon Can Wait. Where are global currencies headed in 2011? After three years of huge, crisis-driven exchange-rate swings, it is useful to take stock both of currency values and of the exchange-rate system as a whole. And my best guess is that we will see a mix of currency wars, currency collapses, and currency chaos in the year ahead – but that this won’t spell the end of the economic recovery, much less the end of the world.

Christopher D. Carroll, Misuzu Otsuka, Jiri Slacalek, ECB: How Large are Housing and Financial Wealth Effects? This paper presents a simple new method for measuring `wealth effects' on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reecting consumption `habits') to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a nal eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration-based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector.

Reuven Glick, Kevin J. Lansing, San Francisco Fed: Consumers and the Economy, Part I: Household Credit and Personal Saving. In the years since the bursting of the housing bubble, the personal saving rate has trended up from around 1% to around 6%, while the ratio of household debt to disposable income has dropped from 130% to 118%. Changes over time in the availability of credit to households can explain 90% of the variance of the saving rate since the mid-1960s, including the recent uptrend, according to a simple empirical model.

Dhaval M. Dave, Inas Rashad Kelly, NBER:  How Does the Business Cycle Affect Eating Habits? A higher risk of unemployment is associated with reduced consumption of fruits and vegetables and increased consumption of "unhealthy" foods such as snacks and fast food.  Among individuals predicted to be at highest risk of being unemployed, a one percentage point increase in the resident state's unemployment rate is associated with a 2-8% reduction in the consumption of fruits and vegetables.  The impact is somewhat higher among married individuals and older adults.

Richard B. Freeman, Stephen Machin, Martina Viarengo, VoxEU: The virtuous equity-efficiency trade-off in educational outcomes. How countries score in international tests are seen by many as report card on their national educational policies. Summarising evidence from international maths exams, this column finds that the highest-scoring countries are those with the least inequality in test scores, suggesting a “virtuous” equity-efficiency trade-off. It also finds that countries perform even better when test scores are highly correlated with the number books in the family home.

Joshua Angrist, Philip Oreopoulos, Tyler Williams, NBER: When Opportunity Knocks, Who Answers? New Evidence on College Achievement Awards. We evaluate the effects of academic achievement awards for first and second-year college students on a Canadian commuter campus. The award scheme offered linear cash incentives for course grades above 70. Awards were paid every term. Program participants also had access to peer advising by upperclassmen. Program engagement appears to have been high but overall treatment effects were small. The intervention increased the number of courses graded above 70 and points earned above 70 for second-year students, but there was no significant effect on overall GPA. Results are somewhat stronger for a subsample that correctly described the program rules. We argue that these results fit in with an emerging picture of mostly modest effects for cash award programs of this type at the post-secondary level.

Anh T. Le, IZA: Attitudes towards Economic Risk and the Gender Pay Gap. This paper examines the links between gender differences in attitudes towards economic risk and the gender pay gap. Consistent with the literature on the socio-economic determinants of attitudes towards economic risk, it shows that females are much more risk averse than males. It then extends this research to show that workers with more favorable attitudes towards risk are associated with higher earnings, and that gender differences in attitudes towards economic risk can account for a small, though important, part of the standardized gender pay gap.

Henrik Kleven, Camille Landais, Emmanuel Saez, NBER: Taxation and International Migration of Superstars: Evidence from the European Football Market. We construct a panel data set of top earnings tax rates, football player careers, and club performances in the first leagues of 14 European countries since 1980. We then set out a theoretical model of taxation and migration, which is structurally estimated using all sources of tax variation simultaneously. Our results show that (i) the overall location elasticity with respect to the net-of-tax rate is positive and large, (ii) location elasticities are extremely large at the top of the ability distribution but negative at the bottom due to ability sorting effects, and (iii) cross-tax effects of foreign players on domestic players (and vice versa) are negative and quite strong due to displacement effects. Finally, we estimate tax

revenue maximizing rates and draw policy conclusions.

David Maddison, Katrin Rehdanz, Kiel Institute: The Impact of Climate on Life Satisfaction. We analyse the influence of climate on average life satisfaction in 87 countries using data from the World Values Survey. Climate is described in terms of ‘degree-months’ calculated using an optimally-selected base temperature of 65°F (18.3°C). Our results suggest that countries with climates characterised by a large number of degree-months enjoy significantly lower levels of life satisfaction. This finding is robust to a wide variety of model specifications. Using our results to analyse a particular climate change scenario associated with the IPCC A2 emissions scenario points to major losses for African countries, but modest gains for Northern Europe

Mara Squicciarini, Jo Swinnen, University of Leuven: Women or Wine ? Monogamy and Alcohol. Intriguingly, across the world the main social groups which practice polygyny do not consume alcohol. We investigate whether there is a correlation between alcohol consumption and polygynous/monogamous arrangements, both over time and across cultures. Historically, we find a correlation between the shift from polygyny to monogamy and the growth of alcohol consumption. Cross-culturally we also find that monogamous societies consume more alcohol than polygynous societies in the preindustrial world. We provide a series of possible explanations to explain the positive correlation between monogamy and alcohol consumption over time and across societies.

Jan-Emmanuel De Neve et al,  CREMA: Genes, Economics, and Happiness. Using data from Add Health, we employ a twin study design to show that genetic variation explains about 33% of the variation in happiness, and that the influence of genes varies by gender (women 26%, men 39%) and tends to rise with age. We also present evidence that variation in a specific gene predicts happiness. Individuals with a transcriptionally more efficient version of the serotonin transporter gene (SLC6A4) are significantly more likely to report higher levels of life satisfaction.  

Timo Boppart, Josef Falkinger, Volker Grossmann, IZA: Protestantism and Education: Reading (the Bible) and Other Skills. During industrialization, Protestants were more literate than Catholics. This paper investigates whether this fact may be led back to the intrinsic motivation of Protestants to read the bible and whether other education motives were involved as well. We employ a historical data set from Switzerland which allows us to differentiate between different cognitive skills: reading, numeracy, essay writing and Swiss history. We develop an estimation strategy to examine whether the impact of religious denomination was particularly large with respect to reading capabilities. We find support for this hypothesis. However, Protestants’ education motives went beyond reading the bible.