Ben S. Bernanke et al, Fed: International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007. A broad array of domestic institutional factors--including problems with the originate-to-distribute model for mortgage loans, deteriorating lending standards, deficiencies in risk management, conflicting incentives for the GSEs, and shortcomings of supervision and regulation--were the primary sources of the U.S. housing boom and bust and the associated financial crisis. In addition, the extended rise in U.S. house prices was likely also supported by long-term interest rates (including mortgage rates) that were surprisingly low, given the level of short-term rates and other macro fundamentals. This essay investigates further the effects of capital inflows to the United States on U.S. longer-term interest rates. The strong demand for apparently safe assets by both domestic and foreign investors not only served to reduce yields on these assets but also provided additional incentives for the U.S. financial services industry to develop structured investment products that "transformed" risky loans into highly-rated securities. Our findings do not challenge the view that domestic factors, including those listed above, were the primary sources of the housing boom and bust in the United States. However, examining how changes in the pattern of international capital flows affected yields on U.S. assets helps provide a deeper understanding of the origins and dynamics of the crisis.
David Beckworth, Macro and Other Market Musings Blog: Four Questions for Ben Bernanke on His Global Saving Glut Hypothesis. So, we have a theory that nicely ties together global economic imbalances, developments in structured finance, and the U.S. housing boom. Note, though, that the GSG hypothesis places no culpability on the Fed. Instead, blame is placed on the failings of the U.S. private sector and foreigners who save too much. How convenient for Ben Benanke and the Fed. I am trying to be open minded here but really, how can one not view this self-serving explanation with some skepticism? But let's give Bernanke benefit of the doubt. It would do a world of good if he would actually address the tough questions that skeptics like me have about the GSG hypothesis. In case he is reading, here are the questions.
Gavyn Davies, FT Blog: How big is the 2011 oil price shock? Each of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices. Sometimes (e.g. in the 1970s and in 1990), the surge in oil prices has been due to supply restrictions, triggered by Opec or by war in the Middle East. Other times (e.g. in 2008), it has been due to rapid growth in the demand for oil. But in both cases the contractionary effects of higher energy prices have eventually proven too much for the world economy to shrug off. With the global average price of oil having moved above $100 per barrel in recent days – about 33 per cent higher than the price last summer – it is natural to fear that this latest oil shock may be enough to kill the global economic recovery. But oil prices would have to rise much further, and persist for much longer, for these fears to be justified.
Macroeconomic Advisers: Calibrating the Macro Effects of Higher Oil Prices: Results from the MA Model. It’s not just the oil price rise that matters! Oil price shocks historically have been associated with an increase in geopolitical risks affecting oil-producing countries, with significant spillovers to financial markets. Rising geopolitical risks and an accompanying pullback from risk taking is then reflected in the decline in the prices of risk assets, especially equity prices. The resulting tightening of financial conditions can significantly augment the adverse direct effect of higher oil prices on growth. To be sure, ignoring the financial market spillover may significantly understate the macro effects of the developments today in North Africa and the Middle East.
David H. Autor, David Dorn, Gordon H. Hansen, NBER: The China Syndrome: Local Labor Market Effects of Import Competition in the United States. Growing import exposure spurs a substantial increase in transfer payments to individuals and households in the form of unemployment insurance benefits, disability benefits, income support payments, and in-kind medical benefits. These transfer payments are two orders of magnitude larger than the corresponding rise in Trade Adjustment Assistance benefits. Nevertheless, transfers fall far short of offsetting the large decline in average household incomes found in local labor markets that are most heavily exposed to China trade. Our estimates imply that the losses in economic efficiency from trade-induced increases in the usage of public benefits are, in the medium run, of the same order of magnitude as U.S. consumer gains from trade with China.
Makoto Nakajima, Philadelphia Fed: A Quantitative Analysis of Unemployment Benefit Extensions. This paper measures the effect of extensions of unemployment insurance (UI) benefits on the unemployment rate using a calibrated structural model that features job search and consumption-saving decision, skill depreciation, UI eligibility, and UI benefit extensions that capture what has happened during the current downturn. The author finds that the extensions of UI benefits contributed to an increase in the unemployment rate by 1.2 percentage points, which is about a quarter of an observed increase during the current downturn (a 5.1 percentage point increase from 4.8 percent at the end of 2007 to 9.9 percent in the fall of 2009). Among the remaining 3.9 percentage points, 2.4 percentage points are due to the large increase in the separation rate, while the staggering job-finding probability contributes 1.4 percentage points. The last extension in December 2010 moderately slows down the recovery of the unemployment rate. Specifically, the model indicates that the last extension keeps the unemployment rate higher by up to 0.4 percentage point during 2011.
Jon Danielsson, VoxEU: Risk and crises. Economic models have recognised the inherent challenges caused by intelligent agents reacting to model predictions ever since the pioneering work of Bob Lucas. Most practical models for price and risk forecasting by the industry and supervisors do not incorporate such features, reflecting the state of the art of macro models’ pre-rational expectations. The presence of endogenous risk, and the resulting feedback effects between agent behaviour and model predictions, coupled with the low information content in market prices when agents are subject to external constraints undermine the reliability of most risk models. Because of the way they are constructed in practise, such models tend to be systematically wrong, over forecasting risk during crises and under forecasting risk at other times.
Stephen J. Dubner, NYT Blog: Darwin as Economist? Darwin did add to the existing thinking about evolution. He identified the mechanism by which evolution occurred: natural selection. In his decades-long course of collecting data, Darwin came to understand that species changed in large part because they were forced to compete for resources with other species and other animals within their species. As habitats changed, so too did the allocation of resources – which allowed some species to survive, thrive, and evolve while others died out. In this regard, “natural selection” is a great deal like “the economic approach.” If the latter describes how people get what they need when other people need the same thing, then the former describes how, say, a groundfinch gets when it needs when other groundfinches need the same thing.
Annemarie Nelen, Andries de Grip, Didier Fouarge, Maastricht University: Is Part-Time Employment Beneficial for Firm Productivity? This paper analyzes whether part-time employment is beneficial for firm productivity in the service sector. Using a unique dataset on the Dutch pharmacy sector that includes the work hours of all employees and a “hard” physical measure of firm productivity, we estimate a production function including heterogeneous employment shares based on work hours. We find that a larger part-time employment share leads to greater firm productivity. Additional data on the timing of labor demand show that part-time employment enables firms to allocate labor more efficiently. First, firms with part-time workers can bridge the gap between opening hours and a full-time work week. Second, we find that during opening hours part-time workers are scheduled differently than full-timers. For example, we find that part-time workers enable their full-time colleagues to take lunch breaks so that the firm can remain open during these times.
Stacy Dale, Alan B. Krueger, Princeton: Estimating the Return to College Selectivity over the Career Using Administrative Earning Data. We use administrative earnings data to estimate the return to various measures of college selectivity for a more recent cohort of students: those who entered college in 1989. We find that the return to college selectivity is sizeable for both cohorts in regression models that control for variables commonly observed by researchers, such as student high school GPA and SAT scores. However, when we adjust for unobserved student ability by controlling for the average SAT score of the colleges that students applied to, our estimates of the return to college selectivity fall substantially and are generally indistinguishable from zero. There were notable exceptions for certain subgroups. For black and Hispanic students and for students who come from less-educated families (in terms of their parents’ education), the estimates of the return to college selectivity remain large, even in models that adjust for unobserved student characteristics.
Oliver Staley, Bloomberg: Chicago Economist’s ‘Crazy Idea’ Wins Ken Griffin’s Backing The preschool in the low-income suburb of Chicago Heights is the centerpiece of one of the largest field experiments ever conducted in economics. With $10 million from hedge-fund billionaire Kenneth Griffin, List will track the results of more than 600 students-- including 150 at this school. His goal is to find out whether investing in teachers or, alternatively, in parents, leads to more gains in kids’ educational performance. List, 42, is a pioneer in designing experiments that test how well economic theories explain the real world. He works in venues ranging from sports-card shows in Denver to villages in Tanzania. His field experiments on altruism, reputation and discrimination upended theories reached in the lab and spurred other economists to use his methods.
Robert N. Stavins, AER: The Problem of the Commons: Still Unsettled after 100 Years.The problem of the commons is more important to our lives and thus more central to economics than a century ago when Katharine Coman led off the first issue of the American Economic Review. As the US and other economies have grown, the carrying capacity of the planet—in regard to natural resources and environmental quality— has become a greater concern, particularly for common-property and open-access resources. The focus of this article is on some important, unsettled problems of the commons. Within the realm of natural resources, there are special challenges associated with renewable resources, which are frequently characterized by open-access. An important example is the degradation of open-access fisheries. Critical commons problems are also associated with environmental quality. A key contribution of economics has been the development of market-based approaches to environmental protection. These instruments are key to addressing the ultimate commons problem of the twenty-first century—global climate change.
Edward Glaeser, the Atlantic: How Skyscrapers Can Save the City. Besides making cities more affordable and architecturally interesting, tall buildings are greener than sprawl, and they foster social capital and creativity. Yet some urban planners and preservationists seem to have a misplaced fear of heights that yields damaging restrictions on how tall a building can be. From New York to Paris to Mumbai, there’s a powerful case for building up, not out.
Alan M Garber, Jeremy D Goldhaber-Fieber, VoxEU: The behavioural economics of exercise habits. Our first study shows that default contract length suggestions can nudge people into longer duration exercise commitment contracts. In subsequent follow-up work that we are now conducting in a larger sample of over 1,500 individuals, preliminary findings suggest the nudge effect is strong and consistent. Furthermore, preliminary findings also indicate that individuals "nudged" into longer contracts through longer default suggested values successfully completed at least the same number of weeks of exercise and, importantly, completed more total exercise sessions during their contracts.
Justin Weidner, John C. Williams, San Francisco Fed: What Is the New Normal Unemployment Rate? Mounting evidence suggests that structural factors may have increased the “normal” rate of unemployment to about 6.7%. Much of this increase is likely to be temporary. In particular, the extension of unemployment benefits probably accounts for about half of the increase. But, even with a 6.7% natural rate, current and forecasted levels of unemployment imply that significant labor market slack will persist for several years. It is important to stress that each of the methods used to estimate the natural rate is subject to considerable error, especially given the limited experience of very high unemployment in the post-World War II U.S. economy.
Alberto Martin, Jaume Ventura, VoxEU: Origins and macroeconomic implications of asset bubbles. Modern economies often experience large movements in asset prices that have significant macroeconomic effects. Yet many of these movements in asset prices seem unrelated to economic fundamentals and are often termed “bubbles”. This column explains how recent advances in the theory of rational bubbles can help us to understand these movements in asset prices and their macroeconomic implications.
Gabriele Galati, Richhild Moessner, BIS: Macroprudential policy – a literature review. The recent financial crisis has highlighted the lack of analytical frameworks to help predict and cope with the global build-up of financial imbalances whose sudden unwinding turned out to have severe macroeconomic consequences. With the benefit of hindsight, there has been a fundamental lack of understanding of system-wide risk. In particular, there has been a failure to appreciate how aggressive risk-taking by different types of financial institutions – against the background of robust macroeconomic performance and low interest rates – supported a massive growth in balance sheets in the financial system. In terms of policy, the recent financial crisis has highlighted the need to go beyond a purely micro-based approach to financial regulation and supervision. In recent months, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. There is a growing consensus among policymakers that a macroprudential approach to regulation and supervision should be adopted:
Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow: 100 Years of the American Economic Review: The Top 20 Articles. We was appointed by Robert Moffitt with the task of selecting the “Top 20” articles published in the American Economic Review during its first hundred years. We decided against trying to define formally the criteria for inclusion: they surely comprise sheer intellectual quality, influence on the ideas and practices of economists, and general significance or breadth; but it would be fruitless to try to specify the marginal rates of substitution among these. In the event, our early ballots showed an encouraging unanimity or near-unanimity, especially about the leading candidates. We very quickly converged on the Top 15 articles. There were occasional differences of opinion, only to be expected from a group with diverse interests, as we filled in the remaining three to five places. Here is our final list, arranged alphabetically, along with a brief reminder about each. There are few, if any, surprises.
Joshua Aizenman, Gurnain Kaur Pasricha, NBER: Net Fiscal Stimulus During the Great Recession. This paper studies the patterns of fiscal stimuli in the OECD countries propagated by the global crisis. Overall, we find that the USA net fiscal stimulus was modest relative to peers, despite it being the epicenter of the crisis, and having access to relatively cheap funding of its twin deficits. The USA is ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 countries in sample. Contrary to historical experience, emerging markets had strongly countercyclical policy during the period immediately preceding the Great Recession and the Great Recession. Many developed OECD countries had procyclical fiscal policy stance in the same periods. Federal unions, emerging markets and countries with very high GDP growth during the pre-recession period saw larger net fiscal stimulus on average than their counterparts. We also find that greater net fiscal stimulus was associated with lower flow costs of general government debt in the same or subsequent period.
N. Gregory Mankiw, NYT: Emerging Markets as Partners, Not Rivals. In his State of the Union address last month, President Obama set the stage for a coming policy debate and his re-election bid with a catch phrase. Six times, he called on Americans to “win the future.” And he used the variant “winning the future” three other times. But is this really a good way to frame the economic challenges we face? Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense.
David Miles et al, BoE: Optimal bank capital. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to hold is very much larger than banks have held in recent years and also higher than targets agreed under the Basel III framework.
Sebastian Barnes et al, OECD: The GDP Impact of Reform. A Simple Simulation Framework. The plausible scenarios suggest that the largest long-run GDP per capita gains may be obtained from reforms that would raise the quantity and quality of education, strengthen competition in product markets, reduce the level and/or duration of unemployment benefits, cut labour tax wedges and relax employment protection legislation. Past reforms in these areas might also have contributed to as much as half of GDP per capita growth in OECD countries in the decade prior to the recent financial and economic crisis. Simulations further indicate that addressing all policy weaknesses in each OECD country by aligning policy settings on the OECD average could raise GDP per capita by as much as 25% in the typical country.
Dan Ariely et al, Boston Fed: Large Stakes and Big Mistakes. Most upper‐management and sales force personnel, as well as workers in many other jobs, are paid based on performance, which is widely perceived as motivating effort and enhancing productivity relative to non‐contingent pay schemes. However, psychological research suggests that excessive rewards can in some cases produce supra‐optimal motivation, resulting in a decline in performance. To test whether very high monetary rewards can decrease performance, we conducted a set of experiments at MIT, the University of Chicago, and rural India. Subjects in our experiment worked on different tasks and received performance‐contingent payments that varied in amount from small to large relative to their typical levels of pay. With some important exceptions, we observed that high reward levels can have detrimental effects on performance.
Mirco Tonin, Ann-Sofie Kolm, IZA: In-Work Benefits and Unemployment. We analyze the impact of in-work benefits on some of the main labour market indicators in a search framework, taking into account the effects on labour market equilibrium. We find that in-work benefits increase labour force participation, employment, and search intensity by the unemployed, while wages and the unemployment rate decline. Moreover, we show that the positive effect on employment and labour force participation in equilibrium exceeds that in partial equilibrium, i.e., when wage are fixed, if the unemployment rate is inefficiently high. Results from numerical simulations suggest that the quantitative impact on unemployment and employment is significantly larger when the effect of benefits on wages is taken into account.
Kevin Lang, Erez Siniver, NBER: Why Is an Elite Undergraduate Education Valuable? Evidence from Israel. In this paper we compare the labor market performance of Israeli students who graduated from one of the leading universities, Hebrew University (HU), with those who graduated from a professional undergraduate college, College of Management Academic Studies (COMAS). Our results support a model in which employers have good information about the quality of HU graduates and pay them according to their ability, but in which the market has relatively little information about COMAS graduates. Hence, high-skill COMAS graduates are initially treated as if they were the average COMAS graduate, who is weaker that a HU graduate, consequently earning less than UH graduates. However, over time the market differentiates among them so that after several years of experience, COMAS and HU graduates with similar entry scores have similar earnings. Our results are therefore consistent with the view that employers use education information to screen workers but that the market acquires information fairly rapidly.
Anders Björklund, Markus Jäntti, John E. Roemer, IZA: Equality of Opportunity and the Distribution of Long-Run Income in Sweden. Equality of opportunity is an ethical goal with almost universal appeal. The interpretation taken here is that a society has achieved equality of opportunity if it is the case that what individuals accomplish, with respect to some desirable objective, is determined wholly by their choices and personal effort, rather than by circumstances beyond their control. We use data for Swedish men born between 1955 and 1967 for whom we measure the distribution of long-run income, as well as several important background circumstances, such as parental education and income, family structure and own IQ before adulthood. We address the question: in Sweden, given its present constellation of social policies and institutions, to what extent is existing income inequality due to circumstances, as opposed to 'effort'? Our results suggest that several circumstances, importantly both parental income and own IQ, are important for long-run income inequality, but that variations in individual effort! account for the most part of that inequality.
Tim Duy's Fed Watch: Acceleration Alert. The January employment report was a mess, but the sharp drop in unemployment is difficult to ignore, especially given the general better-than-expected tone of recent data. At this junction, I believe it is reasonable to believe that overall activity will prove to be better than expected by Federal Reserve policymakers. Still, an upward revision to the forecast does not alone imply that Bernanke & Co. will find it imperative to return to the question of when to tighten. The output gap remains strikingly large for an economy in expansion since the middle of 2009. That should be sufficient to leave the baseline forecast of steady policy intact. But incoming data suggests the balance of risks is no longer on the side of disappointment. It may be that, for the first time in four or five years, the pessimists will need to find a new hobby.
Ragu Rajan, Fault Lines Blog: Why did economists not spot the crisis? At the height of the financial crisis, the Queen of England asked my friends at the London School of Economics a simple question, but one for which there is no easy answer: Why did academic economists fail to foresee the crisis? There have been several responses to that query. One is that economists simply lacked models that could account for the behavior that led to the crisis. Another is that economists were blinkered by an ideology according to which a free and unfettered market could do no wrong. Finally, an answer that is gaining ground is that the system bribed economists to stay silent. In my view, the truth lies elsewhere. I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.
James Feyrer, Bruce Sacerdote, NBER: Did the Stimulus Stimulate? We use state and county level variation to examine the impact of the American Readjustment and Recovery Act on employment. A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000. These results imply Keynesian multipliers between 0.5 and 1.0, somewhat lower than those assumed by the administration. However, the overall results mask considerable variation for different types of spending. Grants to states for education do not appear to have created any additional jobs. Support programs for low income households and infrastructure spending are found to be highly expansionary. Estimates excluding education spending suggest fiscal policy multipliers of about 2.0 with per job cost of under $100,000.
Silvio Contessi, St Louis Fed: Are Bank Reserves and Bank Lending Connected? Large increases in excess reserves have prompted some analysts to argue that depository institutions are “hoarding cash,” thereby impeding the growth of lending and slowing the recovery from the 2007-09 recession. Analysis of the cross-sectional data suggests that some banks may be maintaining such large reserve positions as a precautionary hedge in an uncertain environment. Many banks, especially smaller ones, likely recall the autumn of 2008 when repurchase agreement (repo) markets closed and, absent Federal Reserve actions, liquidity was unavailable at any price. As long as the strength of the recovery remains uncertain, there are few other investment opportunities, after adjusting for risk and taxes, with anticipated returns greater than the near-zero interest (currently 0.25 percent) the Federal Reserve pays on deposits.
Barkley Rosser, EconoSpeak Blog: Does Economics Explain The Current Arab Uprising? No Arab country that is a major oil exporter (or earns the vast majority of its export earnings from oil) is seeing an uprising. Oil prices have risen, and it would appear that most of the leaders of the countries exporting lots of oil have been clever enough to sufficiently distribute the rising earnings from this so as to tamp down any incipient unhappiness about dictatorship or monarchy or excessive friendliness with the US. Those more strongly dependent on food imports and thus suffering shocks that especially impact the poorer parts of their populations have almost all had uprisings.
Paul Krugman, NYT: Droughts, Floods and Food. While several factors have contributed to soaring food prices, what really stands out is the extent to which severe weather events have disrupted agricultural production. And these severe weather events are exactly the kind of thing we’d expect to see as rising concentrations of greenhouse gases change our climate — which means that the current food price surge may be just the beginning. Now, to some extent soaring food prices are part of a general commodity boom: the prices of many raw materials, running the gamut from aluminum to zinc, have been rising rapidly since early 2009, mainly thanks to rapid industrial growth in emerging markets. But the link between industrial growth and demand is a lot clearer for, say, copper than it is for food. Except in very poor countries, rising incomes don’t have much effect on how much people eat.
Aida Caldera Sánchez, Åsa Johansson, OECD: The Price Responsiveness of Housing Supply in OECD Countries. The responsiveness of housing supply to changes in prices bears important implications for the evolution of housing prices and the speed of adjustment of housing markets. This paper estimates the long-run price elasticity of new housing supply in 21 OECD countries based on a stock-flow model of the housing market estimated within an error correction framework. Estimates suggest that housing supply responsiveness to price changes varies substantially across countries. New housing supply is relatively more flexible in North America and some Nordic countries, while it is more rigid in continental European countries and in the United Kingdom. The responsiveness of housing supply depends not only on national geographical and urban characteristics but also on policies, such as land use and planning regulations. The estimates are broadly in line with the limited available evidence on the responsiveness of housing supply in OECD countries.
Olivier Bargain et al, IZA: Tax-Benefit Systems in Europe and the US: Between Equity and Efficiency. Whether observed differences in redistributive policies across countries are the result of differences in social preferences or efficiency constraints is an important question that paves the debate about the optimality of welfare regimes. To shed new light on this question, we estimate labor supply elasticities on microdata and adopt an inverted optimal tax approach to characterize the redistributive preferences embodied in the welfare systems of 17 EU countries and the US. Implicit social welfare functions are broadly compatible with the fiction of an optimizing Paretian social planner. Some exceptions due to generous demogrant transfers are consistent with the ignorance of behavioral responses by some European governments and are partly corrected by recent policy developments. Heterogeneity in leisure-consumption preferences somewhat affect the international comparison in degrees of revealed inequality aversion, but differences in social preferences are significant only be! tween broad groups of countries.
Hans Bloemen, Stefan Hochguertel, Marloes Lammers: Job Search Requirements for Older Unemployed: Transitions to Employment, Early Retirement and Disability Benefits. In this paper, we use a recent policy change in the Netherlands to study how changes in search requirements for the older unemployed affect their transition rates to employment, early retirement and sickness/disability benefits. The reform, becoming effective on January 1st 2004, required the elderly to formally report their job search efforts to the employment office in order to avoid a (temporary) cut in benefits. Before the new law was passed, unemployed were allowed to stop all search activity at the moment they turned 57.5. Estimating various duration models using difference-in-difference and regression discontinuity approaches, we find that for several groups of individuals that were affected by the policy change, the stricter search requirements did significantly increase their entry rate into employment. However, we also find evidence of a higher outflow to sickness/disability insurance schemes, a presumably unwanted side-effect of the policy change.
Luigi Guiso, Aldo Rustichini, EUI: Understanding the size and profitability of firms: The role of a biological factor. We collect information on prenatal testosterone in a large sample of entrepreneurs by measuring the length of their 2th to 4th fingers in face to face interviews. Entrepreneurs with higher exposure to prenatal testosterone (lower second to fourth digit ratio) manage larger firms, are matched with larger firms when acquire control and experience faster average growth over the years they manage the firm. However, firms run by high prenatal testosterone entrepreneurs have lower profitability as measured by return on assets and return on sales. We also find that prenatal testosterone is correlated with elicited measures of entrepreneurial skills such as ability to stand work effort and optimism and the latter are correlated with firm size. This evidence suggests entrepreneurial ability has a biological component and is consistent with models of the size distribution of firms based on entrepreneurial ability once entrepreneurs utility is allowed to depend both on pro fits and size per se.
Kenneth Rogoff, Project Syndicate: The Inequality Wildcard. The problems facing Egypt and Tunisia today are far more profound than in many other countries. Corruption and failure to embrace meaningful political reform have become acute shortcomings. Yet it would be very wrong to suppose that gaping inequality is stable as long as it arises through innovation and growth. How, exactly, will change unfold, and what form will a new social compact ultimately assume? It is difficult to speculate, though in most countries, the process will be peaceful and democratic. What is clear is that inequality is not just a long-term issue. Concerns about the impact of income inequality are already constraining fiscal and monetary policy in developed and developing countries alike as they attempt to extricate themselves from the hyper-stimulative policies adopted during the financial crisis. More importantly, it is very likely that countries’ abilities to navigate the rising social tensions generated by gaping inequality could separate the winners and losers in the next round of globalization. Inequality is the big wildcard in the next decade of global growth, and not just in North Africa.
Larry Hardesty, MIT News: Why do some countries’ economies grow faster? One of the Media Lab’s newest faculty members is adapting the mathematical tools of statistical physics to study development economics. Hidalgo and Hausmann have found that GDP correlates pretty well with diversity of outputs, but it correlates much better with diversity of inputs. And the cases where the correlation breaks down could actually be more interesting than the cases where it holds, because they could indicate economies poised for growth. In 1970, for instance, the Korean economy had much greater diversity of inputs, according to Hidalgo’s measure, than the Peruvian economy; but Peru had twice Korea’s GDP per capita. Over the next 30 years, the relative diversity of inputs in the two countries’ economies stayed more or less the same, but by 2003, Korea had four times Peru’s GDP per capita.
Richard Baldwin, Voxeu: how to become better macroeconomists: Leijonhufvud’s new Policy Insight. The crisis should have cured us of the “pretence of knowledge” (Caballero 2010) – of the illusion that we understood problems of macroeconomic instability very well and had solved them all to general satisfaction. Once cured of this pretence – which is to say, once cognisant of our ignorance – we can see that macroeconomics poses a great many important questions to which my generation did not provide good answers. As Leijonhufvud concludes, that should make the subject full of intellectual excitement for those of you who are a few decades younger.
J. Bradford DeLong, Project Syndicate: Intelligent Economic Design. Economies do not evolve; they are, rather, intelligently designed. Though there is an intelligence behind their design, this does not mean that the design is in any sense wise. There are two dangers in America’s forthcoming debate. The first concerns the term likely to be used to frame the debate: competitiveness. “Productivity” would be much better. "Competitiveness" carries the implication of a zero-sum game, in which America can win only if its trading partners lose. The second danger is that “competitiveness” implies that what is good for companies located in America – good, that is, for their investors, executives, and financiers – is good for America as a whole.
Michael Lewis, Vanity Fair: When Irish Eyes Are Crying. Ireland’s financial disaster shared some things with Iceland’s. It was created by the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions, for instance. But while Icelandic males used foreign money to conquer foreign places—trophy companies in Britain, chunks of Scandinavia—the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was to buy Ireland. From one another. An Irish economist named Morgan Kelly, whose estimates of Irish bank losses have been the most prescient, made a back-of-the-envelope calculation that puts the losses of all Irish banks at roughly 106 billion euros. (Think $10 trillion.) At the rate money currently flows into the Irish treasury, Irish bank losses alone would absorb every penny of Irish taxes for at least the next three years.
Hess Chung et al, San Francisco Fed: Estimating the Macroeconomic Effects of the Fed's Asset Purchases. An analysis shows that the Federal Reserve's large-scale asset purchases have been effective at reducing the economic costs of the zero lower bound on interest rates. Model simulations indicate that, by 2012, the past and projected expansion of the Fed's securities holdings since late 2008 will lower the unemployment rate by 1½ percentage points relative to what it would have been absent the purchases. The asset purchases also have probably prevented the U.S. economy from falling into deflation.
Tyler Cowen's new book, "The Great Stagnation”: The American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century: free land; immigrant labor; and powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are barer than we would like to think. That’s it. That is what has gone wrong. The problem won’t be solved overnight, but there are reasons to be optimistic. We simply have to recognize the underlying causes of our past prosperity—low hanging fruit—and how we will come upon more of it.
Edward L. Glaeser, NYT Blog: The Moral Heart of Economics. Economists, like Friedman, often made the case that freedom had instrumental value — it achieved other aims, including equality and prosperity. But no one should doubt that Friedman and Mill and Smith saw freedom as a fundamental good, a thing to be valued for itself. That is, after all, how freedom is treated at the very heart of economic theory. Because our teaching is so mathematical and formal, it’s easy to miss that we start by making a huge leap, that is basically moral, not mathematical.
Pierre Cahuc , Stéphane Carcillo, VoxEU: Is short-time work a good method to keep unemployment down? One method for combating unemployment during the global crisis has been the use of short-time work schemes that allow employers to temporarily reduce hours worked while compensating workers for the induced loss of income. In the first of two columns on labour markets, the authors present new evidence establishing that these schemes do indeed reduce unemployment. But they are no panacea and are not without their own problems.
Pierre Cahuc, Stéphane Carcillo, IZA: The Detaxation of Overtime Hours: Lessons from the French Experiment. In October 2007 France introduced an exemption on the income tax and social security contributions that applied to wages received for hours worked overtime. The goal of the policy was to increase the number of hours worked. This article shows that this reform has had no significant impact on hours worked. Conversely, it has had a positive impact on the overtime hours declared by highly qualified wage-earners, who have opportunities to manipulate the overtime hours they declare in order to optimize their tax situation, since the hours they work are difficult to verify.
Jon Hilsenrath, WSJ Blog: Larry Summers vs. Tiger Mom. In a world where things that require discipline and steadiness can be done increasingly by computers, is the traditional educational emphasis on discipline, accuracy and successful performance and regularity really what we want?” he asked. Creativity, he said, might be an even more valuable asset that educators and parents should emphasize. At Harvard the A students tend to become professors and the C students become wealthy donors.
Lance Lochner, NBER: Non-Production Benefits of Education: Crime, Health, and Good Citizenship. A fast growing literature has established that education and human capital impact a wide range of personal decisions and activities. Education has been shown to reduce crime, improve health, lower mortality, and increase political participation. The social benefits from these impacts can be sizeable. For example, Lochner and Moretti (2004) estimate that high school completion may lower the annual social costs of crime by roughly $3,000 per male graduate. Increasing high school completion rates in the U.S. by one percentage point would reap a savings of more than $2 billion. Annual benefits from reductions in mortality are likely to be in the neighborhood of $1,500-2,500 per additional graduate; however, there is considerable uncertainty about this value.
Terrie E. Moffitta et al, PNAS: A gradient of childhood self-control predicts health, wealth, and public safety. Following a cohort of 1,000 children from birth to the age of 32 y, we show that childhood self-control predicts physical health, substance dependence, personal finances, and criminal offending outcomes, following a gradient of self-control. Effects of children’s self-control could be disentangled from their intelligence and social class as well as from mistakes they made as adolescents. In another cohort of 500 sibling-pairs, the sibling with lower self-control had poorer outcomes, despite shared family background. Interventions addressing self-control might reduce a panoply of societal costs, save taxpayers money, and promote prosperity
Yann Algan, Pierre Cahuc, Marc Sangnier, IZA: Efficient and Inefficient Welfare States. This paper shows that cross country differences in the generosity and the quality of the welfare state are associated with differences in the trustworthiness of their citizens. We show that generous, transparent and efficient welfare states in Scandinavian countries are based on the civicness of their citizens. In contrast, the generosity but low transparency of the Continental European welfare states survive thanks to the support of a large share of uncivic individuals who consider that it can be justifiable to misbehave with taxes and social benefits. We also explain why countries with an intermediate degree of trustworthiness of their citizens and of transparency of the government, like Anglo-Saxon countries, have small welfare states. Overall, this paper provides a rationale for the observed persistence of both efficient and inefficient welfare states, as a function of the civicness of the citizens.
Catherine Rampell, NYT Blog: The Haves and the Have-Nots. I had a review this weekend about “ The Haves and the Have-Nots,” a new book by the World Bank economist Branko Milanovic about inequality around the world. The household income numbers are all converted into international dollars adjusted for equal purchasing power, since the cost of goods varies from country to country. The graph shows inequality within a country, in the context of inequality around the world. Check out the line for India. India’s poorest ventile corresponds with the 4th poorest percentile worldwide. And its richest? The 68th percentile. Yes, that’s right: America’s poorest are, as a group, about as rich as India’s richest.
Rowthorn, Robert, Seabright, Paul, TSE: Property Rights, Warfare and the Neolithic Transition. One of the great puzzles of prehistory is why agriculture caught on so fast when archaeo-logical evidence suggests those who adopted it had worse health and nutrition than their hunter gatherer predecessors and contemporaries. If output is harder for farmers to defend, adoption may entail increased defense investments, and equilibrium consumption levels may decline as agricultural productivity increases over a significant range, before eventually increasing thereafter. Agricultural adoption may have been a prisoners' ’dilemma in that adoption was individually attractive even though all groups would have been better off committing not to adopt while the initial productivity advantage of agriculture remained low.
Cullen Roche, Pragmatic Capitalism Blog: Is Europe on the Verge of a Double Dip? Leading indicators in the Eurozone have rolled over. The OECD’s Euro Area Composite Leading Index has declined for seven consecutive months. Euro-area monetary aggregates are weak across the board. However, euro-area business confidence is nearly back to peak 2007 levels. Despite the ongoing struggles, business confidence is high in the eurozone. However, confidence levels tend to be elevated at cycle peaks and depressed at cycle troughs. Weak money growth and strained credit markets suggest a high risk that the euro-area nominal GDP recovery could be stopped in its tracks. Absent a powerful positive shock to the velocity of money, European nominal GDP growth is likely to slow sharply. Debt spreads in Spain and Italy are showing a troubling pattern of “higher highs and lower lows”. The ECB’s balance sheet (the asset side of the monetary base) is growing at less than half the historical average despite wide credit spreads, contained inflation expectations and weak broad money growth. There’s even talk in some circles about the ECB tightening policy this year.
Mark Blyth, Crooked Timber Blog: The End Game for the Euro: German Rules and Bondholder Revolts. In a democracy there is only so much you can put on the taxpayer before they throw out the rascals and vote for someone that promises to put that ‘put’ elsewhere, and the only place left is back on the bondholders. So if the bondholders know that the haircut is coming, they can try and put the put back on the banks, but given the state of the bank’s balance sheets and overall business model (it’s bust – and its not coming back), that’s not going to happen. So bondholders have only one out. They pressure the EU, and the Germans in particular, by squeezing peripheral bonds to make sure that taxpayers there take the hit that they don’t want to. But this of course, has a limit. That limit is called Spain. When you put $750 billion in a bag and say ‘bailout funds’ that tells everyone how much you are really willing to lose. It’s a chunk of change and it will take care of Ireland and Greece. But if everyone is, metaphorically speaking, trying to get towards the door in case someone shouts ‘fire’ in the crowded theater, then there is no guarantee it will stop there as contagion mechanisms take hold. In which case Spain’s liabilities, dotted across the bond portfolios of major Eurozone banks, blow through the bag of cash and the limit is reached. When that limit is reached, the mother of all bank runs will begin and the endgame for not just the Euro, but also the EU, will enter its final act.
Robert Skidelsky, Project Syndicate: Life after Capitalism. Today, I wonder whether there will be a world after capitalism.That question is not prompted by the worst economic slump since the 1930’s. Capitalism has always had crises, and will go on having them. Rather, it comes from the feeling that Western civilization is increasingly unsatisfying, saddled with a system of incentives that are essential for accumulating wealth, but that undermine our capacity to enjoy it. Capitalism may be close to exhausting its potential to create a better life – at least in the world’s rich countries.
Romain Bouis, Romain Duval, OECD: Raising potential growth after the crisis: A quantitative assessment of the potential gains from various structural reforms in the OECD area and beyond. Results of simulations suggest that a gradual alignment of product market regulations to best practice in a broad range of non-manufacturing sectors could boost aggregate labour productivity levels by several per cent over the next decade in many OECD countries, and by over five per cent across most of continental Europe, as well as for the BRIICS. Relaxation of job protection legislation could also raise productivity growth for a while in many OECD and non-OECD G20 countries, although the effects are estimated to be smaller than those from product market reforms. In a scenario under which they would be phased in relatively quickly, labour market reforms in the areas of unemployment benefit systems, activation policies, labour taxes and pension systems could raise employment rates by several percentage points in a number of OECD countries over a 10-year horizon. Large continental European countries would have the largest benefits to reap from reforms. The overall potential GDP gain for the average OECD country from undertaking the full range of reforms considered here might come close to 10% at a 10-year horizon, indicating the presence of ample room for structural reforms to offset the permanent GDP losses from the recent crisis.
Jagdish Bhagwati, Project Syndicate: Globalization Marches On. What happened next was what I have called an “ironic reversal.” As the benefits of globalization became manifest, and the damage wrought by autarkic policies also became evident, policymakers in the East began to appreciate that their anti-globalization stance had been a mistake. But then fear of globalization moved to the West. The East had feared that it could not gain from trade with the West, which had superior infrastructure and human capital; now, the West had come to fear that it would lose from trade with the East, which had abundant, cheap labor. The longstanding stagnation in wages for unskilled labor was attributed to low-cost, labor-intensive imports, ignoring the corollary that Western workers’ consumption of labor-intensive Asian goods offset the effect on real wages.
Daron Acemoglu, Economist Blog: Economic power begets political power. Inequality impacts politics. Economic power tends to beget political power even in democratic and pluralistic societies. In the United States, this tends to work through campaign contributions and access to politicians that wealth and money tend to buy. This political channel implies another, potentially more powerful and distortionary link between inequality and a non-level playing field. It may also create pathways from inequality to instability, because both the economic and political implications of inequality can create various backlashes.
Lawrence Mishel, EPI: Education is Not the Cure for High Unemployment or for Income Inequality. The challenge we face with high and persistent unemployment exceeding 9% is not better education and training for those currently unemployed. Rather, we need more jobs. Moreover, the reason we have seen a huge increase in wage and income inequality over the last 30 years is not a shortfall in the skills and education of the workforce. Workers face a “wage deficit” much more than a “skills deficit.” Moving forward, our primary challenge is not generating a greatly expanded supply of college graduates because otherwise employers will not have a sufficient number available to them. Rather, we need to provide access to further education (i.e., college completion) for the many working class and minority children who are now excluded from it so they can have a full opportunity to compete for the jobs that require such an education.
Derek Neal, NBER: The Design of Performance Pay in Education. First, it is difficult to use one assessment system to create both educator performance metrics and measures of student achievement. To mitigate incentives for coaching, incentive systems should employ assessments that vary in both format and item content. Separate no-stakes assessments provide more reliable information about student achievement because they create no incentives for educators to take hidden actions that contaminate student test scores. Second, relative performance schemes are rare in education even though they are more difficult to manipulate than systems built around psychometric or subjective performance standards. Third, assessment-based incentive schemes are mechanisms that complement rather than substitute for systems that promote parental choice, e.g. vouchers and charter schools.
Max Chafkin, Inc: In Norway, Start-ups Say Ja to Socialism. We venture to the very heart of the hell that is Scandinavian socialism—and find out that it’s not so bad. Pricey, yes, but a good place to start and run a company. What exactly does that suggest about the link between taxes and entrepreneurship.
Ian Ayres, Freakonomics Blog: The Economics of Tiger Parenting. When my daughter Anna was 7, she told me she desperately wanted a dog. I looked her in the eye and said, “You can have a dog if you publish an article in an academic peer-reviewed journal.” I wasn’t kidding. I really, really didn’t want a dog because I thought it would disrupt our family routine, which included large dollops of what Amy Chua’s controversial new book, Battle Hymn of the Tiger Mother, refers to as Tiger parenting. So, for the next year-and-a-half, I worked hard with Anna and her brother, Henry — first in teaching them statistics and then in co-authoring a study based on survey data the kids collected concerning perceptions about the variability of women’s height. As I write this, our beloved family dog, Cheby (who is named for the mathematician that discovered Chebychev’s inequality), is lying at my feet.
Don Fullerton, NBER: Six Distributional Effects of Environmental Policy. While prior literature has identified various effects of environmental policy, this note uses the example of a proposed carbon permit system to illustrate and discuss six different types of distributional effects: (1) higher prices of carbon-intensive products, (2) changes in relative returns to factors like labor, capital, and resources, (3) allocation of scarcity rents from a restricted number of permits, (4) distribution of the benefits from improvements in environmental quality, (5) temporary effects during the transition, and (6) capitalization of all those effects into prices of land, corporate stock, or house values. The note also discusses whether all six effects could be regressive, that is, whether carbon policy could place disproportionate burden on the poor.
