FEBRUARY 25

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.