FEBRUARY 4 2011

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.

Guido Schwerdt, Dolores Messer, Ludger Woessmann, Stefan Wolter: Effects of Adult Education Vouchers on the Labor Market: Evidence from a Randomized Field Experiment. This paper evaluates the effects of a large-scale randomized field experiment issuing vouchers for adult education in Switzerland. We find no significant average effects of voucher-induced adult education on earnings, employment, and subsequent education one year after treatment. But effects are heterogeneous: Low- education individuals are most likely to profit from adult education, but least likely to use the voucher. The findings cast doubt on the effectiveness of existing untargeted voucher programs in promoting labor market outcomes through adult education.

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.

Niclas Berggren, Henrik Jordahl, Panu Poutvaara, CESifo; The right look: Conservative politicians look better and their voters reward it. Previous research has established that good-looking political candidates win more votes. We extend this line of research by examining differences between parties on the right and on the left. Our study combines data on personal votes in real elections with a web survey in which 2,513 non-Finnish respondents evaluated 1,357 Finnish political candidates. We find that politicians on the right are better looking and have a larger beauty premium in municipal elections.