JANUARY 28 2011

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.

Laurent Gobillon, Thierry Magnac, Harris Selod, VoxEU: Did French enterprise zones fail poor areas? It’s mainly about jobs. The employment effects of enterprise zones are widely studied but remain uncertain. This column examines the impact of recent tax incentives designed to attract businesses to poor residential areas around Paris. It finds that while unemployment decreases, the costs of the programme leave its efficacy open to interpretation.

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.

David Berreby, Big Think Blog: Science Closes In On the Reason Rich People Are Jerks. Dan O'Brien was researching cooperative behavior in a local primate species called the Binghamton, N.Y. high-school student. The higher a neighborhood's median income, O'Brien found, the less cooperative were its teen-agers.