AUGUST 12 2011

Paul Krugman, NYT: Credibility, Chutzpah And Debt. To understand the furor over the decision by Standard & Poor’s, the rating agency, to downgrade U.S. government debt, you have to hold in your mind two seemingly (but not actually) contradictory ideas. The first is that America is indeed no longer the stable, reliable country it once was. The second is that S.& P. itself has even lower credibility; it’s the last place anyone should turn for judgments about our nation’s prospects. If there’s a single word that best describes the rating agency’s decision to downgrade America, it’s chutzpah — traditionally defined by the example of the young man who kills his parents, then pleads for mercy because he’s an orphan.

Menzie D. Chinn And Jeffry A. Frieden, NYT: The Downgrading of a Debtor Nation. The Treasury can cry foul all it wants, but the decision by Standard & Poor’s to downgrade America’s credit rating by one notch last Friday, and the subsequent plunge in the stock market, are serious symptoms of a loss of confidence — an assessment that is fundamentally political, not economic. There is little question about the technical ability of America to make good on its debts — but there are grave questions about the political system’s ability to resolve our nation’s financial problems.

Kenneth Rogoff, Spiegel: Some European Countries Are Fundamentally Bankrupt. It is not easy for a politician to do what needs to be done if it is unpopular. Greece needs a massive restructuring plan, Portugal as well, probably Ireland, too. Ultimately, Germany has to guarantee all the central government debt in Spain and Italy, and that will be very painful. If Italy and Spain are to be kept in the euro area, then unfortunately the Germans will have to acknowledge that Europe is going to be a transfer union for some time to come.

Nicholas Bloom, VoxEU: The uncertainty shock from the debt disaster will cause a double-dip recession. The potentially explosive combination of Eurozone debt contagion, vulnerable banking systems, and European and American political paralysis has pushed stock-market volatility to levels nearly as bad as the days following the 11 September 2001 terrorist attacks. Nobody knows what happens next. This column reviews research on 16 previous shocks and concludes that today’s uncertainty shock will create a short, sharp contraction in late 2011 of about 1% with a rebound coming in spring 2012.

Jeffrey A. Frankel, NBER:  Over-optimism in Forecasts by Official Budget Agencies and Its Implications.   The paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries.  In general, the forecasts are found:  (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons. This over-optimism in official forecasts can help explain excessive budget deficits, especially the failure to run surpluses during periods of high output:  if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary. Many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or, better yet, the structural deficit.  But we also find:  (iv) countries subject to a budget rule, in the form of euroland's Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP. 

Christophe Chamley, Bloomberg: The Default More Than 400 Years Ago Leaves Scars. House Republicans, many of them opposed to raising the federal government’s borrowing ceiling, might take a lesson from the first sovereign debt crisis: Spain’s default in 1575. What events more than 400 years ago suggest is that it’s easy to ignite a dangerous chain reaction in financial and credit markets and inflict lasting damage on the economy. Republicans today are playing the part of the cities of Castile, whose delegates to the Cortes (the Spanish parliament) opposed raising taxes to service King Philip II’s long-term bonds.

Denise DiPasquale, Edward L. Glaeser, Chicago/Harvard: The Los Angeles Riot and the Economics of Urban Unrest. We examine the causes of rioting using international data, evidence from the race riots of the 1960s in the U.S., and Census data on Los Angeles, 1990. We find some support for the notions that the opportunity cost of time and the potential costs of punishment influence the incidence and intensity of riots. Beyond these individual costs and benefits, community structure matters. In our results, ethnic diversity seems a significant determinant of rioting, while we find little evidence that poverty in the community matters.

Jacopo Ponticelli, Hans-Joachim Voth, CEPR: Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009. The results show a clear

positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyse interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures. Growing media penetration does not lead to a stronger effect of cut-backs on the level of unrest.

Chris Dillow, Stumbling and Mumbling Blog:  Riots, sell-offs & cascades. There’s a parallel between the riots and the stock market sell-off. Both are examples of how social behaviour can shift from stability to instability. There’s always some doom-monger trader who’s keen to sell.  Usually, though, his selling readily finds a buyer, so prices don’t move much. Analogously, there’s always some nutter who wants to rob and trash places. But normally, his friends don’t go along with him, so he suppresses his tendencies. In other words, when behaviour is uncorrelated - when sellers find buyers or when the lawless are surrounded by the lawful - we get stability. What we’re seeing now, though, is a higher correlation of behaviour. When sellers have tried to sell, they’ve run into other sellers - so prices have tanked low enough to lure out the buyers. And the lawless have found themselves accompanied by other criminals, so their behaviour has been encouraged rather than suppressed. But what explains this? A big part of the story must be information cascades. These happen when people base their behaviour not upon their private information, but rather upon what others are doing.

Mark A. Wynne, Dallas Fed: Will China Ever Become as Rich as the U.S.? Many countries have expanded at a rapid pace for long periods. But as they get richer, their growth rates tend to slow and they can’t attain the U.S. standard of living. For most of the 20th century, the U.S. defined the technological frontier to which other countries could aspire. That remains the case today, and absent any major policy errors in the U.S., it should continue. In 1820, China was responsible for about one-third of global GDP, while the U.S. accounted for just 1.8 percent. So, the likely shift in relative size in the next decade is in some ways simply a return to what we previously experienced.6 Even then, U.S. living standards were twice those of China. If China were to become the first country to completely close the gap with the U.S., it would mark a significant break with development patterns observed over the past half-century.

JUNE 24 2011

ECB: Inflation in the Euro Area and the United States. Why do inflation rates in the United States and the euro area react differently to similar shocks. While exact numerical results such as those shown in Charts D and E are model-specific, a general conclusion that can be derived from these kind of exercises is that US inflation reacts more strongly to movements in oil prices and the output gap than euro area inflation does. At the same time, the exercises confirm the higher persistence of inflation in the euro area and underline the importance for monetary policy to anchor inflation expectations in a manner which is compatible with price stability over the medium term.

Menzie Chinn, Barry Eichengreen, and Hiro Ito, University of Wisconsin: A forensic analysis of global imbalances. Changes in the budget balance appear to be an important factor affecting current account balances for advanced current account deficit countries such as the United States and the United Kingdom. The effect of the “saving glut variables” on current account balances has been relatively stable for emerging market countries, suggesting the prominence of those factors is not a particularly recent phenomenon. We also find the 2006-08 period to be the structural break for emerging market countries, and to a lesser extent, for industrialized countries. When we investigate what can explain the purportedly anomalous behavior in the current account balances during the 2006-08 period, we find that stock market performance and real housing appreciation explain the unusual current account balances in the pre-crisis period; fiscal procyclicality and monetary policy stance do not seem to matter as much. Extrapolating to the future, we find that for the U.S., fiscal consolidation alone cannot induce significant current account deficit reduction. For China, financial development may help shrink its current account surplus, but only when it is coupled with financial liberalization. These findings suggest that unless countries implement substantial policy changes, the global imbalances are unlikely to disappear.

Michael Greenstone, Adam Looney, The Hamilton Project: A Strategy for America’s Energy Future: Illuminating Energy’s Full Costs. Our energy choices are based on the visible costs that appear on utility bills and at the gas pump. This system masks the social costs arising from those energy choices, including shorter lives, higher health care expenses, a changing climate, and weakened national security. As a result, we pay unnecessarily high costs for energy.

Björn Bartling, Ernst Fehr, Daniel Schunk, IZA: Health Effects on Children's Willingness to Compete. The formation of human capital is important for a society’s welfare and economic success. Recent literature shows that child health can provide an important explanation for disparities in children's human capital development across different socio-economic groups. While this literature focuses on cognitive skills as determinants of human capital, it neglects non-cognitive skills. We analyze data from economic experiments with preschoolers and their mothers to investigate whether child health can explain developmental gaps in children's non-cognitive skills. Our measure for children's non-cognitive skills is their willingness to compete with others. Our findings suggest that health problems are negatively related to children's willingness to compete and that the effect of health on competitiveness differs with socio-economic background. Health has a strongly negative effect in our sub-sample with low socioeconomic background, whereas there is no effect in our sub-sample with ! high socio-economic background.

Jennifer Sloan Mccombs et al, RAND: Making Summer Count. The loss of knowledge and educational skills during the summer months is cumulative over the course of a student's career and further widens the achievement gap between low- and upper-income students, according to a RAND Corporation study issued today. The study confirms that students who attend summer programs can disrupt the educational loss and do better in school than peers who do not attend the same programs.

Sheldon H. Jacobson, Douglas M. King, Rong Yuan, University of Illinois: A note on the relationship between obesity and driving. Vehicle travel and obesity rates in the United States have surged in recent decades. This paper contributes to the mounting evidence of a link between them by drawing attention to a very close relationship between trends in miles driven per licensed driver and adult obesity rates six years later. It also presents evidence on why the effect might be expected to be lagged by six years. A simple model is produced, which predicts reductions in obesity rates over the next few years. If these reductions come about, the model will be seen to offer a powerful insight into the relationship between driving and obesity. If the relationship is more than coincidental, it has implications for transport policy and supports the development of a multi-pronged, interdisciplinary approach to tackle increased driving and obesity.

David Leonhardt, NYT Blog: A Look at How Many Calories $1 Will Buy. One dollar’s worth of Coke has 447 calories, while $1 of iceberg lettuce has just 16.5. To look at it another way, you would have to spend about $5 to buy 2,000 calories at McDonald’s, $19 to buy 2,000 calories worth of canned tuna and $60 to buy 2,000 calories worth of lettuce. These gaps have become larger over time, as this chart makes clear:

Melissa Bateson et al, Current Biology: Agitated Honeybees Exhibit Pessimistic Cognitive Biases. We ask whether honeybees display a pessimistic cognitive bias when they are subjected to an anxiety-like state induced by vigorous shaking designed to simulate a predatory attack. We show for the first time that agitated bees are more likely to classify ambiguous stimuli as predicting punishment. Shaken bees also have lower levels of hemolymph dopamine, octopamine, and serotonin. In demonstrating state-dependent modulation of categorization in bees, and thereby a cognitive component of emotion, we show that the bees’ response to a negatively valenced event has more in common with that of vertebrates than previously thought. This finding reinforces the use of cognitive bias as a measure of negative emotional states across species and suggests that honeybees could be regarded as exhibiting emotions.

JUNE 17 2011

Robert J. Shiller, NYT: The Sickness Beneath the Slump. A half-century ago, there was a lively discussion among economists about the dynamics of price expectations. For example, Alain C. Enthoven, then of the Massachusetts Institute of Technology, and Kenneth J. Arrow of Stanford wrote in 1956 that expectations that extrapolate past price increases can produce economic instability. But that thinking was largely cast aside in the 1960s, when my profession embraced the theory that efficient markets formed by people holding rational expectations could explain virtually all economic activity. As a result, economists in recent decades have not developed expectations theory much further. That needs to be corrected in coming years. In the meantime, this failing helps explain why the current crisis was generally unpredicted, and why its future course is so poorly understood.

Bharat Trehan, San Francisco Fed: Household Inflation Expectations and the Price of Oil: It's Déjà Vu All Over Again. The University of Michigan survey of consumers shows that expected inflation has moved up noticeably over the past few months, raising concerns that we may be in for a period of rising inflation. However, the increase in expected inflation likely reflects the excess sensitivity of consumers to food and energy prices. Consistent with this hypothesis, household surveys have not forecast inflation well in recent years, a period of volatile food and energy prices.

Stéphane Dées, Pedro Soares Brinca, ECB: Consumer Confidence as a Predictor of Consumption Spending: Evidence for the United States and the Euro Area. For most academics and policy makers, the depth of the 2007-09 financial crisis, its longevity and its impacts on the real economy resulted from an erosion of confidence. This paper proposes to assess empirically the link between consumer sentiment and consumption expenditures for the United States and the euro area. It shows under which circumstances confidence indicators can be a good predictor of household consumption even after controlling for information in economic fundamentals. Overall, the results show that the consumer confidence index can be in certain circumstances a good predictor of consumption. In particular, out-of-sample evidence shows that the contribution of confidence in explaining consumption expenditures increases when household survey indicators feature large changes, so that confidence indicators can have some increasing predictive power during such episodes. Moreover, there is some evidence of a “confidence channel” in the international transmission of shocks, as U.S. confidence indices lead consumer sentiment in the euro area.

Carlos Carvalho, Stefano Eusepi, and Christian Grisse, NY Fed: Did Unconventional Policy Responses to the Crisis Work? Evidence from a Cross-Country Analysis. The 2008-09 global recession produced a significant loss of output and a deflationary scare in many countries. The depth, scale, and duration of the crisis triggered monetary and fiscal policy actions that were “unconventional” in terms of their size and scope, leading to an ongoing debate over the role that these policy responses played in the stabilization process. How and to what extent were these policies effective? In this post, we examine cross-country experiences and find evidence consistent with the idea that the policies contributed to the stabilization process through their effect on expectations of output and inflation.

James Surowiecki, New Yorker: A Billion Prices Now. A new venture called the Billion Prices Project may help change. The B.P.P., which was designed by the M.I.T. economists Alberto Cavallo and Roberto Rigobon, gathers price data not via survey but, rather, by continuously scouring the Web for prices of online goods around the world. (In the U.S., it collects more than half a million prices daily—five times the number that the government looks at.) Using this information, Cavallo and Rigobon have succeeded in building what amounts to the first real-time inflation index. The B.P.P. tells us what’s happening now, not what was happening a month ago. For instance, after Lehman Brothers went under, in September, 2008, the project’s data showed that businesses started cutting prices almost immediately, which suggested that demand had collapsed. The government’s numbers, by contrast, didn’t show this deflationary pressure until that November.

David H. Autor, Alan Manning, Christopher L. Smith: The Contribution of the Minimum Wage to U.S. Wage. Inequality over Three Decades: A Reassessment. We find that the minimum wage reduces inequality in the lower tail of the wage distribution (the 50/10 wage ratio), but the impacts are typically less than half as large as those reported in the literature and are almost negligible for males. Nevertheless, the estimated effects extend to wage percentiles where the minimum is nominally non-binding, implying spillovers. We structurally estimate these spillovers and show that their relative importance grows as the nominal minimum wage becomes less binding. Subsequent analysis underscores, however, that spillovers and measurement error (absent spillovers) have similar implications for the effect of the minimum on the shape of the lower tail of the measured wage distribution. With available precision, we cannot reject the hypothesis that estimated spillovers to non-binding percentiles are due to reporting artifacts. Accepting this null, the implied effect of the minimum wage on the actual wage distribution is smaller than the effect of the minimum wage on the measured wage distribution.

Jean-Pierre Chauffour, World Bank: Freedom, Entitlement, and the Path to Development. Reviewing the economic performance of more than 100 countries over the past 30 years, new empirical evidence tends to support the idea that economic freedom and civil and political liberties are the root causes of why certain countries achieve and sustain better economic outcomes. In contrast, entitlement rights do not seem to have any significant effects on long-term per capita income except for a possible negative effect. These results tend to support earlier findings that, beyond core functions of government responsibility (including the protection of liberty itself), the expansion of the state to provide for various entitlements (including so-called economic, social, and cultural rights) may not make people richer in the long run; it may even make them poorer.

Robert Johnson, Guillermo Noguera, VoxEU: The value-added content of trade. Roughly two-thirds of international trade is in intermediate goods. As a result, measures of trade flows that tally the gross value of goods at each border crossing lead to a distorted view of world trade. Using a value-added measure, this column finds that the controversial US-China imbalance is in fact around 40% smaller than many people think.

Jörn-Steffen Pischke, IZA: Money and Happiness: Evidence from the Industry Wage Structure. There is a well-established positive correlation between life-satisfaction measures and income in individual level cross-sectional data. This paper attempts to provide some evidence on whether this correlation reflects causality running from money to happiness. I use industry wage differentials as instruments for income. This is based on the idea that at least part of these differentials are due to rents, and part of the pattern of industry affiliations of individuals is random. To probe the validity of these assumptions, I compare estimates for life satisfaction with those for job satisfaction, present fixed effects estimates, and present estimates for married women using their husbands' industry as the instrument. All these specifications paint a fairly uniform picture across three different data sets. IV estimates are similar to the OLS estimates suggesting that most of the association of income and well-being is causal.

Sumit Agarwal et al,  Boston College: What is the age of reason? Most U.S. households have accumulated significant assets by retirement, but these assets are often accompanied by significant liabilities. This brief raises the question of whether older households have the ability to manage their increasingly large and complex balance sheets. The first section of this brief documents the decline in cognitive function that occurs as individuals age. The second section describes new evidence from different financial transactions indicating that middle-age adults make fewer financial mistakes than younger or older adults. The third section explores possible policy responses to help older individuals more effectively manage their finances. The final section concludes that the best way forward is not yet clear, stressing that further research is needed on several key questions.

Ralf R Meisenzahl, Joel Mokyr, VoxEU: Is education policy innovation policy? The industrial revolution is, for many, the start of modern economic growth. But what started the industrial revolution? The consensus view is that scarce labour stimulated labour-saving inventions and induced innovation. This column begs to differ. It argues that it was the technical competence of the British mechanical elite that allowed great ideas to turn into economic realities.

Tim Harford, Independence:  In praise of pragmatism. What's to dislike about pragmatism? Nothing. But here's the problem: we pay lip service to the concept, but in practice we dislike pragmatism. We don't vote for genuinely pragmatic politicians. We don't invest in pragmatic businesses. The truth is that making pragmatism work requires effort, embarrassment, and compromise. We don't seem to be willing to pay what it costs. Because the pragmatist tries to take each situation on its own merits and figure out a sensible way forward, pragmatism tends to look hesitant, messy, and prone to error. The ideologue, whether a left winger or a right winger, a corporate visionary or a pub philosopher, looks decisive in comparison. Ideology always offers a neat answer, whether through reference to Karl Marx, Milton Friedman or the latest corporate mission statement.

JUNE 10 2011

Kash, Street Light Blog: Betting On the PIGs. The BIS today released some very interesting new data on the exposure of various parties to debt issued by the PIGs (Portugal, Ireland, and Greece). Approximately 30% of total potential exposures to debt from the PIGs are covered by default insurance. If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts. US and European financial institutions are likely to have very different incentives as negotiations regarding debt restructuring and reprofiling proceed. US banks and insurance companies are surely delighted with the "soft restructuring" that is currently being discussed. Why have American firms been so willing to sell default insurance to the Europeans, though they have not bought much PIG debt? Could the Europeans know something that the Americans don't about the likelihood or timing of eventual default?

Kenneth Rogoff, Project Syndicate: The Euro’s PIG-Headed Masters. Europe is in constitutional crisis: no one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis. The endgame to any crisis is difficult to predict. Perhaps a wholesale collapse of the euro exchange rate will be enough, triggering an export boom. Perhaps Europe will just boom anyway. Indeed, it is hard to see how the single currency can survive much longer without a decisive move towards a far stronger fiscal union.

G.I. The Economist Blog: Read this speech, then sell the dollar. In a nutshell, Mr Dudley tells us that aggressively easy monetary policy is essential to both the cyclical recovery and to a structural rebalancing of the American economy away from consumption and toward exports. This process will go more smoothly for everyone if emerging market economies (EMEs) cooperate and let their exchange rates appreciate (i.e. let the dollar fall), but absent such cooperation, don’t expect the Fed to change course.

Simon Kennedy; Bloomberg: Global Economic Rebound Weakens on Quake, Oil Price, European Debt Crisis. Goldman Sachs economists led by Dominic Wilson and Jan Hatzius said in a May 25 report they now expect “less upside in equities” with their colleagues reducing price targets for most of the major regions even though they still anticipate another 10 percent gain in developed markets this year. The world economy is losing strength halfway through the year as high oil prices and fallout from Japan’s natural disaster and Europe’s debt woes take their toll. Goldman Sachs Group Inc. now expects global economic growth of 4.3 percent in 2011, compared with its 4.8 percent estimate in mid-April, while UBS AG has cut its projection to 3.6 percent from 3.9 percent in January. Downside risks also include a shift to tighter monetary policy in emerging markets.

Paul Krugman, NYT: Against Learned Helplessness. Unemployment is a terrible scourge across much of the Western world. Almost 14 million Americans are jobless, and millions more are stuck with part-time work or jobs that fail to use their skills. Some European countries have it even worse: 21 percent of Spanish workers are unemployed. As I see it, policy makers are sinking into a condition of learned helplessness on the jobs issue: the more they fail to do anything about the problem, the more they convince themselves that there’s nothing they could do. And those of us who know better should be doing all we can to break that vicious circle.

Jeremy J. Nalewaik, Fed: The Income- and Expenditure-Side Estimates of U.S. Output Growth. The two official measures of U.S. economic output, gross domestic product (GDP) and gross domestic income (GDI), have shown markedly different business cycle fluctuations over the past 25 years, with GDI showing a more pronounced cycle than GDP. This paper reports a broad range of results that indicate that GDI better reflects the business cycle fluctuations in true output growth. Results on revisions to the estimates, and correlations with numerous other cyclically sensitive variables, are particularly favourable to GDI. The most recent GDI data show the 2007–09 downturn to have been considerably worse than is reflected in GDP.

David Leonhardt, NYT: The German Example: By The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy. Yet it has also been more ruthless about cutting wasteful parts of government. The results are intriguing. After performing worse than the American economy for years, the Germany economy has grown faster since the middle of last decade. (It did better than our economy before the crisis and has endured the crisis about equally). Just as important, most Germans have fared much better than most Americans, because the bounty of their growth has not been concentrated among a small slice of the affluent.

The Economist: The Swedish economy. North star: The results have been spectacular. After long being a case study in jobless growth (except in the bloated public sector), Sweden has become a big creator of private-sector jobs. The government has narrowed the “tax wedge” that deters employment and whittled away at sickness benefits: Sweden no longer stands out for welfare excesses. The retirement age has risen to 67. Inheritance and wealth taxes have gone. Mr Borg and Mr Reinfeldt believe firmly in ownership as a driver of prosperity.

Charles I. Jones, NBER:  Life and Growth. Some technologies save lives -- new vaccines, new surgical techniques, safer highways.  Others threaten lives -- pollution, nuclear accidents, global warming, the rapid global transmission of disease, and bioengineered viruses.  How is growth theory altered when technologies involve life and death instead of just higher consumption? This paper shows that taking life into account has first-order consequences.  Under standard preferences, the value of life may rise faster than consumption, leading society to value safety over consumption growth.  As a result, the optimal rate of consumption growth may be substantially lower than what is feasible, in some cases falling all the way to zero.

Torben Andersen, IZA: A Flexicurity Labour Market in the Great Recession: The Case of Denmark. Flexicurity labour markets are characterised by flexible hiring/firing rules, generous social safety net, and active labour market policies. How can such labour markets cope with the consequences of the Great Recession? Larger labour shedding is to be expected and this strains the social safety net and increases the demands on active labour market policies. This paper takes a closer look at the labour market consequences of the crisis for Denmark. It is found that employment adjustment is not particularly large in international comparison, although it has more weight on the extensive (number of employees) than the intensive (hours) margin. The level of job creation remains high, although job creation is pro-cyclical and job-separation counter-cyclical. As a consequence most unemployment spells remain short. This is critical since a persistent increase in unemployment will affect the financial balance of the model severely. Comparative evidence does not, however, indicate that flexicurity markets are more prone to persistence. Crucial for this is the design of the social safety net and in particular the active labour market policy. However, the larger inflow into activation raises questions concerning the possibility of maintaining the efficiency of the system.

Katrine V. Loken, Kjell Erik Lommerud, Shelly Lundberg, IZA: Your Place or Mine? On the Residence Choice of Young Couples in Norway. Surprisingly, married men live significantly closer to their own parents than do married women, even if they have children, and this difference cannot be explained by differences in observed characteristics. The principal source of excess female distance from parents in this population is the relatively low mobility of men without a college degree, particularly in rural areas. Despite evidence that intergenerational resource flows, such as childcare and eldercare, are particularly important between women and their parents, the family connections of husbands appear to dominate the location decisions of less-educated married couples.

Michael Baker, Kevin S. Milligan  Maternity Leave and Children's Cognitive and Behavioral Development. We investigate the impact of maternity leave on the cognitive and behavioral development of children at ages 4 and 5.  The impact is identified by legislated increases in the duration of maternity leave in Canada, which significantly increased the amount of maternal care children received in the second half of their first year. We carefully document that other observable inputs to child development do not vary across cohorts of children exposed to different maternity leave regimes. Our results indicate that these changes had no positive effect on indices of children's cognitive and behavioural development.  We uncover a small negative impact on PPVT and Who Am I? scores, which suggests the timing of the mother/child separation due to the mother's return to work may be important.

Devin Pope, Nicola Lacetera, Justin Sydnor: Limited attention costs: Sometimes driving a mile costs $200. People like to take shortcuts and this affects how we make decisions. Looking at auctions of more than 22 million used cars in the US, this column finds that buyers will often only pay attention to the first few digits of mileage. So if you have driven your car 30,000 miles, you might have to sell it for $200 less than if you had driven in 29,999 miles.

Ingvild Almås, Tarjei Havnes, Magne Mogstad, NHH: Baby Booming Inequality? Demographic Change and Earnings Inequality in Norway, 1967-2000. In this paper, we demonstrate how age-adjusted inequality measures can be used to evaluate whether changes in inequality over time are due to changes in the age-structure. To this end, we use administrative data on earnings for every male Norwegian over the period 1967-2000. We find that the substantial rise in earnings inequality over the 1980s and into the early 1990s, is to some extent driven by the fact that the large baby boom cohorts are approaching the peak of the age-earnings profile. We further demonstrate that the impact of age-adjustments on the trend in inequality during the period 1993-2000 is highly sensitive to the method used: While the most widely used age-adjusted inequality measure indicates little change in inequality over this period, a new and improved age-adjusted measure suggest a decline in inequality.

OECD: Create Your Better Life Index. There is more to life than the cold numbers of GDP and economic statistics – This Index allows you to compare well-being across countries, based on 11 topics the OECD has identified as essential, in the areas of material living conditions and quality of life

Gebhard Kirchgaessner, CESifo: Econometric Estimates of Deterrence of the Death Penalty: Facts or Ideology? In 2007, the Wall Street Journal published an article claiming that each execution saves more than 70 lives. This example is used to show how easy it is, using simple or advanced econometric techniques, to produce results that do or do not support the deterrence hypothesis. Moreover, we also point to some puzzles which have not been satisfactorily solved so far. We then present a critical survey of the papers published in the last ten years. It is shown how simple changes can produce quite different results using the same data. Finally, we draw some conclusions about the usefulness of statistical arguments in policy debates, but also on the moral questions involved in this particular debate.

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MAY 27 2011

Gregory Mankiw, Matthew C. Weinzierl, NBER: An Exploration of Optimal Stabilization Policy. This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand.  The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short run and flexible in the long run. Policy is evaluated by how well it raises the welfare of the representative household. While the model has Keynesian features, its policy prescriptions differ significantly from textbook Keynesian analysis. Moreover, the model suggests that the commonly used "bang for the buck" calculations are potentially misleading guides for the welfare effects of alternative fiscal policies.

Christina D. Romer, NYT: Needed: Plain Talk About the Dollar. Strangely, every politician seems to understand that [in the current situation] it would be desirable for the dollar to weaken against ... the Chinese renminbi. ... The United States would export more and grow faster... But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more...To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation.

Vidhi Chhaochharia, George M. Korniotis, Alok Kumar, University of Miami: Prozac for Depressed States? Effect of Mood on Local Economic Recessions. We consider two sets of exogenous proxies for optimism that are unrelated to the economic environment: (i) weather (average temperature and cloud cover) and (ii) sports and political optimism. We show that economic recessions are weaker, expansions are stronger, and the economic recovery is faster in U.S. states where local individuals are more optimistic. Further, local optimism has a stronger impact on state-level business cycles of smaller states and regions with low levels of risk sharing. In contrast, the incremental effects of local optimism are weaker in states where people are younger, more educated and sophisticated, and socially more connected. States with larger concentration of minority and urban population also exhibit lower sensitivity to variations in mood and optimism. Alternative explanations based on state's industrial composition, tax environment, migration, seasonal affective disorder (SAD), oil shocks, and direct economic impact of weather cannot explain these findings.

Daniel Gros, VoxEU: External versus domestic debt in the euro crisis. As EU leaders muddle through the Eurozone crisis, the debate about its root causes continues. The debate is important if we are to understand how to prevent future crises. This column argues that the focus on total public debt is misleading – external debt is the key to the turmoil in European economies.

Claire Y. C.Liang, R. David McLean, Mengxin Zhao, University of Alberta: Creative Destruction and Finance: Evidence from the Last Half Century. The rate of creative destruction increases in the U.S. during the period 1960-2009. We document statistically significant, increasing trends in big business turnover, changes in market share, the difference in growth rates between firms that gain and lose market share, and other measures that show an increasingly dynamic economy. The increase in economic dynamism is driven by increasingly fast-growing firms that exhibit increasingly high growths in total factor productivity, value-added, and profit margins, and have increasingly high R&D spending and patent grants. The type of firm that generates this creative destruction changes during the sample period. Creators are increasingly younger and smaller, and increasingly issue shares and debt; the average creator would have run out of cash by year-end had it not raised external capital, and this financial dependence increases throughout the sample period.

Lane Kenworthy, Consider the Evidence Blog: Is heavy taxation bad for the economy? Half a century ago, in 1960, taxes totaled about a quarter of GDP in Denmark, Sweden, and the United States. The tax take then began to rise in Denmark and Sweden, reaching half of GDP by the mid-1980s, where it has remained. In America it has barely budged, hovering between 25% and 30% of GDP throughout the past five decades. At what point does the harmful impact of taxes on the economy kick in? And how large is it? The Danish and Swedish experiences over the past generation pose a challenge for those who believe the answers to these two questions are “somewhere below 50% of GDP” and “large.” It’s a challenge that in my view has yet to be met.

Jose Maria Millan et al, University of Huelva: The Value of an Educated Population for an Individual's Entrepreneurship Success. The performance of an entrepreneur is not only affected positively by her own education level but in addition, also by the education level of the population. We test this proposition using an eight years (1994-2001) panel of labor market participants in the EU-15 countries from which we select individuals who have been observed as entrepreneurs. We find strong support for a positive relationship between enrolment rates in tertiary education in country j and year t and several measures of the performance of individual entrepreneurs in that same country and year, including survival and the probability that an entrepreneur starts employing personnel and maintains as an employer for a longer period of time. An implication of our novel finding is that entrepreneurship and higher education policies should be considered in tandem with each other.

James Banks, Richard Blundell, Antoine Bozio, Carl Emmerson, NBER:  Disability, Health and Retirement in the United Kingdom. General economic conditions seem to have been important driving forces during the entire period.  In contrast changes in health do not seem to provide convincing explanations for these trends:  mortality has been falling over the period without any apparent link to the share of the population reporting ill health or disability or to the number claiming benefits. We also find evidence that recent reforms have had some impact.  The halting of the previous growth in the rate of in-flow onto disability benefits in the mid-1990s coincided with the implementation of a major reform. Evidence from the pilots of the Pathways-to-Work programme in 2003-2005 suggests that those moving onto disability benefits moved off these benefits faster than they would otherwise have done as a direct result of the programme.

Yonatan Ben-Shalom, Robert A. Moffitt, John Karl Scholz, NBER: An Assessment of the Effectiveness of Anti-Poverty Programs in the United States. The benefit system in the U.S. has a major impact on poverty rates, reducing the percent poor in 2004 from 29 percent to 13.5 percent, estimates which are robust to different measures of the poverty line. We find that, while there are significant behavioral side effects of many programs, their aggregate impact is very small and does not affect the magnitude of the aggregate poverty impact of the system. The system reduces poverty the most for the disabled and the elderly and least for several groups among the non-elderly and non-disabled. Over time, we find that expenditures have shifted toward the disabled and the elderly, and away from those with the lowest incomes and toward those with higher incomes, with the consequence that post-transfer rates of deep poverty for some groups have increased. We conclude that the U.S. benefit system is paternalistic and tilted toward the support of the employed and toward groups with special needs and perceived deservingness.

Joseph E. Stiglitz, Vanity Fair: Of the 1%, by the 1%, for the 1%. Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret. As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.

James M. Poterba, Steven F. Venti, David A. Wise, NBER: The Drawdown of Personal Retirement Assets. We find a relatively modest rate of withdrawals prior to the age at which households are required to take minimum required distributions. Only seven percent of PRA-owning households between the ages of 60 and 69 take annual distributions of more than ten percent of their PRA balance, and only 18 percent of PRA households in this age group make any withdrawals in a typical year. On average, households age 60 to 69 with PRA accounts withdraw only about two percent of their account balances each year, considerably less than the rate of return on account balances during our sample period. Even at older ages—after the required minimum distribution age--the percentage of balances withdrawn remains at about five percent.

David Leonhardt, NYT: Is Your Religion Your Financial Destiny? The economic differences among the country’s various religions are strikingly large, much larger than the differences among states and even larger than those among racial groups. The most affluent of the major religions — including secularism — is Reform Judaism. Sixty-seven percent of Reform Jewish households made more than $75,000 a year at the time the Pew Forum on Religion and Public Life collected the data, compared with only 31 percent of the population as a whole. Hindus were second, at 65 percent, and Conservative Jews were third, at 57 percent. On the other end are Pentecostals, Jehovah’s Witnesses and Baptists. In each case, 20 percent or fewer of followers made at least $75,000. Remarkably, the share of Baptist households making $40,000 or less is roughly the same as the share of Reform Jews making $100,000 or more. Overall, Protestants, who together are the country’s largest religious group, are poorer than average and poorer than Catholics. That stands in contrast to the long history, made famous by Max Weber, of Protestant nations generally being richer than Catholic nations. Many factors are behind the discrepancies among religions, but one stands out. The relationship between education and income is so strong that you can almost draw a line through the points on this graph. Social science rarely produces results this clean.

Nico Voigtländer, Hans-Joachim Voth, VoxEU: How anti-Semitism in interwar Germany was influenced by the medieval mass murder of Jews. Is violence a cultural trait passed from one generation to the next? This column examines an extreme case – anti-Semitism in Germany. It shows that towns that murdered their Jews during the Black Death (1348-1350) were also much more likely to commit violence or engage in anti-Semitic acts in interwar Germany, nearly 600 years later. This suggests racial hatred can persist over centuries.

MAY 20 2011

Viral Acharya et al, VoxEU: A race to the bottom: Understanding the US housing boom. At the centre of the global financial crisis was a housing boom and bust. A New York University team has produced an excellent book on the flaws in the design of US housing finance that opened the door for the mayhem that followed. This column, the first of a series of two, describes the race to the bottom that occurred among Fannie Mae, Freddie Mac, and the too-big-to-fail private financial institutions.

David Hauner, Jaewoo Lee, Hajime Takizawa, IMF: In Which Exchange Rate Models Do Forecasters Trust? The prominence of inflation points to the broad subscription to a version of purchasing power parity. The prominence of growth rates suggests the broad acceptance of the productivity-driven appreciation, either in terms of the classic Balassa-Samuelson effect or in terms of procyclical capital inflows. Other often-mentioned factors, including the current account balance, do not appear to play a common role in the exchange rate formation. These findings speak indirectly to the fundamental determinants of exchange rates. To the extent that market forecasters adhere to models or variables which have proven to help forecast exchange rates, inflation and GDP growth rates are time-tested drivers of exchange rate movements. They must have proven to have a robust explanatory power for explaining exchange rates, even though their marginal explanatory power must be highly limited in relation to shocks of all varieties that buffet exchange rates.

Jeremy J. Nalewaik, FED: Forecasting Recessions Using Stall Speeds. This paper presents evidence that the economic stall speed concept has some empirical content, and can be moderately useful in forecasting recessions. Specifically, output tends to transition to a slow-growth phase at the end of expansions before falling into a recession, and the paper designs Markov-switching models that behave in that way. While the switching models using output growth alone produce a considerable number of false positive recession signals, adding the slope of the yield curve, the percent change in housing starts, and the change in the unemployment rate to the model reduces false positives and improves recession forecasting. The switching model is particularly good at forecasting at long horizons, outperforming Blue Chip consensus forecasts.

Ruediger Fahlenbrach, Robert Prilmeier, Rene M. Stulz, NBER: This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance During the Recent Financial Crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis.  This effect is economically important.  In particular, it is economically as important as the leverage of banks before the start of the crisis.  The result cannot be attributed to banks having the same chief executive in both crises.  Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.

Titan Alon el al, San Francisco Fed: What Is the Value of Bank Output? Measures of the nominal value of loan services, especially mortgages, can be improved by using more accurate and consistent standards, such as risk-adjusted reference interest rates. Other challenges in measuring financial services output include calculating real lending services, and measuring real and nominal services to depositors (see Wang et al.). Ultimately, the goal is to develop measures of financial output that make it easier to study the impact of the financial sector on real economic outcomes.

Johan Almenberg, Artashes Karapetyan, NB: Mental accounting in the housing market.  We report evidence that salience may have economically significant effects on homeowners' borrowing behavior, through a bias in favour of less salient but more costly loans. We outline a simple model in which some consumers are biased. Under plausible assumptions, the bias may affect prices in equilibrium. Market data support the predictions of the model.

Jordan Rappaport, Kansas Fed: The Effectiveness of Homeownership in Building Household Wealth. These results suggest that either homeownership or renting and investing can be reasonable strategies for building household wealth. In other words, the conventional wisdom that homeownership is usually the better strategy is probably too strong. For many households in many years, renting and investing the saved cash flow has built more wealth than homeownership."

David N.F. Bell, David G. Blanchflower, IZA: Youth Unemployment in Europe and the United States. This paper focuses particularly on youth unemployment, why we should be concerned about it, why it is increasing again, how the present difficulties of young people entering the labour market differ from those of the past and what useful lessons have been learned that may guide future policy. We focus on Europe and USA, but introduce evidence from other countries where appropriate. Our analysis of the UK NCDS birth cohort data provides evidence supporting the notion that early adulthood unemployment creates long lasting scars which affect labour market outcomes much later in life. Our chosen variables are weekly wages and happiness. Our results show significant effects at age 50 from early adulthood unemployment. These affects are stronger than more recent unemployment experiences.

Lisa Joensson, Marten Palme, Ingemar Svensson, NBER: Disability Insurance, Population Health and Employment in Sweden. In this paper, we posed three main research questions. The first question was whether the development of disability insurance recipiency over the past decades can be explained by changes in the health status of the population. We found some support for this hypothesis. The analysis showed that the demographic groups with the least advantageous health development were the same groups with the least advantageous development in disability insurance recipiency. The second question was whether the changes in disability insurance recipiency can be explained by changes in the eligibility rules in the disability insurance program. For some of the changes in eligibility for older workers, we found evidence of an effect on disability insurance recipiency. The final question was to what extent the changes in eligibility rules for older workers affected employment and labor force participation. The answer is ambiguous.

Kash, The Street Light Blog: Thoughts on Europe, the US, and Fearing the Future. In general, I always felt like countries on both sides of the Atlantic were basically similarly advanced, with if anything a slight edge going to the US. Over the last year or two, however, my perception has changed. I've begun to get the distinct (albeit also purely subjective) feeling that Europeans are simply better off than Americans. That Western Europe is now more advanced than the US. What has caused this change in my perception? That's the question I'm asking myself today. I'm not entirely sure what the answer is, but let me throw out a few of the contrasts that are simmering in my mind: trains that run on time; clean and well-maintained private and public spaces; reliable wireless data services; state-of-the-art transportation facilities and infrastructure; lack of anxiety about health care costs; relative affordability of vacations abroad for average people; ambitious and far-sighted public works projects; efficient and modern cities (even when they contain many centuries-old buildings) that incorporate modern technologies and simply work.

James Cloyne, CESifo: What are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation. This paper estimates the effects of tax changes on the U.K. economy. Identification is achieved by isolating the ‘exogenous’ tax policy shocks in the post-war U.K. economy using a narrative strategy as in Romer and Romer (2010). The resulting tax changes are shown to be unforecastable on the basis of past macroeconomic data. I find that a 1 per cent cut in taxes stimulates GDP by 0.6 per cent on impact and by 2.5 per cent over three years. These findings are remarkably similar to the corresponding estimates for the United States. The results reinforce the view that tax changes do indeed have powerful, persistent and significant effects on the economy. Finally, ‘exogenous’ tax changes are shown to have contributed to major episodes in the U.K. business cycle.

Grover J. "Russ" Whitehurst, Matthew M. Chingos, Brookings: Class Size: What Research Says and What it Means for State Policy Education, K-12 Education. Despite there being a large literature on class-size effects on academic achievement, only a few studies are of high enough quality and sufficiently relevant to be given credence as a basis for legislative action. It appears that very large class-size reductions, on the order of magnitude of 7-10 fewer students per class, can have meaningful long-term effects on student achievement and perhaps on non-cognitive outcomes. The academic effects seem to be largest when introduced in the earliest grades, and for students from less advantaged family backgrounds.  They may also be largest in classrooms of teachers who are less well prepared and effective in the classroom.

William L. Davis, Bob Figgins, David Hedengren, Daniel B. Klein, EJV: Economics Professors’ Favorite Economic Thinkers, Journals, and Blogs (along with Party and Policy Views). First-place positions as favorite economist in their respective categories are Adam Smith (by far), John Maynard Keynes followed closely by Milton Friedman, Gary Becker, and Paul Krugman. For journals, the leaders are American Economic Review and Journal of Economic Perspectives. For blogs, the leaders are Greg Mankiw followed closely by Marginal Revolution (Tyler Cowen and Alex Tabarrok).

Tim Harford, New York Times Magazine: The Art of Economic Complexity. These diagrams are the early fruits of a new approach to the most important unsolved problem of the last century: how to make a rich country out of a poor one. Thanks to César A. Hidalgo of the M.I.T. Media Lab, we can now visualize the differences between national economies in new ways. Hidalgo is a statistical physicist fascinated by the structure of networks, and along with the Harvard economist Ricardo Hausmann, he has been developing tools designed to study not just economic wealth but also economic structure and sophistication. Hidalgo and Hausmann think of economies as collections of "capabilities" that can be combined in different ways like an Erector set to produce different products. Because these capabilities cannot be easily identified and observed, Hausmann and Hidalgo track the silhouettes that the capabilities cast upon trade statistics. If a product is a significant part of a country's exports, it offers evidence that the country has certain kinds of related capabilities.

Steven D. Levitt, Thomas J. Miles, NBER: The Role of Skill Versus Luck in Poker: Evidence from the World Series of Poker. In determining the legality of online poker - a multibillion dollar industry - courts have relied heavily on the issue of whether or not poker is a game of skill.  Using newly available data, we analyze that question by examining the performance in the 2010 World Series of Poker of a group of poker players identified as being highly skilled prior to the start of the events. Those players identified a priori as being highly skilled achieved an average return on investment of over 30 percent, compared to a -15 percent for all other players. This large gap in returns is strong evidence in support of the idea that poker is a game of skill.

MAY 13 2011

Menzie Chinn, Econbrowser: What Would Really Bring about a Dollar Dive? For certain, what would be key to causing a crash in the dollar's value would be a failure to raise the debt ceiling in a timely fashion. In almost any model I can think of, that would either cause a flight from US government debt, or -- even if we only go to the brink -- elevating the risk premium, and hence total interest payments, on US Treasury debt indefinitely. Thus, it's the height of irresponsibility to make unrealistic demands for deficit reduction based solely on spending cuts, thereby risking a crisis

Andrew G Haldane, BoE: The Short Long. First, there is statistically significant evidence of short-termism in the pricing of companies’ equities. This is true across all industrial sectors. Moreover, there is evidence of short-termism having increased over the recent past. Myopia is mounting. Second, estimates of short-termism are economically as well as statistically significant. Empirical evidence points to excess discounting of between 5% and 10% per year. To illustrate the impact of this on investment choice, consider the earlier project with an annual income stream of $10. Chart 6 shows the present value of those income streams under three counter-factual assumptions: rational discounting; myopic discounting – lower bound (5%); and myopic discounting – upper bound (10%). The cumulative impact is fairly dramatic. Ten-year ahead cash-flows under rational discounting are valued similarly to between six-year (lower bound) and four-year (upper bound) ahead cash-flows under myopic discounting. The long is shortened.

Geoffrey M.B. Tootell, Boston Fed: Do Commodity Price Spikes Cause Long-Term Inflation? Neither theory nor evidence supports the notion that commodity price changes necessarily affect the long-run inflation rate. Going forward, to determine whether the economy is in a situation like the 1970s or one like the post-1985 period, the response of wages to these commodity price increases should be monitored closely.

John V. Duca, John Muellbauer, Anthony Murphy, Dallas Fed: House Prices and Credit Constraints: Making Sense of the U.S. Experience. Most US house price models break down in the mid-2000's, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions - the cyclically adjusted loan-to-value ratio for first time buyers – into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.

Igor Lebrun, Esther Pérez, IMF: Real Unit Labor Costs Differentials in EMU: How Big, How Benign and How Reversible? Real unit labor costs (RULC) growth differentials between euro area members have persisted since EMU began and even widened out in the run-up to the crisis. This paper focuses on the causes underlying such dispersion. According to our empirical findings, persistent RULC growth differentials can be attributed to divergent evolutions in capital-output ratios, nominal effective exchange rates and country-specific institutional features, coupled with an increased sensitivity of RULC to fundamentals following the shift in the monetary regime. Because these RULC growth discrepancies in EMU partly result from heterogeneous structural characteristics, policy action seeking more homogenous regulation across the euro area can make a significant contribution to reduce them.

Jinzhu Chen et al, IMF: New evidence on cyclical and structural sources of unemployment. We provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors—real GDP changes (―Okun‘s Law‖), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.

Edward L. Glaeser, NYT Blog: The Role of Economics in an Imperfect World. Positive economics attempts to understand the world as it is; normative economics describes how the world should be. Most economists spend most of their time doing positive economics, but most economics columns advocate particular policies, which is implicitly normative economics.

David Leonhardt, NYT Blog: Using Economics to Help the World’s Poor. Ms. Duflo: Why aren’t parents revolting, one might wonder. Why are they not demanding that their children be taught at the appropriate level, instead of sitting through day after day of teaching that mean nothing to them? In part this is because they do not know how badly schools are doing: they are not in a position to evaluate what their children are learning, and no one tells them that they are not. In part it is because they have bought into the elite bias that plagues the entire system: parents often seem to believe that education is worth it only if the child can reach the highest level.

Gary Becker, Becker Posner Blog: Yes, the Earth Will Have Ample Resources for 10 Billion People. Given the sharp rise in food prices during this first decade of the 21st century, it would appear difficult to feed adequately a much larger and richer world population. Yet, unlike say the production of copper, no natural limits sharply curtail the amounts of food that can be produced. Food output will expand with a growth in the amount of land devoted to food production-currently agriculture takes a small fraction of the world’s arable land. Also, the world can invest much more in fertilizers and in improving food technology, so that greater output can be squeezed out of each acre used to grow corn, wheat, soy, dairy, meats, and other foods.

Ezra Klein, Washington Post Blog: Eight facts and three thoughts about Social Security. Most opinion elites — [Simpson-Bowles Deficit Commission Co-Chairman Alan] Simpson being one good example, and the U.S. Senate being another — show a very strong preference for working as long as possible. Most Americans show a very strong preference for retiring as early as possible. Elites who enjoy their jobs need to be very careful about generalizing their experience to people who don’t enjoy their jobs. More bluntly: Raising the retirement age is the worst of all possible options for reforming Social Security. It’s not only regressive, but it also falls most heavily on those with the worst jobs. Means-testing would be much better.

R.A. Free Exchange Blog: More on later retirement. I'm particularly concerned about the fact that Social Security is most important for lower income workers, whose life expectancy has increased the least. Since 1972, for instance, workers in the bottom half of the income spectrum have seen a rise in life expectancy at age 60 of just 2 years. In the top half, the gain has been 6 years. I agree that longer working lives would be very good for fiscal conditions, as they boost tax revenues while reducing pension costs. I suspect working lives will continue to increase, especially among richer groups more reliant on investment portfolios that were damaged by the financial crisis. This would be a particularly salutary occurence as far as governments are concerned, given that richer workers pay more in taxes, and given that the voluntary nature of delayed retirement suggests that the utility impact of more years working is benign relative to what one would see with a statutory increase in retirement ages.

Elisabeth Fevang, Simen Markussen, Knut Røed, IZA: The Sick Pay Trap. In most countries, employers are financially responsible for sick pay during an initial period of a worker's absence spell, after which the public insurance system covers the bill. Based on a quasi-natural experiment in Norway, where pay liability was removed for pregnancy-related absences, we show that firms' absence costs significantly affect employees' absence behavior. However, by restricting pay liability to the initial period of the absence spell, firms are discouraged from letting long-term sick workers back into work, since they then face the financial risk associated with subsequent relapses. We show that this disincentive effect is statistically and economically significant.

Tim Harford, The Undercover Economist: Failure: It’s everywhere. A study by Kathy Fogel, Randall Morck,and Bernard Yeung, found statistical evidence that economies with more churn in the corporate sector also had faster economic growth. The relationship even seems causal: churn today is correlated with fast economic growth tomorrow. The real benefit of this creative destruction, say Fogel and her colleagues, is not the appearance of “rising stars” but the disappearance of old, inefficient companies. Failure is not only common and unpredictable, it’s healthy. But if this is true, it makes nonsense out of much of the way we approach complex problems in the world – anything from fighting wars to fighting poverty. For one thing, where’s the churn in education policy or healthcare policy or policing? These are difficult problems. Why would we expect them to be solved the first time? They are surely no simpler than the business problems which seem so prone to experiment and error.

Andrea Ichino, Elly-Ann Lindström, Eliana Viviano, EUI: Hidden Consequences of a First-Born Boy for Mothers. We show that in the US, the UK, Italy and Sweden women whose first child is a boy are less likely to work in a typical week and work fewer hours than women with first-born girls. The puzzle is why women in these countries react in this way to the sex of their first child, which is chosen randomly by nature. We consider two explanations. As Dahl and Moretti (2008) we show that first-born boys positively affect the probability that a marriage survives, but differently from them and from the literature on developing countries, we show that after a first-born boy the probability that women have more children increases. In these advanced economies the negative impact on fertility deriving from the fact that fewer pregnancies are needed to get a boy is more than compensated by the positive effect on fertility deriving from the greater stability of marriages, which is neglected by studies that focus on married women only.

Steven D. Levitt, Freakonomics Blog: The Rare Earth Conundrum. Looking casually as an outsider at the unappealing economics of electric vehicles (the need for a new and immensely expensive infrastructure, cars that cost much more than either traditional gas engines or hybrids, limited ranges and long recharging times), I find it hard to understand why the Obama administration is pushing electric cars. One argument I’ve heard is “national security,” the idea being that electric vehicles would make the United States less dependent on imported oil. Be careful what you wish for, however, because if electric cars become a mainstay, we may be trading one dependence for another that is even more troubling. Ninety-five percent of the world’s output of rare-earth metals today comes from one country: China.