APRIL 15 2011

Bini Smaghi, ECB: Macroeconomic impact of Basel III. Overall impact on euro area macro economy will be relatively modest in the medium- short-run The economy will face transitional costs through tighter credit conditions. But the negative impact is mitigated by the long implementation period. The negative effects should not constitute an obstacle to the economic recovery in the euro area.

Stephen G Cecchetti, Michael R King, James Yetman, BIS: Weathering the financial crisis: good policy or good luck? The macroeconomic performance of individual countries varied markedly during the 2007–09 global financial crisis. While China’s growth never dipped below 6% and Australia’s worst quarter was no growth, the economies of Japan, Mexico and the United Kingdom suffered annualised GDP contractions of 5–10% per quarter for five to seven quarters in a row. We exploit this cross-country variation to examine whether a country’s macroeconomic performance over this period was the result of pre-crisis policy decisions or just good luck. The answer is a bit of both. Better-performing economies featured a better-capitalised banking sector, a current account surplus, high foreign exchange reserves and low private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.

Viral V. Acharya, Hamid Mehran, Anjan Thakor, New York University: Caught Between Scylla and Charybdis? Regulating Bank Leverage When There is Rent-Seeking and Risk-Shifting. When correlated bank failures can impose significant social costs, regulators may bail out bank creditors. Anticipation of this action generates an equilibrium featuring systemic risk, in which all banks choose inefficiently high leverage to fund correlated, excessively risky assets. Leverage can be reduced via a minimum equity capital requirement, which can also rule out asset substitution. But this also compromises market discipline by making bank debt too safe. Optimal capital regulation requires that a part of bank capital be unavailable to creditors upon failure so as to retain market discipline and be made available to shareholders only contingent on good performance in order to contain risk-taking.

Bernd Schwaab, Siem Jan Koopman, André Lucas, ECB: Systemic risk diagnostics: coincident indicators and early warning signals.  We propose a novel framework to assess financial system risk. Using a dynamic factor framework based on state-space methods, we construct coincident measures (‘thermometers’) and a forward looking indicator for the likelihood of simultaneous failure of a large number of financial intermediaries. The indicators are based on latent macro-financial and credit risk components for a large data set comprising the U.S., the EU-27 area, and the respective rest of the world. Credit risk conditions can significantly and persistently de-couple from macro-financial fundamentals. Such decoupling can serve as an early warning signal for macro-prudential policy.

David Leonhardt, NYT Blog: Men, Unemployment and Disability. In the worst economic times of the 1950s and ’60s, about 9 percent of men in the prime of their working lives (25 to 54 years old) were not working. At the depth of the severe recession in the early 1980s, about 15 percent of prime-age men were not working. Today, more than 18 percent of such men aren’t working. For growing numbers of these men, the federal disability program is a significant source of support. Yet disability usually goes unlargely uncovered by the media.

Martin Feldstein, Daniel Feenberg, Maya MacGuineas, NBER: Capping Individual Tax Expenditure Benefits. This paper analyzes a new way of reducing the major individual tax expenditures: capping the total amount that tax expenditures as a whole can reduce each individual's tax burden. More specifically, we examine the effect of limiting the total value of the tax reduction resulting from tax expenditures to two percent of the individual's adjusted gross income. Each individual can benefit from the full range of tax expenditures but can receive tax reduction only up to 2 percent of his AGI.

Francesc Ortega, Giovanni Peri, IZA: The Aggregate Effects of Trade and Migration: Evidence from OECD Countries. We assemble panel data on immigration flows, output, employment and capital stocks for thirty OECD countries over the period 1980-2007. In order to identify the causal effects of trade and immigration on economic outcomes we adopt and extend the gravity-based approach in Frankel and Romer (1999). Our predictors for trade and immigration flows are based on geography and the demographic trends of each country’s trade and migration partners. We find that immigration has a large, positive effect on the employment rate of the receiving country. However, it leaves income per capita unaffected because of an offsetting negative effect on TFP. In contrast, trade flows appear to increase income per capita, mainly through TFP growth, and have no impact on the employment rate. The positive employment effect of immigration is the most robust of all the effects identified in this paper.

Nathaniel Popper, Los Angeles Times: Ikea's U.S. factory churns out unhappy workers. Laborers in Swedwood plants in Sweden produce bookcases and tables similar to those manufactured in Danville. The big difference is that the Europeans enjoy a minimum wage of about $19 an hour and a government-mandated five weeks of paid vacation. Full-time employees in Danville start at $8 an hour with 12 vacation days — eight of them on dates determined by the company. What's more, as many as one-third of the workers at the Danville plant have been drawn from local temporary-staffing agencies. These workers receive even lower wages and no benefits, employees said. Swedwood's Steen said the company is reducing the number of temps, but she acknowledged the pay gap between factories in Europe and the U.S. "That is related to the standard of living and general conditions in the different countries," Steen said.

OECD: Housing and the Economy: Policies for Renovation. This chapter compares a number of housing policies for a range of OECD countries and concludes that badly-designed policies can have substantial negative effects on the economy, for instance by increasing the level and volatility of real house prices and preventing people from moving easily to follow employment opportunities. Some of these policies played an important role in triggering the recent financial and economic crisis and could also slow down the recovery. The chapter makes some recommendations for efficient and equitable housing policies that can also contribute to macroeconomic stability and growth.

Nicolas R. Ziebarth, IZA: Assessing the Effectiveness of Health Care Cost Containment Measures. Using SOEP panel data and difference-in-differences methods, this study is the first to empirically evaluate the effectiveness of four different health care cost containment measures within an integrated framework. The four measures investigated were introduced in Germany in 1997 to reduce moral hazard and public health expenditures in the market for convalescent care. Doubling the daily copayments was clearly the most effective cost containment measure, resulting in a reduction in demand of about 20 percent. Indirect measures such as allowing employers to cut statutory sick pay or paid vacation during health spa stays did not significantly reduce demand.

OECD (2011), Society at a Glance – OECD Social Indicators. Key Findings: Sweden. Did you know? The Swedes report the highest participation rate in cooking in the OECD, with four in every five getting into the kitchen on a daily basis. However, they don’t spend much time on it, with daily time spent cooking by participants at just 1 hour 2 minutes being 18 minutes below the OECD average. Swedes have the fifth highest life expectancy in the OECD of 81.4 years and just above three people of working age for every person over 65 years old, the fourth lowest ratio in the OECD.

Matt Ridley, WSJ: Free-Market Solutions for Overweight Americans. So instead of spending large sums on ads to shame us into better eating habits, spend the money on vouchers handed out to the overweight and let them find whatever provider of goods or services best meets their particular dieting needs. After all, the root causes of obesity are multifarious and new ones are being added all the time—such as diet sodas, gut bacteria, genes, sleep apnea, leptin levels, medication, depression, poverty and peer pressure. So the solutions need to be multipronged, too. What works for you may not work for me.

Freakonomics Blog: Why Did the Monkey Steal? There’s a crime wave at London Zoo. We’ve blogged in the past about monkeys that can do amazing things: use money, be rational actors, even learn grammar. Add to that list baby Bolivian monkeys who have taken to stealing sunglasses from visitors. But, say their keepers, the monkeys’ motives have nothing to do profit-maximizing. Here’s a hint: they’re so vain.