APRIL 22 2011

Felix Salmon, Reuters: Expecting an early Greek default. Greece is going to restructure its debts — and it’s going to do so before mid-2013. That’s the clear message sent by the latest Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months. This is a major development. The markets haven’t believed Greece for a while — but now they don’t believe the European Union, either.

Tyler Cowen, NYT: Euro vs. Invasion of the Zombie Banks. All of the ways forward look ugly but, sooner or later, some variation of at least one of them is likely. Unfortunately, they all share the property of lowering European bank values, whipsawing currencies, hurting business confidence and possibly ending the European Union as an effective institution for collective decisions. That’s all because the euro, in retrospect, appears to have been a misguided attempt to equalize the values for some very unequal assets, namely the bank deposits of strong countries and those of weak countries.

Pierella Paci, Ana Revenga, Bob Rijkers, VoxEU: Coping with crises: Policies to protect employment and earnings. When a crisis hits, how should policymakers move to save jobs? This column reviews the evidence from policy responses to recent crises, highlighting the importance of being prepared. It finds that countries with prudent fiscal management and sound policy infrastructure tend to suffer relatively smaller and shorter negative shocks than others.

Stijn Claessens, M. Ayhan Kose, Marco E. Terrones, IMF: Financial Cycles: What? How? When? This paper provides a comprehensive analysis of financial cycles using a large database covering 21 advanced countries over the period 1960:1-2007:4. We report three main results. First, financial cycles tend to be long and severe, especially those in housing and equity markets. Second, they are highly synchronized within countries, particularly credit and house price cycles. The extent of synchronization of financial cycles across countries is high as well, mainly for credit and equity cycles, and has been increasing over time. Third financial cycles accentuate each other and become magnified, especially during coincident downturns in credit and housing markets. Moreover, globally synchronized downturns tend to be associated with more prolonged and costly episodes, especially for credit and equity cycles.

Carmen M. Reinhart, M. Belen Sbrancia, PIIE: The Liquidation of Government Debt. A subtle type of debt restructuring takes the form of "financial repression." Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historical standards). For the advanced economies in Reinhart and Sbrancia's sample, real interest rates were negative roughly half of the time during 1945-80. For the United States and the United Kingdom, their estimates of the annual liquidation of debt via negative real interest rates amounted on average to 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).

Erica L. Groshen, NY Fed: Temporary Layoffs during the Great Recession. I show that despite the depth of the Great Recession, U.S. employers did not use temporary layoffs much to cut costs. Just as they did during the previous two recessions, when firms laid workers off, they usually severed ties completely. This prevalence of permanent layoffs during the recession could slow the employment rebound over the coming months. It also raises questions about why the behavior of employers during recessions has changed.

Michela Braga, Marco Paccagnella, Michele Pellizzari, IZA: Evaluating Students' Evaluations of Professors. The average difference in subsequent performance between students who were assigned to the best and worst teacher (on the effectiveness scale) is approximately 43% of a standard deviation in the distribution of exam grades, corresponding to about 5.6% of the average grade. Additionally, we find that our measure of teacher effectiveness is negatively correlated with the students' evaluations: in other words, teachers who are associated with better subsequent performance receive worst evaluations from their students. We rationalize these results with a simple model where teachers can either engage in real teaching or in teaching-to-the-test, the former requiring higher students’ effort than the latter. Teaching-to-the-test guarantees high grades in the current course but does not improve future outcomes. Hence, if students are myopic and evaluate better teachers from which they derive higher utility in a static framework, the model is capable of predicting our empirical finding that good teachers receive bad evaluations, especially when teaching-to-the-test is very effective (for example, with multiple choice tests).

Sara Murray, WSJ: Suicide Rates Spike During Recessions. From the Great Depression to the double-dip recession of the 1980s, suicide rates have shown a spike in economic downturns, according to a study the Centers for Disease Control and Prevention released last week. And early data suggest that’s likely to be the case in the most recent economic shock as well.

Aadland, David, Shaffer, Sherrill, MPRA: Time Compression. Economists have generally ignored the notion that perceived time may differ from clock time. Borrowing from the behavioral psychology literature, we investigate the case of time compression whereby perceived time passes more quickly than actual time. A framework is presented to embed time compression in economic models. We then apply the principle to a standard lifecycle permanent income model with endogenous labor. Time compression provides an alternative explanation of why older individuals, even those without declining labor productivity, may choose to reduce their work effort.

Binyamin Appelbaum, NYT  Blog: Time and Judgment. A new paper finds that experienced parole judges in Israel granted freedom about 65 percent of the time to the first prisoner who appeared before them on a given day. By the end of a morning session, the chance of release had dropped almost to zero. After the same judge returned from a lunch break, the first prisoner once again had about a 65 percent chance at freedom. And once again the odds declined steadily. The reason offered by the authors suggests the broader significance. They write that making successive decisions depletes a limited mental facility, just like curling a dumbbell wears out your arms.

Resul Cesur, Joseph J. Sabia, Erdal Tekin, IZA: The Psychological Costs of War: Military Combat and Mental Health. While descriptive evidence suggests that deployment in the Global War on Terrorism is associated with adverse mental health, the causal effect of combat is not well established. Using data drawn from the National Longitudinal Study of Adolescent Health, we exploit exogenous variation in deployment assignment and find that soldiers deployed to combat zones where they engage in frequent enemy firefight or witness allied or civilian deaths are at substantially increased risk for suicidal ideation, psychological counseling, and post-traumatic stress disorder (PTSD). Our estimates imply lower-bound health care costs of $1.5 to $2.7 billion for combat-induced PTSD.