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.

Eternal Earth-Bound Pets. Serving our pet loving Rapture believing friends since 2009. You've committed your life to Jesus. You know you're saved.  But when the Rapture comes what's to become of your loving pets who are left behind?  Eternal Earth-Bound Pets takes that burden off your mind. Our service is plain and simple; our fee structure is reasonable. For $135.00 we will guarantee that should the Rapture occur within ten (10) years of receipt of payment, one pet per residence will be saved.  Each additional pet at your residence will be saved for an additional $20.00 fee. A small price to pay for your peace of mind and the health and safety of your four legged and feathered friends (Hat tip: Greg Mankiew).