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.