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.