MAY 6 2011

Econbrowser Blog: Will high oil prices bring a new recession? Ten of the 11 recessions in the United States since World War II have been preceded by an increase in oil prices. Does the recent surge in oil prices mean we should be looking for recession number 12? Because consumers never went back to the earlier spending patterns on items like bigger cars, $4 gasoline will not have the same disruptive effects now that it did when we experienced these prices for the first time in 2008. My judgment is that, contrary to my 2003 model, there will be some contractionary consequences of recent developments, but, consistent with that model and many others, they will not be as severe as what we experienced in 2008.

Andrew Ang, Francis A. Longstaff, NBER: Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe. We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major European countries.  Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is considerable heterogeneity across U.S. and European issuers in their sensitivity to systemic risk. U.S. and Euro systemic shocks are highly correlated, but there is much less systemic risk among U.S. sovereigns than among European sovereigns.  We also find that U.S. and European systemic sovereign risk is strongly related to financial market variables.  These results provide strong support for the view that systemic sovereign risk has its roots in financial markets rather than in macroeconomic fundamentals.

Hyunseung Oh, Ricardo Reis, VoxEU: The fiscal expansion of 2007-09: All about transfers. Government spending and its effect on the economy is a perpetual source of debate. This column argues that too much discussion has focused on government purchases, when the fiscal expansion from 2007 to 2009 was all about transfers. It suggests that fiscal spending on transfers can boost the economy in a recession, though only if the transfer moves resources between the right groups.

David Altig, Atlanta FedIs offshoring behind U.S. employment's current problems? A few weeks back, David Wessel of the Wall Street Journal provided some pretty compelling facts: "U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy. The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show.” Sixty-nine percent of the foreign employment growth by U.S. multinationals from 1999 to 2008 was in the "other industries" category, and 87 percent of that growth was in three types of industries: retail trade; administration, support, and waste management; and accommodation of food services. If you forced us to choose between global or domestic factors as the place to look for solutions as we struggle with persistent underperformance in U.S. labor markets, we'd choose the latter.

Menzie Chinn, U.S. EconoMonitor: Learning About Long Term Unemployment. There are at least three definitions of structural unemployment: 1) often equated with persistent (long-term) unemployment; but this can be cyclical (disappears as economy recovers) 2) mismatch between skills/location of workers and jobs (common definition) 3) sources of unemployment (other than "frictional") that contribute to a higher equilibrium "natural rate of unemployment" or NAIRU ("nonaccelerating inflation rate of unemployment").There was a consensus that most of the unemployment increase since the onset of the Great Recession was cyclical in nature. Even when one takes the higher estimates of structural unemployment, structural unemployment still does not account for more than two percentage points of the increased amount of unemployment. Citing joint research with Mary Daly and Bart Hobijn, Dr. Valletta puts the estimate at 1.25 ppts, while Dr. Aaronson thought 1 ppts was reasonable.

Georges Tanguay, Ian Gingras, CIRANO: Gas price variations and urban sprawl. We conduct a multivariate analysis of the potential impact of higher gas prices on urban sprawl in the 12 largest Canadian Metropolitan Areas for the period 1986-2006. Controlling for variables such as income and population, we show that higher prices of gas have contributed significantly to reduce urban sprawl. On average, a 1% increase in gas prices has caused: i) a 0.32% increase in the population living in the inner city and ii) a 1.28% decrease in low-density housing units. Our results also show that higher incomes have played a significant role in increasing urban sprawl.

Abhijit Banerjee, Esther Duflo, Foreign Policy: More Than 1 Billion People Are Hungry in the World. But what if the experts are wrong? Our research on this question has taken us to rural villages and teeming urban slums around the world, collecting data and speaking with poor people about what they eat and what else they buy, from Morocco to Kenya, Indonesia to India. We've also tapped into a wealth of insights from our academic colleagues. What we've found is that the story of hunger, and of poverty more broadly, is far more complex than any one statistic or grand theory; it is a world where those without enough to eat may save up to buy a TV instead, where more money doesn't necessarily translate into more food, and where making rice cheaper can sometimes even lead people to buy less rice. But unfortunately, this is not always the world as the experts view it. All too many of them still promote sweeping, ideological solutions to problems that defy one-size-fits-all answers, arguing over foreign aid, for example, while the facts on the ground bear little resemblance to the fierce policy battles they wage.

Gary Becker, Becker Posner Blog: Can Poor Countries Afford Democracy? “Poor countries cannot afford democracy” is a common refrain suggesting that poor countries need strong and authoritarian leaders to overcome the various forces that kept them poor for centuries. The actual effects of democracy on the economy and other aspects of life should be compared not with an ideal form of government, but with various governments that do not have a free press, do not allow open competition for political office, do not have widespread suffrage, and lack the other institutions and freedoms that define democracies. Many studies have tried to isolate the effects of democracy compared to authoritarian systems of government on economic development, inequality, education, and many other factors. Since it is very hard to separate the effects of democracy from that of many other variables, these studies fail to reach conclusive results. The tendency, however, is to find that once other suitable factors are taken into account, there seems to be only a weak relation between long-term average rates of growth in GDP and whether countries are democratic. Yes, poor countries can afford democracy, as long as they use their democratic government to promote economic freedoms. Unfortunately, many poor countries, including democracies, fail to do this.

Patricia Cohen, NYT: Technology Advances; Humans Supersize. In most if not quite all parts of the world, the size, shape and longevity of the human body have changed more substantially, and much more rapidly, during the past three centuries than over many previous millennia. This alteration has come about within a time frame that is “minutely short by the standards of Darwinian evolution.” “The rate of technological and human physiological change in the 20th century has been remarkable. Beyond that, a synergy between the improved technology and physiology is more than the simple addition of the two.

Alberto F. Alesina, Eliana La Ferrara, NBER: A Test of Racial Bias in Capital Sentencing. We model the behavior of the trial court as minimizing a weighted sum of the probability of sentencing an innocent and that of letting a guilty defendant free.  We define racial bias as a situation where the relative weight on the two types of errors is a function of defendant and/or victim race.  The key prediction of the model is that if the court is unbiased, ex post the error rate should be independent of the combination of defendant and victim race.  We test this prediction using an original dataset that contains the race of the defendant and of the victim(s) for all capital appeals that became final between 1973 and 1995.  We find robust evidence of bias against minority defendants who killed white victims:  In Direct Appeal and Habeas Corpus the probability of error in these cases is 3 and 9 percentage points higher, respectively, than for minority defendants who killed minority victims.

Daniel M. Hungerman, NBER: The Effect of Education on Religion:  Evidence from Compulsory Schooling Laws. For over a century, social scientists have debated how educational attainment impacts religious belief.  In this paper, I use Canadian compulsory schooling laws to identify the relationship between completed schooling and later religiosity.  I find that higher levels of education lead to lower levels of religious participation later in life.  An additional year of education leads to a 4-percentage-point decline in the likelihood that an individual identifies with any religious tradition; the estimates suggest that increases in schooling can explain most of the large rise in non-affiliation in Canada in recent decades.

William Easterly, The Lancet: The happiness wars. The piece of the Easterlin paradox that really falls apart with newer data is his evidence that there was little difference between rich and poor countries on average happiness. Especially with the life satisfaction concept and a much larger sample, the differences are now recognised as vast, as shown in the chapter here by Ed Diener, Daniel Kahneman, and colleagues. As I heard a happiness researcher once state it most colourfully, the average Togolese man would be hospitalised for depression in Denmark. The non-paradoxical piece of the paradox remains as strong as it always was—within the same country, the richer are happier and more satisfied with their lives than the poor.

John Mueller and Mark G. Stewart, Ohio State University: Terror, Security, and Money: Balancing the Risks, Benefits, and Costs of Homeland Security. The cumulative increase in expenditures on US domestic homeland security over the decade since 9/11 exceeds one trillion dollars. It is clearly time to examine these massive expenditures applying risk assessment and cost-benefit approaches that have been standard for decades. We find that enhanced expenditures have been excessive: to be deemed cost-effective in analyses that substantially bias the consideration toward the opposite conclusion, they would have to deter, prevent, foil, or protect against 1,667 otherwise successful Times-Square type attacks per year, or more than four per day.

Gustaf Bruze, Aarhus University: Marriage Choices of Movie Stars: Does Spouse's Education Matter? Marital sorting on education is an important but poorly understood source of inequality. This paper analyzes a group of men and women who do not meet their spouses in school, are not sorted by education in the workplace, and whose earnings are not correlated with their years of education. Nevertheless, movie actors marry spouses with an education similar to their own. These findings suggest that male and female preferences alone induce considerable sorting on education in marriage and that men and women have very strong preferences for nonfinancial partner traits correlated with years of education.

Mason Levinson, Bloomberg: Harvard's Adams Enlists Nobel Economist Charging $5,000 for Hour of Advice. Lots of bandwidth and $5,000 can get anyone an hour with Nobel Prize-winning economist Gary Becker. A couple more computer clicks can also remake a tennis serve, fix a golf swing and provide tips on how to out-bluff the poker world’s top pros. Becker, a University of Chicago professor who won the Nobel Prize in Economics in 1992, will be selling his time on ExpertInsight.com, a website offering one-to-one video chats with leaders, which opened yesterday. He’ll join people such as economics professors Jeffrey Miron of Harvard University and Laurence Kotlikoff of Boston University, “Freakonomics” co- authors Steven Levitt and Stephen Dubner, poker celebrities Patrik Antonius and Tom Dwan, and tennis coach Jeff Salzenstein.

Redzo Mujcic, Paul Frijters, IZA: Altruism in Society: Evidence from a Natural Experiment Involving Commuters. We study social preferences in the form of altruism using data on 959 interactions between random commuters at selected traffic intersections in the city of Brisbane, Australia. By observing real decisions of individual commuters on whether to stop (give way) for others, we find evidence of (i) gender discrimination by both men and women, with women discriminating relatively more against the same sex than men, and men discriminating in favour of the opposite sex more than women; (ii) status-seeking and envy, with individuals who drive a more luxury motor vehicle having a 0.18 lower probability of receiving a kind treatment from others of low status, however this result improves when the decision maker is also of high status; (iii) strong peer effects, with those commuters accompanied by other passengers being 25 percent more likely to sacrifice for others; and (iv) an age effect, with mature-aged people eliciting a higher degree of altruism.