AUGUST 19 2011

Nouriel Roubini, Economonitor: Is Capitalism Doomed? Unless the EFSF pot were  tripled – a move that Germany would resist  – the only option left would become an orderly but coercive restructuring of Italian and Spanish debt, as has happened in Greece. Coercive restructuring of insolvent banks’ unsecured debt would be next. So, although the process of deleveraging has barely started, debt reductions will become necessary if countries cannot grow or save or inflate themselves out of their debt problems. So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.

David Beckworth, Macro and Other Market Musings Blog, It´s getting ugly: The recent spate of bad economics news coming from the U.S. and Europe is ramping up the money demand black hole as investors rush back into money and money-like assets.  Velocity is dropping fast because of this spike in money demand and, as a result, current and expected current dollar spending is falling too.  This is, in turn, is causing the economic outlook to decline and is the development to which long-term yields are responding.  Ideally, the Fed would respond to the money demand black hole in a systematic, predictable manner that would bring certainty to the market.  Unfortunately, the Fed is not doing that and continues to allow a passive tightening on monetary policy.

Christina D. Romer, NYT: The Hope That Flows From History: After the grim economic developments of the last few weeks, it’s easy to lose hope. Could the Great Recession of 2008 drag on for years, just as the Great Depression did in the 1930s? Adding to the despair is the oft-repeated notion that it took World War II to end the economic nightmare of the ’30s: If a global war was needed to return the economy to full employment then, what is going to save us today? Look more closely at history and you’ll see that the truth is much more complicated — and less gloomy. While the war helped the recovery from the Depression, the economy was improving long before military spending increased. More fundamentally, the wrenching wartime experience provides a message of hope for our troubled economy today: we have the tools to deal with our problems, if only policy makers will use them.

Edward Hugh, Fistful of Euros Blog: Going Dutch – One Possible Solution To the Euro Debt Crisis? Fortunately there is a third alternative, even if it is one that at first appears no more appetising than either of the other two: the Eurozone could be split in two, creating two different euro currencies. Naturally the composition of the groups would be a matter of negotiation, since some countries do not easily belong in either one group or the other. The broad outline is, however, clear enough. Germany would form the heart of one group, along with Finland, Holland and Austria. Spain, Italy and Portugal would naturally form the nucleus of the second group, with Slovenia and Slovakia being possible candidates. Some countries, Ireland and Greece for example, might simply choose to opt out.

Hélène Poirson, Sebastian Weber, VoxEU: Can Germany be Europe’s engine of growth? Europe needs economic growth. Can Germany provide the needed boost? This column argues that such hopes may be in vain. Germany’s role as an independent, short-term engine of growth for Europe is likely to remain limited for the foreseeable future—at least until its policies change.

Rasmussen, Tobias N. ; Roitman, Agustin, IMF: Oil Shocks in a Global Perspective: Are they Really that Bad? Using a comprehensive global dataset, we outline stylized facts characterizing relationships between crude oil prices and macroeconomic developments across the world. Approaching the data from several angles, we find that the impact of higher oil prices on oil-importing economies is generally small: a 25 percent increase in oil prices typically causes GDP to fall by about half of one percent or less. While cross-country differences in impact are found to depend mainly on the relative size of oil imports, we also show that oil price shocks are not always costly for oil-importing countries: although higher oil prices increase the import bill, there are partly offsetting increases in external receipts. We provide a small open economy model illustrating the main transmission channels of oil shocks, and show how the recycling of petrodollars may mitigate the impact.

Atila Abdulkadiroglu, Joshua Angrist, Parag Pathak, MIT: The Elite Illusion: Achievement Effects at Boston and New York Exam Schools. Talented students compete fiercely for seats at Boston and New York exam schools. These schools are characterized by high levels of peer achievement and a demanding curriculum tailored to each district's highest achievers. While exam school students clearly do very well in school, the question of whether an exam school education adds value relative to a regular public education remains open. We estimate the causal effect of exam school attendance using a regression-discontinuity design, reporting both parametric and non-parametric estimates. We also develop a procedure that addresses the potential for confounding in regression-discontinuity designs with multiple, closely-spaced admissions cutoffs. The outcomes studied here include scores on state standardized achievement tests, PSAT and SAT participation and scores, and AP scores. Our estimates show little effect of exam school offers on most students' achievement in most grades. We use two-stage least squares to convert reduced form estimates of the effects of exam school offers into estimates of peer and tracking effects, arguing that these appear to be unimportant in this context. On the other hand, a Boston exam school education seems to have a modest effect on high school English scores for minority applicants. A small group of 9th grade applicants also appears to do better on SAT Reasoning. These localized gains notwithstanding, the intense competition for exam school seats does not appear to be justified by improved learning for a broad set of students.

Francesco D'Amuri, Giovanni Peri, NBER:  Immigration, Jobs and Employment Protection: Evidence from Europe. In this paper we analyze the effect of immigrants on native jobs in fourteen Western European countries. We test whether the inflow of immigrants in the period 1996-2007 decreased employment rates and/or if it altered the occupational distribution of natives with similar education and age. We find no evidence of the first but significant evidence of the second: immigrants took "simple" (manual-routine) type of occupations and natives moved, in response, toward more "complex" (abstract-communication) jobs. The results are robust to the use of an IV strategy based on past settlement of different nationalities of immigrants across European countries. We also document the labor market flows through which such a positive reallocation took place: immigration stimulated job creation, and the complexity of jobs offered to new native hires was higher relative to the complexity of destructed native jobs. Finally, we find evidence that the occupation reallocation of natives was significantly larger in countries with more flexible labor laws. This tendency was particularly strong for less educated workers.

Peter Fredriksson, Björn Öckert, Hessel Oosterbeek, IZA: Long-Term Effects of Class Size. This paper evaluates the long-term effects of class size in primary school. We use rich administrative data from Sweden and exploit variation in class size created by a maximum class size rule. Smaller classes in the last three years of primary school (age 10 to 13) are not only beneficial for cognitive test scores at age 13 but also for non-cognitive scores at that age, for cognitive test scores at ages 16 and 18, and for completed education and wages at age 27 to 42. The estimated effect on wages is much larger than any indirect (imputed) estimate of the wage effect, and is large enough to pass a cost-benefit test.