OCTOBER 21 2011

Kash, The Street Light Blog: Where Exactly Are Those Lazy Southern Europeans, Anyway? Putting it all together, it's hard to see much empirical support in this data for the notion that southern Europeans are a bunch of lazy free-loaders. That's not to say that there aren't obvious cases of gross inefficiencies in southern European countries -- of course there are. Maybe there really isn't a systematic difference in how hard-working, responsible, or self-reliant southern and northern Europeans are. After all, it is also possible to find plenty of examples of opaque government bureaucracies, entrenched unions, and extremely generous state assistance in the northern eurozone countries. So the next time someone asserts that southern European irresponsibility is what lead to this crisis, I would simply ask to see the data they have to support that claim

Menzie D. Chinn, Barry Eichengreen, Hiro Ito, University of Wisconsin-Madison: A Forensic Analysis of Global Imbalances. Changes in the budget balance appear to be an important factor affecting current account balances for advanced current account deficit countries such as the United States and the United Kingdom. The effect of the “saving glut variables” on current account balances has been relatively stable for emerging market countries, suggesting the prominence of those factors is not a particularly recent phenomenon. We also find the 2006-08 period to be the structural break for emerging market countries, and to a lesser extent, for industrialized countries. When we investigate what can explain the purportedly anomalous behavior in the current account balances during the 2006-08 period, we find that stock market performance and real housing appreciation explain the unusual current account balances in the pre-crisis period; fiscal procyclicality and monetary policy stance do not seem to matter as much. However, we also identify components of current account balances that can be only explained by country-specific factors. Extrapolating to the future, we find that for the U.S., fiscal consolidation alone cannot induce significant current account deficit reduction. For China, financial development may help shrink its current account surplus, but only when it is coupled with financial liberalization. These findings suggest that unless countries implement substantial policy changes, the global imbalances are unlikely to disappear.

Ryan Avent, Economist Blog, Why not blame Germany? The crisis is not all Germany's fault, but Germany deserves its fair share of the blame. That's mostly beside the point right now. Germany has a unique ability to bring the crisis to an end, and it is not accepting the responsibility that falls to it given its role, economically and politically, in the euro zone.

Dagmar Hartwig Lojsch, Marta Rodríguez-Vives, Michal Slavík, ECB: The Size and Composition of Government Debt in the Euro Area. This paper explains the various concepts of government debt in the euro area with particular emphasis on its size and composition. In terms of size, the paper focuses on different definitions that are in use, in particular the concept of gross general government debt used in the surveillance of the euro area countries, the total liabilities from the government balance sheet approach, and the net debt concept which subtracts government financial assets from the liability side. In addition, it discusses “hidden debt” in the form of implicit and contingent liabilities. In terms of composition, the paper provides information about euro area government debt broken down by maturity, holder or the currency of issue. All these indicators illustrate a sharp increase in government debt in most euro area countries as a result of the crisis. This in turn has several policy implications: (i) the growing government debt ratios need to be stabilised and put on a downward path which improves market confidence; (ii) fiscal surveillance needs to put more emphasis on government debt indicators than in the past; (iii) government financial assets could play a role when analysing solvency issues; (iv) implicit and other off-balance-sheet government liabilities need to be carefully monitored and reported; (v) the gross debt concept should remain the key basis for fiscal surveillance in the EU and for the Excessive Deficit Procedure in particular; (vi) beyond the size of government debt its composition is also a key factor behind public finance vulnerabilities.

Juan J. Cruces, Christoph Trebesch, CESifo: Sovereign Defaults: The Price of Haircuts. A main puzzle in the sovereign debt literature is that defaults have only minor effects on subsequent borrowing costs and access to credit. This paper comes to a different conclusion. We construct the first complete database of investor losses ('haircuts') in all restructurings with foreign banks and bondholders from 1970 until 2010, covering 180 cases in 68 countries. We then show that restructurings involving higher haircuts are associated with significantly higher subsequent bond yield spreads and longer periods of capital market exclusion. The results cast doubt on the widespread belief that credit markets 'forgive and forget.'

Eric A. Hanushek, Ludger Woessmann, Lei Zhang, NBER: General Education, Vocational Education, and Labor-Market Outcomes over the Life-Cycle. Policy debates about the balance of vocational and general education programs focus on the school-to-work transition. But with rapid technological change, gains in youth employment from vocational education may be offset by less adaptability and thus diminished employment later in life. To test our main hypothesis that any relative labor-market advantage of vocational education decreases with age, we employ a difference-in-differences approach that compares employment rates across different ages for people with general and vocational education. Using micro data for 18 countries from the International Adult Literacy Survey, we find strong support for the existence of such a trade-off, which is most pronounced in countries emphasizing apprenticeship programs. Results are robust to accounting for ability patterns and to propensity-score matching.

Susan Dynarski, Joshua Hyman, Diane Whitmore Schanzenbach, NBER: Experimental Evidence on the Effect of Childhood Investments on Postsecondary Attainment and Degree Completion. We use the random assignment in the Project STAR experiment to estimate the effect of smaller classes in primary school on college entry, college choice, and degree completion. We improve on existing work in this area with unusually detailed data on college enrollment spells and the previously unexplored outcome of college degree completion. We find that assignment to a small class increases the probability of attending college by 2.7 percentage points, with effects more than twice as large among blacks. Among those whose predicted probability of attending college is in the bottom quintile, smaller classes increase the college attendance rate by 11 percentage points. Smaller classes increase the likelihood of earning a college degree by 1.6 percentage points and shift students towards high-earning fields such as STEM (science, technology, engineering and medicine), business and economics. We confirm the standard finding that test score effects fade out by middle school, but show that test score effects at the time of the experiment are an excellent predictor of long-term improvements in postsecondary outcomes. We compare the costs and impacts of this intervention with other tools for increasing postsecondary attainment, such as Head Start and financial aid, and conclude that early investments are no more cost effective than later investments in boosting adult educational attainment.

Colm P. Harmon, IZA: Economic Returns to Education: What We Know, What We Don't Know, and Where We Are Going – Some Brief Pointers. The estimation of the economic return to education has perhaps been one of the predominant areas of analysis in applied economics for over 50 years. In this short note we consider some of the recent directions taken by the literature, and also some of the blockages faced by both science and policymakers in pushing forward some key issues. This serves by way of introduction to a set of papers for a special issue of the Economics of Education Review.

David Hummels, Rasmus Jørgensen, Jakob R. Munch, Chong Xiang, NBER: The Wage Effects of Offshoring: Evidence from Danish Matched Worker-Firm Data. We estimate how offshoring and exporting affect wages by skill type. Our data match the population of Danish workers to the universe of private-sector Danish firms, whose trade flows are broken down by product and origin and destination countries. Our data reveal new stylized facts about offshoring activities at the firm level, and allow us to both condition our identification on within-job-spell changes and construct instruments for offshoring and exporting that are time varying and uncorrelated with the wage setting of the firm. We find that within job spells, (1) offshoring tends to increase the high-skilled wage and decrease the low-skilled wage; (2) exporting tends to increase the wages of all skill types; (3) the net wage effect of trade varies substantially across workers of the same skill type; and (4) conditional on skill, the wage effect of offshoring exhibits additional variation depending on task characteristics. We then track the outcomes for workers after a job spell and find that those displaced from offshoring firms suffer greater earnings losses than other displaced workers, and that low-skilled workers suffer greater and more persistent earnings losses than high-skilled workers

Jialan Wang, Studies in Everyday Life: Benford's Law and the Decreasing Reliability of Accounting Data for US Firms. An earth-shattering fact is that there are more numbers in the universe that begin with the digit 1 than 2, or 3, or 4, or 5, or 6, or 7, or 8, or 9. This relationship holds for the lengths of rivers, the populations of cities, molecular weights of chemicals, and any number of other categories.  What a blow to any of us who purport to have mastered the basic facts of the world around us!  This numerical regularity is known as Benford's Law. Benford's law has been used in legal cases to detect corporate fraud, because deviations from the law can indicate that a company's books have been manipulated.  Naturally, I was keen to see whether it applies to the large public firms that we commonly study in finance. According to Benford's law, accounting statements are getting less and less representative of what's really going on inside of companies.The major reform that was passed after Enron and other major accounting standards barely made a dent.

M.A. Sumour, M.A. Radwan, M.M. Shabat, Ali H. El-Astal, Al-Aqsa University: Statistical physics applied to stone-age civilization. About 45,000 years ago, symbolic and technological complexity of human arte facts increased drastically. Computer simulations of Powell, Shennan and Thomas (2009) explained it through an increase of the population density, facilitating the spread of information about useful innovations. We simplify this demographic model and make it more similar to standard physics models. For this purpose, we assume that bands (extended families) of stone-age humans were distributed randomly on a square lattice such that each lattice site is randomly occupied with probability p and empty with probability 1 − p. Information spreads randomly from an occupied site to one of its occupied neighbours. If we wait long enough, information spreads from one side of the lattice to the opposite site if and only if p is larger than the percolation threshold; this process was called ”ant in the labyrinth” by de Gennes 1976. We modify it by giving the diffusing information a finite lifetime, which shifts the threshold upwards.