SEPTEMBER 30 2011

Kash, Street Light Blog: Moral Judgment and Bad Economics from the ECB. The letter, published in Corriere della Sera, said Italy should aim to bring the deficit down to 1% of gross domestic product by 2012 and balance the budget by 2013, a year ahead of schedule, "mainly via expenditure cuts".  This is troubling in several ways. The timing of things certainly makes it appear as if there was a quid pro quo: the ECB would help only if the Italian government took certain policy steps that the ECB wanted. Most distressing to me is how a central element of the policy prescription that the ECB made to Italy was completely wrong. Italy's problem is not annual budget deficits; yes, Italy had chronically large budget deficits during the decades leading up to euro adoption in 1999, but Italy actually ran smaller budget deficits than France, Belgium, or even the Netherlands over the past couple of years (see chart below). Italy's problem right now is low growth, and the fact that such low growth makes it more difficult for Italy to service the massive debt is has left over from 20 or 30 years ago. The recession hit Italy very hard, and the country has been slow to recover (which makes Italy's relatively low budget deficits even more impressive, by the way). The last thing Italy needs at this point is a sharp fiscal contraction

Aaron Tornell, Frank Westermann, VoxEU: Greece: The sudden stop that wasn’t. In 1995 Mexico experienced a sharp real depreciation and a deep recession. By 1996, however, net exports rebounded and economic growth resumed. At the time it was argued that Mexico could have avoided the severe crisis by adjusting in early 1994. Unfortunately, like Greece today, the authorities chose to increase domestic credit to delay a recession. The difference between Mexico and Greece is that while Mexico had to run down its international reserves, Greece has been able to keep them practically unchanged. Instead Greece has used the EU rescue package and the Eurosystem loans to increase domestic credit. Had Greece been like a typical small economy with no access to rescue packages, it would have had to close its massive current-account deficit by now. Its ability to maintain such massive current-account deficit in the face of a sharp reversal in private capital inflows will be recorded in the annals of financial crises as a remarkably rare feat. It is time to address Greece‘s economic policy options in a holistic manner, and stop the emergency measures that only provide Greece with another lifeline.

Alan J. Auerbach, Yuriy Gorodnichenko, NBER:  Fiscal Multipliers in Recession and Expansion. In this paper, we estimate government purchase multipliers for a large number of OECD countries, allowing these multipliers to vary smoothly according to the state of the economy and using real-time forecast data to purge policy innovations of their predictable components.  We adapt our previous methodology (Auerbach and Gorodnichenko, 2011) to use direct projections rather than the SVAR approach to estimate multipliers, to economize on degrees of freedom and to relax the assumptions on impulse response functions imposed by the SVAR method.  Our findings confirm those of our earlier paper.  In particular, GDP multipliers of government purchases are larger in recession, and controlling for real-time predictions of government purchases tends to increase the estimated multipliers of government purchases in recession.  We also consider the responses of other key macroeconomic variables and find that these responses generally vary over the cycle as well, in a pattern consistent with the varying impact on GDP.

Dan A. Black, Natalia Kolesnikova, Seth G. Sanders, Lowell J. Taylor, IZA: Are Children "Normal"?: We examine Becker's (1960) contention that children are "normal." For the cross section of non-Hispanic white married couples in the U.S., we show that when we restrict comparisons to similarly-educated women living in similarly-expensive locations, completed fertility is positively correlated with the husband's income. The empirical evidence is consistent with children being "normal." In an effort to show causal effects, we analyze the localized impact on fertility of the mid-1970s increase in world energy prices – an exogenous shock that substantially increased men's incomes in the Appalachian coal-mining region. Empirical evidence for that population indicates that fertility increases in men's income.

Chloe Gibbs, Jens Ludwig, Douglas L. Miller, NBER:  Does Head Start Do Any Lasting Good? Head Start is a federal early childhood intervention designed to reduce disparities in preschool outcomes.  The first randomized experimental study of Head Start, the National Head Start Impact Study (NHSIS), found impacts on academic outcomes of .15 to .3 standard deviations measured at the end of the program year, although the estimated impacts were no longer significant when measured at the end of kindergarten or first grade.  Assessments that Head Start is ineffective based on the NHSIS results are in our view premature, given our currently limited understanding of how and why early childhood education improves long-term life chances.  Many of the specific changes to Head Start that have been proposed could potentially wind up doing more harm than good.

Nina Smith, Valdemar Smith, Mette Verner, IZA: Why Are So Few Females Promoted into CEO and Vice-President Positions? In most OECD countries, only very few women succeed in reaching top executive positions. In this paper, the probability of promotion into VP and CEO positions is estimated based on employer-employee data on all Danish companies observed during the period 1997-2007. After controlling for a large number of family-related variables, including take-up history of maternity and paternity leave and proxies for 'female-friendly' companies, there is still a considerable gap in the promotion probabilities for CEO positions, but not for VP positions. Thus, the results cannot confirm recent theories on 'belief flipping' or disappearance of statistical discrimination against women who succeed getting into career track positions. The results reflect that the hiring decision and the decision to enter a top position as 'number one', i.e. CEO, in the organization is very different from the decision to hire or become VP, i.e. 'number two' or lower.