AUGUST 24 2012

Jeff Frankels Blog: More Black Swans?  I have argued that the best way to think of “black swan” events is as developments that, even though low-probability, can in fact be contemplated ahead of time.  Even if they are the sort of thing that has never happened before within an analyst’s memory, similar things may have happened before in the distant past or in other countries. What current possible shocks have probabilities that, even if fairly low, are high enough to warrant thinking about now?  Some have been discussed ad infinitum, others hardly at all. Most widely discussed is the danger of a break-up of the euro. Considered unthinkable a short time ago, the probability that one or more euro members will drop out is now well above 50%. Currency unions have disintegrated before. The most worrisome financial threat is a crash of currently over-priced bond markets. In theory such a crash could be precipitated by inflation (particularly commodity-induced inflation as in 1973 or 1979). But this seems unlikely. More likely triggers are (i) a breakdown in the eurozone or (ii) political dysfunction in Washington.

Clemens Fuest, Andreas Peichl, IZA: European Fiscal Union: What Is It? Does It Work? And Are There Really 'No Alternatives'? The view is widespread that there are just two options for the future of the Eurozone – either it is complemented by a fiscal union, or it will fall apart. In this paper, we discuss five possible elements of a fiscal union, of which three are in the centre of the current debate on fiscal union in the Eurozone. Second, we argue that the fiscal union will only work if political integration in Europe goes significantly beyond the current state of affairs. Third, we suggest an alternative approach, which places less emphasis on centralised fiscal policy coordination and focuses on financial sector reform, decentralised responsibility for government debt and sovereign debt restructurings in the case of fiscal crises.

Charles Wyplosz, VoxEU: The coming revolt against austerity. Mindless austerity is losing policy credibility in some Eurozone nations. This column suggests governments shouldn’t mix long-term growth and fiscal discipline nor produce another Lisbon strategy. Instead, they should adopt a framework for fiscal policy cooperation, restructure debts, and remember that fiscal discipline is for the long run.

Carmen M. Reinhart, Vincent R. Reinhart, Kenneth S. Rogoff, NBER: Debt Overhangs: Past and Present. We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.

Anders Bohlmark, Mikael Lindahl, CESifo: Independent Schools and Long-Run Educational Outcomes - Evidence from Sweden's Large Scale Voucher Reform. This paper evaluates average educational performance effects of an expanding independent school sector at the compulsory level by assessing a radical voucher reform that was implemented in Sweden in 1992. We regress the change in educational performance outcomes on the increase in the share of independent-school students between Swedish municipalities. We find that an increase in the share of independent-school students improves average performance at the end of compulsory school as well as long-run educational outcomes. We show that these effects are very robust with respect to a number of potential issues, such as grade inflation and pre-reform trends. However, for most outcomes, we do not detect positive and statistically significant effects until approximately a decade after the reform. This is notable, but not surprising given that it took time for independent schools to become more than a marginal phenomenon in Sweden. We do not find positive effects on school expenditures. Hence, the educational performance effects are interpretable as positive effects on school productivity. We further find that the average effects primarily are due to external effects (e.g., school competition), and not that independent-school students gain significantly more than public-school students.

AGING AND RETIREMENT

Kadir Atalay, Garry F. Barrett, SEDAP: The Impact of Age Pension Eligibility Age on Retirement and Program Dependence: Evidence from an Australian Experiment. Identifying the effect of the financial incentives created by social security systems on the retirement behaviour of individuals requires exogenous variation in program parameters. In this paper we study the 1993 Australian Age Pension reform which increased the eligibility age for women to access the social security benefit. We find economically significant responses to the increase in the Age Pension eligibility age. An increase in the eligibility age of 1 year induced a decline in retirement probability by approximately 10 percent. In addition, we find that the social security reform induced significant "program substitution." The rise in the Age Pension eligibility age had an unintended consequence of increasing enrolment in other social insurance programs, particularly the Disability Support Pension, which functioned as an alternative source for funding retirement.

Espen Bratberg et al,  CESifo: Is Recipiency of Disability Pension Hereditary? This paper addresses whether children’s exposure to parents receiving disability benefits induces a higher probability of receiving such benefits themselves. Most OECD countries experience an increasing proportion of the working-age population receiving permanent disability benefits. Using data from Norway, a country where around 10% of the working-age population rely on disability benefits, we find that the amount of time that children are exposed to their fathers receiving disability benefits affects their own likelihood of receiving benefits positively. This finding is robust to a range of different specifications, including family fixed effects.

Hanna Hultin, Christina Lindholm, Jette Möller, Karolinska Institutet: Is There an Association between Long-Term Sick Leave and Disability Pension and Unemployment beyond the Effect of Health Status? – A Cohort Study. The objective of this study was to investigate whether there is an association between long-term sick leave and disability pension and unemployment, when taking health status into account. The study was based on the Stockholm Public Health Cohort, restricted to 13,027 employed individuals (45.9% men) aged 18–59 in 2002 and followed until 2007. Having been on long-term sick leave increased the risk of disability pension (HR 4.01; 95% CI 3.19–5.05) and longterm unemployment (HR 1.45; 95% CI 1.05–2.00), after adjustment for health status. Long-term sick leave increases the risks of both disability pension and unemployment even when taking health status into account. The results support the hypothesis that long-term sick leave may start a process of marginalization from the labor market.