Felix Salmon, Reuter: The improbable Greece plan. The plan assumes that Greece’s politicians will stick to what they’ve agreed, and start selling off huge chunks of their country’s patrimony while at the same time imposing enormous budget cuts. Needless to say, there is no indication that Greece’s politicians are willing or able to do this, nor that Greece’s population will put up with such a thing. It could easily all fall apart within months; the chances of it gliding to success and a 120% debt-to-GDP ratio in 2020 have got to be de minimis. Europe’s politicians know this, of course. But at the very least they’re buying time: this deal might well delay catastrophic capital flight from Greece, and give the Europeans more time to work out how to shore up Portugal if and when that happens. Will they make good use of the time that they’re buying? I hope so. Because once the Greek domino falls, it’s going to take a huge amount of money, statesmanship, and luck to prevent further dominoes from toppling.
Kenneth Rogoff, Spiegel: Germany Has Been the Winner in the
Globalization Process. Kenneth Rogoff says it was a mistake to bring
all the southern European countries into the common currency. He also argues
that Greece should be granted a "sabbatical" from the euro and that a
United States of Europe may take shape far sooner than many believe.
Matthew Denes, Gauti B. Eggertsson, and Sophia Gilbukh, NY Fed:
Deficits, Public Debt Dynamics, and Tax and Spending Multipliers. Cutting government
spending on goods and services increases the budget deficit if the nominal
interest rate is close to zero. This is the message of a simple but standard
New Keynesian DSGE model calibrated with Bayesian methods. The cut in spending
reduces output and thus—holding rates for labor and sales taxes
constant—reduces revenues by even more than what is saved by the spending cut.
Similarly, increasing sales taxes can increase the budget deficit rather than
reduce it. Both results suggest limitations of “austerity measures” in low
interest rate economies to cut budget deficits. Running budget deficits can by
itself be either expansionary or contractionary for output, depending on how
deficits interact with expectations about the long run in the model. If
deficits trigger expectations of i) lower long-run government spending, ii)
higher long-run sales taxes, or iii) higher future inflation, they are
expansionary. If deficits trigger expectations of higher long-run labor taxes
or lower long-run productivity, they are contractionary.
Atif
Mian, Amir Sufi, CBSB: What Explains High Unemployment? The Aggregate Demand
Channel. A drop in aggregate demand driven by shocks to
household balance sheets is responsible for a large fraction of the decline in
U.S. employment from 2007 to 2009. The aggregate demand channel for
unemployment predicts that employment losses in the non-tradable sector are
higher in high leverage U.S. counties that were most severely impacted by the
balance sheet shock, while losses in the tradable sector are distributed
uniformly across all counties. We find exactly this pattern from 2007 to 2009.
Alternative hypotheses for job losses based on uncertainty shocks or structural
unemployment related to construction do not explain our results. Using the
relation between non-tradable sector job losses and demand shocks and assuming
Cobb-Douglas preferences over tradable and non-tradable goods, we quantify the
effect of aggregate demand channel on total employment. Our estimates suggest
that the decline in aggregate demand driven by household balance sheet shocks
accounts for almost 4 million of the lost jobs from 2007 to 2009, or 65% of the
lost jobs in our data.
Edward
Hughes, A Fistful of Euros Blog: For Whom The Bailout Tolls. Feelings that what we
are seeing today will only constitute a short interlude in a pretty atonal
concierto are based on an appreciation of three important factors: a) a
recognition that even a reduction of debt to GDP to 120% by 2020 is still not
sustainable; b) a recognition that after the formal bailout is awarded there
will still be ongoing programme reviews, and the country will struggle to
comply with the conditions; and c) the fact that the implementation of the
Private Sector Involvement debt swap will probably mean changing the
jurisdiction under which Greek debt is denominated from mainly Greek law in the
majority to international law in the totality, and that the only creditors left
on whom the country can effectively default is now the official sector. This
latter point is undoubtedly the most important, although being able to grasp
its full implications implies an understanding of the first two. Essentially, if the unsustainability of the
Greek debt path and the inability to comply with conditionality are accepted,
then a further default will be inevitable, but such a default will undoubtedly
be a very, very hard one, and most likely an uncontrolled one. In the first
place if the country were to leave the Euro after the debt swap, then the new
Greek bonds could now not be converted to New Drachma (or equivalent) by a
weekend session of the Greek parliament, and the country would have to default
on bonds denominated in Euros, which would presented them with all kinds of
problems.
Jo Ritzen, Klaus F. Zimmermann, IZA: Fading
Hope in the US. A substantial literature claims that the
strong increase in inequality over the last decade in countries such as the US
would lead to a collapse of society. Fading hopes in the population seem to
confirm this. The paper rejects this interpretation since the decline in hopes
cannot be traced back to rising inequality.
William B. Peterman, FED: The Effect of Endogenous Human Capital
Accumulation on Optimal Taxation. This paper considers
the impact of endogenous human capital accumulation on optimal tax policy in a
life cycle model. Including endogenous human capital accumulation, either
through learning-by-doing or learning-or-doing, is analytically shown to create
a motive for the government to use age-dependent labor income taxes. If the
government cannot condition taxes on age, then it is optimal to use a tax on
capital in order to mimic such taxes. Quantitatively, introducing
learning-by-doing or learning-or-doing increases the optimal tax on capital by
forty or four percent, respectively. Overall, the optimal tax on capital is
thirty five percent higher in the model with learning-by-doing compared to the
model with learning-or-doing implying that how human capital accumulates is of
significant importance when determining the optimal tax policy.
Daniel H. Cooper, Byron F. Lutz, and Michael G. Palumbo, FED:
Quantifying the Role of Federal and State Taxes in Mitigating Wage Inequality. Wage inequality has risen dramatically in the
United States since at least 1980. This paper quantifies the role that the tax
policies of the federal and state governments have played in mitigating wage
inequality. The analysis, which isolates the contribution of federal taxes and
state taxes separately, employs two approaches. First, cross-sectional
estimates compare before-tax and after-tax inequality across the 50 states and
the District of Columbia. Second, inequality estimates across time are
calculated to assess the evolution of the effects of tax policies. The results
from the first approach indicate that the tax code reduces wage inequality
substantially in all states. On average, taxes reverse approximately the last
two decades of growth in wage inequality. Most of this compression of the
income distribution is attributable to federal taxes. Nevertheless, there is
substantial cross-state variation in the extent to which state tax policies compress
the income distribution. Cross-state differences in gasoline taxes have a
surprisingly large impact on income compression, as do sales tax exemptions for
food and clothing. The results of the second approach indicate that the
mitigating influence of tax policy on wage inequality has increased very
modestly since the early 1980s. The increase is due to the widening of the
pre-tax wage distribution interacting with a progressive tax structure. In
contrast, legislated tax changes over this period decreased income compression
somewhat.
Chiara Criscuolo,
Ralf Martin, Henry Overman, John Van Reenen, NBER: The Causal Effects of an
Industrial Policy. We exploit
multiple changes in the area-specific eligibility criteria for a major program
to support manufacturing jobs ("Regional Selective Assistance"). Area
eligibility is governed by pan-European state aid rules which change every
seven years and we use these rule changes to construct instrumental variables for
program participation. We match two decades of UK panel data on the population
of firms to all program participants. IV estimates find positive program
treatment effect on employment, investment and net entry but not on TFP. OLS
underestimates program effects because the policy targets underperforming
plants and areas. The treatment effect is confined to smaller firms with no
effect for larger firms (e.g. over 150 employees). We also find the policy
raises area level manufacturing employment mainly through significantly
reducing unemployment. The positive program effect is not due to substitution
between plants in the same area or between eligible and ineligible areas
nearby. We estimate that "cost per job" of the program was only
$6,300 suggesting that in some respects investment subsidies can be cost
effective.
Alex Tabarrok , Marginal Revolution Blog: Unemployment Insurance and
Disability Applications. More than 8.5 million workers are now collecting
disability insurance, in other words almost 6% of the labor force is officially
disabled. Perhaps not surprisingly, disability applications shot up just as
unemployment benefits started to exhaust.
Ryan Avent, Free Exchange Blog: Cognitive inequality. Politicians, and many
economists, are increasingly focused on the importance of global supply
chains—where production is done and what benefits are conferred on those
controlling which parts of the production line. Now there are certainly some
interesting and potentially important issues in that discussion, but what most
people seem to gloss over is the fact that the most important parts of modern
supply chains are embedded in the heads of innovators and (I would add and Mr
Smith probably would not) in the space between groups innovators in which
discussions about innovation take place. To take a common and extreme but
useful example: the most important parts of the Apple supply chain are Steve
Jobs' brain and the community of engineers tasked with turning Jobs' musings
into actual, revolutionary products.
Mark Van Vugt, Wendy Iredale, BJP: Men behaving nicely: Public goods as
peacock tails. Insights from sexual selection and costly
signalling theory suggest that competition for females underlies men's public
good contributions. We conducted two public good experiments to test this
hypothesis. First, we found that men contributed more in the presence of an
opposite sex audience, but there was no parallel effect for the women. In
addition, men's public good contributions went up as they rated the female
observer more attractive. In the second experiment, all male groups played a
five round public good game and their contributions significantly increased
over time with a female audience only. In this condition men also volunteered
more time for various charitable causes. These findings support the idea that
men compete with each other by creating public goods to impress women. Thus, a
public good is the human equivalent of a peacock's tail.
AGING AND RETIREMENT
Atella, Vincenzo
and Carbonari, Lorenzo, MPRA: When elders rule: is gerontocracy harmful for
growth? We study the relationship between
gerontocracy and aggregate economic perfomance in a simple model where growth
is driven by human capital accumulation and productive government spending. We
show that gerontocratic élites display the tendency to underinvest in public
education and productive government services and thereby may be harmful growth.
In absence of intergenerational altruism, the damage caused by gerontocracy is
mainly due to the lack in long-term delayed-return investment originated by the
shorter life horizon of the ruling class with respect to the rest of the
population. An empirical analysis is carried out on a rich data set that al
lows to test theoretical results across different countries and different sectors. The
econometric results confirm our main
hypotheses.
Klaus Prettner,
David Canning, Harvard: Increasing life expectancy and optimal retirement:does
population aging necessarily undermine economic prosperity? In this paper we
analyze the effects of changes in longevity and the pace of technological
progress on interest rates, savings behaviour and optimal retirement decisions.
In so doing we embed the dynamic optimization problem of choosing a life-cycle
consumption path and the retirement age into a general equilibrium setting.
Thereby we assume that technology evolves exogenously and the production side
of the economy can be described by means of a neoclassical production function.
Our results show that (i) the aggregate capital to consumption ratio increases
and interest rates decrease in response to increases in longevity; (ii) the
response of the optimal retirement age to increases in longevity is ambiguous. However,
for reasonable parameter values the optimal retirement age increases in
longevity; (iii) the aggregate capital to consumption ratio decreases and
interest rates increase in response to faster technological progress; (iv) the
response of the optimal retirement age to faster technological progress is
ambiguous. However, for reasonable parameter values the optimal retirement age
increases in the pace of technological improvements.
FEBRUARY 16 2012
Benjamin R. Mandel, NY Fed: Why
Is the U.S. Share of World Merchandise Exports Shrinking? As the U.S. share of
the world goods trade slips from its level in the 1980s and 1990s, concerns have
arisen that the productivity of U.S. exporters has not been growing as fast as
that of foreign firms selling similar products. However, an analysis of
industry-level trade data suggests that two other factors explain much of the
drop in export share: the changing composition of the products traded
internationally and the diminished share of U.S. GDP in global output.
Declining relative productivity may have played a role in the early 2000s, but
it has not been a large factor across industries over the longer term. Overall,
there is little evidence of a broad-based decline in the nation’s ability to
compete in global markets.
Christina D. Romer, NYT: Do Manufacturers Need Special Treatment? A successful argument
for a government manufacturing policy has to go beyond the feeling that it’s
better to produce “real things” than services. American consumers value health
care and haircuts as much as washing machines and hair dryers. And our earnings
from exporting architectural plans for a building in Shanghai are as real as
those from exporting cars to Canada. The economic rationales for a policy aimed
specifically at shoring up manufacturing largely fall into three categories.
None are completely convincing: Market Failures ..., Jobs ..., Income
Distribution ...As an economic historian, I appreciate what manufacturing has
contributed to the United States. It was the engine of growth that allowed us
to win two world wars and provided millions of families with a ticket to the
middle class. But public policy needs to go beyond sentiment and history. It
should be based on hard evidence of market failures, and reliable data on the
proposals’ impact on jobs and income inequality. So far, a persuasive case for
a manufacturing policy remains to be made...
Daron Acemoglu,
David Autor , NBER: What Does Human Capital Do? A Review of Goldin and Katz's The
Race between Education and Technology. Goldin and Katz's The
Race between Education and Technology is a monumental achievement that supplies
a unified framework for interpreting how the demand and supply of human capital
have shaped the distribution of earnings in the U.S. labor market over the 20th
century. This essay reviews the theoretical and conceptual underpinnings of
this work and documents the success of Goldin and Katz's framework in
accounting for numerous broad labor market trends. The essay also considers
areas where the framework falls short in explaining several key labor market
puzzles of recent decades and argues that these shortcomings can potentially be
overcome by relaxing the implicit equivalence drawn between workers' skills and
their job tasks in the conceptual framework on which Goldin and Katz build. The
essay argues that allowing for a richer set of interactions between skills and
technologies in accomplishing job tasks both augments and refines the
predictions of Goldin and Katz's approach and suggests an even more important
role for human capital in economic growth than indicated by their analysis.
Brandon Keim, Wired: Why Some Wild Animals Are Becoming Nicer. Nature is supposed
to be red in tooth and claw, and domestication an artificial process for making
animals gentle. But it appears that some corners of the animal kingdom are
becoming kinder, gentler places. Certain creatures may be domesticating
themselves. This possibility is most apparent in bonobos, a close cousin of
chimpanzees. Unlike their violent cousins, bonobos are generally peaceful. And
while many animals have evolved to be socially agreeable, bonobos — and
possibly other species — seem to be experiencing something more precise and
profound: the physical and behavioral changes specifically described in studies
of domestication, but as a natural evolutionary process.
Tim Harford, The Undercover Economist Blog: Five steps to an organised
inbox. Here are a few microeconomic analysis-tested tips to
get your email under control: It is remarkably easy, however, to get rid of
email: all that is needed is the “will to delete” – ideally the deletion should
be swift and without remorse. Steve Whittaker, a computer scientist at IBM
Research, with four colleagues, has conducted a study to figure out the
effectiveness of these different approaches. It’s called “Am I wasting my time
organising email?” and the conclusion is “yes, you are”.
AGING AND RETIREMENT
Taina Leinonen et al, SJPH: Interrelationships between education,
occupational social class, and income as determinants of disability retirement. The effects of socioeconomic position on
disability retirement may not be fully captured if the pathways between the
various subdomains are disregarded. Our results suggest that efforts to delay
and prevent disability retirement should focus on lifestyle and cognitive
factors associated with education, as well as on factors associated with social
class such as working conditions and power resources.
James M. Poterba,
Steven F. Venti, David A. Wise, NBER: Were They Prepared for Retirement?
Financial Status at Advanced Ages in the HRS and AHEAD Cohorts. Many analysts have considered whether
households approaching retirement age have accumulated enough assets to be well
prepared for retirement. In this paper, we shift from studying household
finances at the start of the retirement period, an ex ante measure of
retirement preparation, to studying the asset holdings of households in their
last years of life. The analysis is based on Health and Retirement Study. We
find that a substantial fraction of persons die with virtually no financial
assets--46.1 percent with less than $10,000--and many of these households also
have no housing wealth and rely almost entirely on Social Security benefits for
support. In addition this group is disproportionately in poor health. Based on
a replacement rate comparison, many of these households may be deemed to have
been well-prepared for retirement, in the sense that their income in their final
years was not substantially lower than their income in their late 50s or early
60s. Yet with such low asset levels, they would have little capacity to pay for
unanticipated needs such as health expenses or other financial shocks or to pay
for entertainment, travel, or other activities. This raises a question of
whether the replacement ratio is a sufficient statistic for the
"adequacy" of retirement preparation.
Deloitte: Tilbage til
arbejdsmarkedet. Erfaringer med folkepensionister og efterlønsmodtagere, der
arbejder. På
engelsk anvendes betegnelsen unretirement for, at folkepensioni-ster og
efterlønsmodtagere vender tilbage til arbejdsmarkedet, selvom de oprindeligt
havde trukket sig tilbage. At dømme efter antallet af folkepensionister og
efterlønsmodta-gere, der stiller deres arbejdskraft til rådighed på job- og
rekrut-teringsportaler, har pensionister og efterlønsmodtagere lyst til at
arbejde. Samtidig har virksomhederne, der har ansat pensioni-ster og
efterlønsmodtagere, gode erfaringer og fremhæver kvali-teter som stabilitet,
omhyggelighed og lang erhvervs- og livser-faring hos deres medarbejdere over 60
år. Det skaber gode for-udsætninger for at få flere pensionister og
efterlønsmodtagere til at vende tilbage til arbejdsmarkedet. Det Danska Social-
och integrationsministeriet bedriver ett project för “Unretirement:
FEBRUARY 9 2012
Ryan Avent, Free Exchange Blog: The hazards of crisis. I don't know whether
the euro zone has figured out a way to muddle through this mess. It seems
pretty clear to me that the euro zone has not done the things I thought it
needed to do to make it through, but at the moment it isn't that easy to figure
out what the ECB's actual underlying strategy is. Perhaps time will vindicate
me in every way; so I say to myself every morning. My feeling is that the
crisis is about the fear that institutions will be unable to make good on their
obligations, that failure to make good on these obligations will cause
significant financial and economic disruption, and that the only way to solve
the problem is to figure out how to handle a potential shortfall in a manner
that's as minimally disruptive as possible—perhaps through inflation and/or
financial repression.
Daniel J. Wilson, San Francisco Fed: Government Spending: An Economic
Boost? The severe global
economic downturn and the large stimulus programs that governments in many
countries adopted in response have generated a resurgence in research on the
effects of fiscal policy. One key lesson emerging from this research is that
there is no single fiscal multiplier that sums up the economic impact of fiscal
policy. Rather, the impact varies widely depending on the specific fiscal
policies put into effect and the overall economic environment.
Mark Setterfield, Trinity College: Real Sector Imbalances and the Great
Recession. While much attention has been focused on the
financial woes of the US economy in the wake of the Great Recession, this
chapter focuses on an important real sector imbalance: the failure of real
wages to keep pace with productivity growth over the past three decades. This
imbalance is shown to create a structural flaw in the aggregate demand generating
process that threatens to undermine future macroeconomic performance. The
chapter reflects on the policy responses necessary to remedy this situation,
and the likelihood that the US will succeed in avoiding a future of secular
stagnation.
David Beckworth, Macro and other musings Blog: Can Raising Interest Rates Spark a Recovery? The economy is not sluggish because interest
rates are low. Rather, interest rates are low because the economy is sluggish.
The demand for credit by households and firms simply is depressed. They see uncertainty, lower-than-expected
future income paths, on-going deleveraging, and consequently have pulled back
on their borrowing. There also has been
an increase in domestic private savings for the same reasons. And to pile it on, there is this global
shortage of safe assets problem which causes foreigners to channel their
savings here too. All of these
developments mean lower interest rates.
Rob Valletta, Katherine Kuang, San Francisco Fed: Why Is Unemployment
Duration So Long? During the recent recession, unemployment duration
reached levels well above those of past downturns. Duration has continued to
rise during the uneven economic recovery that began in mid-2009. Elevated
duration reflects such factors as changes in survey measurement, the
demographic characteristics of the unemployed, and the availability of extended
unemployment benefits. But the key explanation is the severe and persistent
weakness in aggregate demand for labor.
Gregory F. Branch, Eric A. Hanushek, Steven
G. Rivkin, NBER: Estimating the Effect of Leaders on Public Sector
Productivity: The Case of School Principals. Outcome-based
estimates of principal value-added to student achievement reveal significant
variation in principal quality that appears to be larger for high-poverty
schools. Alternate lower-bound estimates based on direct estimation of the
variance yield smaller estimates of the variation in principal productivity but
ones that are still important, particularly for high poverty schools. Patterns
of teacher exits by principal quality validate the notion that a primary
channel for principal influence is the management of the teacher force.
Finally, looking at principal transitions by quality reveals little systematic
evidence that more effective leaders have a higher probability of exiting high
poverty schools.
Michael Waldman, Sean Nicholson, Nodir
Adilov, NBER: Positive and Negative Mental Health Consequences of Early
Childhood Television Watching. An extensive literature in medicine investigates the
health consequences of early childhood television watching. However, this
literature does not address the issue of reverse causation, i.e., does early
childhood television watching cause specific health outcomes or do children
more likely to have these health outcomes watch more television? This paper
uses a natural experiment to investigate the health consequences of early
childhood television watching and so is not subject to questions concerning reverse
causation. Specifically, we use repeated cross-sectional data from 1972 through
1992 on county-level mental retardation rates, county-level autism rates, and
county-level children’s cable-television subscription rates to investigate how
early childhood television watching affects the prevalence of mental
retardation and autism. We find a strong negative correlation between average
county-level cable subscription rates when a birth cohort is below three and
subsequent mental retardation diagnosis rates, but a strong positive
correlation between the same cable subscription rates and subsequent autism
diagnosis rates. Our results thus suggest that early childhood television
watching has important positive and negative health consequences.
Andrei Shleifer,
VoxEU: Seven things I learned about transition from communism. Twenty years ago,
communist countries began their shift towards capitalism. What do we know now
that we didn’t know then? Harvard's Andrei Shleifer, the Russian-born,
American-trained economist, provides his answers and their relevance for
contemporary policymakers.
AGING AND RETIREMENT
Benedict Clements, IMF: It’s the Years, Not The Mileage: IMF Analysis of
Pension Reforms in Advanced Economies. Indiana Jones, the fictional character of the
namesake movies, once said “It’s not the years, it’s the mileage.” This quote
comes to mind as many advanced economies wrestle with pension reform and the
best way to ensure both retirees and governments don’t go broke. Our view,
explained in a new study, is that the years do matter. Our analysis shows that
gradually raising retirement ages could help countries contain increases in
pension spending and boost economic growth. Further cuts in pension benefits,
or raising payroll contributions, are also options countries could consider,
although many countries will find many advantages in raising retirement ages.
The challenge is to reform pension systems without hurting their ability to
provide income security for the elderly and prevent old-age poverty
Nicolai Kristensen, IZA: Training and Retirement. This paper presents
results on the effect of formal life-long learning on the decision to retire
early. Specifically, I estimate an Option Value model based on individual
employer-employee longitudinal data including comprehensive government
co-sponsored training records dating back more than 30 years. Human capital
theory predicts that the amount of training and the length of working life will
be positively correlated in order to recoup investment and yield a higher
return. Significant upper bound effects of training in prolonging working life
are found for certain types of training and certain groups of workers. However,
out-of-sample simulations indicate that on average one year of training only
adds up to one month to the career length. This means that training in itself
is not enough to substantially prolong careers and increase the workforce.
Tobias Launa, Johanna Wallenius, HHS: A Life Cycle Model of Health and
Retirement: The Case of Swedish Pension Reform. In this paper we
develop a life cycle model of labor supply and retirement to study the
interactions between health and the labor supply behavior of older workers, in
particular disability insurance and pension claiming. In our framework,
individuals choose when to stop working and, given eligibility criteria,
when/if to apply for disability and pension benefits. Individuals care about
their health and can partially insure against health shocks by investing in
health. We use the model to study the labor supply implications of the recent
Swedish pension reform. We find that the new pension system creates big
incentives for the continued employment of older workers. In particular, the
model predicts an increase in the average retirement age of more than two
years.
FEBRUARY 2 2012
Tyler Durden , Zero Hedge Blog: This Is Europe's Scariest Chart. Surging Greek and
Portuguese bond yields? Plunging Italian bank stocks? The projected GDP of the
Eurozone? In the grand scheme of things, while certainly disturbing, none of
these data points actually tell us much about the secular shift within European
society, and certainly are nothing that couldn't be fixed if the ECB were to
gamble with hyperinflation and print an inordinate amount of fiat units
diluting the capital base even further. No: the one chart that truly captures
the latent fear behind the scenes in Europe is that showing youth unemployment
in the continent's troubled countries (and frankly everywhere else). Because
the last thing Europe needs is a discontented, disenfranchised, and devoid of
hope youth roving the streets with nothing to do, easily susceptible to
extremist and xenophobic tendencies: after all, it must be
"someone's" fault that there are no job opportunities for anyone.
Michael B. Devereux, Ozge Senay, Alan
Sutherland, NBER: Nominal Stability and Financial Globalization. Over the one and a
half decades prior to the global financial crisis, advanced economies
experienced a large growth in gross external portfolio positions. This
phenomenon has been described as Financial Globalization. Over roughly the same
time frame, most of these countries also saw a substantial fall in the level
and variability of inflation. Many economists have conjectured that financial
globalization contributed to the improved performance in the level and
predictability of inflation. In this paper, we explore the causal link running
in the opposite direction. We show that a monetary policy rule which reduces
inflation variability leads to an increase in the size of gross external
positions, both in equity and bond portfolios. This is a highly robust
prediction of open economy macro models with endogenous portfolio choice. It
holds across many different modeling specifications and parameterizations. We
also present preliminary empirical evidence which shows a negative relationship
between inflation volatility and the size of gross external positions.
Pierre-Olivier
Gourinchas, Maurice Obstfeld, VoxEU:
Understanding past and future financial crises. What explains the
different effects of the crisis around the world? This column compares the
2007–09 crisis to earlier episodes of banking, currency, and sovereign debt
distress and identifies domestic-credit booms and real currency appreciation as
the most significant predictors of future crises, in both advanced and emerging
economies. It argues these results could help policymakers determine the need
for corrective action before crises hit.
Daniel Aaronson, Jonathan Davis, Luojia Hu, Chicago Fed: Explaining the decline in the U.S. labor
force participation rate. Just under half of
the post-1999 decline in the U.S. labor force participation rate, or LFPR (the
proportion of the working-age population that is employed or unemployed and
seeking work), can be explained by long-running demographic patterns, such as
the retirement of baby boomers. These patterns are expected to continue,
offsetting LFPR improvements due to economic recovery
Kenneth Rogoff, Project Syndicate: Coronary Capitalism. A systematic and
broad failure of regulation is the elephant in the room when it comes to
reforming today’s Western capitalism. ... But is the problem unique to the
financial industry...? Consider the food industry... Obesity rates are soaring
around the entire world... Of course,... there are numerous other examples,
across a wide variety of goods and services, where one could find similar
issues. Here, though, I want to focus on the food industry’s link to broader
problems with contemporary capitalism...True, market forces have spurred
innovation, which has continually driven down the price of processed food, even
as the price of plain old fruits and vegetables has gone up. That is a fair
point, but it overlooks the huge market failure here. Consumers are provided
with precious little information through schools, libraries, or health
campaigns; instead, they are swamped with disinformation through advertising.
Conditions for children are particularly alarming..., children are co-opted by
channels paid for by advertisements...If our only problems were the food
industry causing physical heart attacks and the financial industry facilitating
their economic equivalent, that would be bad enough. But the pathological
regulatory-political-economic dynamic that characterizes these industries is
far broader. We need to develop new and much better institutions to protect
society’s long-run interests.Of course, the balance between consumer
sovereignty and paternalism is always delicate. But we could certainly begin to
strike a healthier balance than the one we have by giving the public far better
information across a range of platforms, so that people could begin to make
more informed consumption choices and political decisions.
Steve Loughna et
al, University of Kent: Economic Inequality Is Linked to Biased Self-Perception. People’s
self-perception biases often lead them to see themselves as better than the
average person (a phenomenon known as self-enhancement). This bias varies
across cultures, and variations are typically explained using cultural
variables, such as individualism versus collectivism. We propose that
socioeconomic differences among societies—specifically, relative levels of
economic inequality—play an important but unrecognized role in how people
evaluate themselves. Evidence for self-enhancement was found in 15 diverse
nations, but the magnitude of the bias varied. Greater self-enhancement was
found in societies with more income inequality, and income inequality predicted
cross-cultural differences in self-enhancement better than did
individualism/collectivism. These results indicate that macrosocial differences
in the distribution of economic goods are linked to microsocial processes of
perceiving the self.
AGING AND RETIREMENT
Machado, C. Sofia, Portela, IZA: Miguel
Hours of Work and Retirement Behavior. Using a novel dataset
from the 2006 Portuguese Labor Force Survey this paper examines the impact of a
voluntary reduction in hours of work, before retirement, on the moment of exit
from the labor force. If, as often suggested, flexibility in hours of work is a
useful measure to postpone retirement, then a reduction in working hours should
be associated with retirement at later ages. Results prove otherwise suggesting
that reducing hours of work before retirement is associated with early exits
from the labor force. A reduction in hours of work seems to signal the worker's
wish to retire sooner rather than to announce the desire of remaining in the
labor market.
David M. Cutler Ellen Meara Seth Richards-Shubik, Harvard University:
Healthy Life Expectancy: Estimates and Implications for Retirement Age Policy. The simultaneous
growth in longevity and mounting budget deficits in the U.S. have increased
interest in raising the age of eligibility for public health and retirement
benefits. The consequences of this policy depend on the health of the near
elderly, and on the distribution of health by demographic group. We first
describe healthy life expectancy at age 62 by sex, race, and education. Healthy
life expectancy varies widely within and across gender and race groups, with
the best-off groups enjoying nearly 4 more years of healthy life than less
well-off groups. We then simulate the capacity to work of near elderly
individuals (62-64 year-olds) based on the work, disability, and retirement
status of 57-61 year-olds reporting the same level of health. Our estimates
indicate that work capacity is substantial. The health status of 62-64
year-olds suggests their labor force participation could rise by over 15
percentage points without access to early Social Security retirement benefits,
while disability rates would increase modestly, by 3 percentage points. Still,
less advantaged groups such as those without any college education, would
experience a rise in disability rates that is twice as large, indicating the
uneven burden of changes in the age of eligibility.
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