NOVEMBER 2011

NOVEMBER 25 2011

Matthew Yglesias, Thinkprogess Blog:  €conomia, The Game Of Terrible Monetary Policy. The good people at the European Central Bank have a game on their website called €conomia that I would really encourage anyone who reports on economic policy to play around with for a while. The game embeds a number of assumptions I would disagree with, but that seem telling. Short-term interest rates are your only policy tool. Long story short, the only responsible thing to do is to prophylactically raise rates in the face of adverse supply shocks. It shouldn’t stun us that this is what the game says, since it’s how the ECB behaves in practice. But the consequences have been disastrous in practice and I’m not sure what theoretical support they think they have for this view of how the world works.

Paolo Manasse, Giulio Trigilia, EconoMonitor: Italy’s Humpy Swap Curve and Berlusconi’s Time-Bomb Politics. The price of credit-default swaps can be used to estimate the probability of sovereign default. This column examines the case of Italy, looking at how default risk varies across maturities and how this has evolved since January 2011. It suggests that markets are pricing in a heightening of risk two years from now – mostly probably due to political tensions and the risk of deadlocked reform.

Hyun Song Shin, Princeton University: Global Banking Glut and Loan Risk Premium. European global banks intermediating US dollar funds are important in influencing credit conditions in the United States. US dollar-denominated assets of banks outside the US are comparable in size to the total assets of the US commercial bank sector, but the large gross cross-border positions are masked by the netting out of the gross assets and liabilities. As a consequence, current account imbalances do not reflect the influence of gross capital flows on US financial conditions. This paper pieces together evidence from a global flow of funds analysis, and develops a theoretical model linking global banks and US loan risk premiums. The culprit for the easy credit conditions in the United States up to 2007 may have been the “Global Banking Glut” rather than the “Global Savings Glut”.

Christina D. Romer, Hamilton College: What Do We Know About the Effects of Fiscal Policy? Separating Evidence from Ideology. The one thing that has disillusioned me is the discussion of fiscal policy. Policymakers and far too many economists seem to be arguing from ideology rather than evidence. As I have described this evening, the evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process. That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policymaking is essential if we are ever going to triumph over this recession and deal with our long-run budget problems.

Andrew G Haldane, VoxEU: What is the contribution of the financial sector? In fact, high pre-crisis returns to banking had a much more mundane explanation. They reflected simply increased risk-taking across the sector. This was not an outward shift in the portfolio possibility set of finance. Instead, it was a traverse up the high-wire of risk and return. This hire-wire act involved, on the asset side, rapid credit expansion, often through the development of poorly understood financial instruments. On the liability side, this ballooning balance sheet was financed using risky leverage, often at short maturities. In what sense is increased risk-taking by banks a value-added service for the economy at large? In short, it is not.

Christopher L. Smith, Fed: What’s behind the dramatic decline in youth employment? There is little research regarding why teen employment has fallen. Some earlier work emphasized labor supply explanations related to schooling and education, such as an increased emphasis on college preparation (Aaronson, Park, and Sullivan 2006), while others have argued that adult immigrants have crowded out teens, at least in part because adult immigrants and native teens tend to be employed in similar occupations (Sum, Garrington, and Khatiwada 2006, Camarota and Jensenius 2010, Smith 2012). This paper presents updated trends in teen employment and participation across multiple demographic characteristics, and argues that, in addition to immigration, occupational polarization in the U.S. adult labor market has resulted in increased competition for jobs that teens traditionally hold. Testing various supply and demand explanations for the decline in employment since the mid‐1980s, I find that demand factors can explain at least half of the decline unexplained by the business cycle, and that supply factors can explain much of the remaining decline.

Antoinette Schoar, Luo Zuo, MIT: How the Economy Impacts CEO Careers and Management Style. Economic conditions at the beginning of a manager’s career have lasting effects on the career path and the ultimate outcome as a CEO. CEOs who start in recessions take less time to become CEOs, but end up as CEOs in smaller firms, receive lower compensation, and are more likely to rise through the ranks within a given firm rather than moving across firms and industries. Moreover, managers who start in recessions have more conservative management styles once they become CEOs. These managers spend less in capital expenditures and R&D, have lower leverage, are more diversified across segments, and show more concerns about cost effectiveness. While looking at the role of early job choices on CEO careers is more endogenous, the results support the idea that certain types of starting positions are feeders for successful long-run management careers: Starting in a firm that ranks within the top ten firms from which CEOs come from is associated with favorable outcomes for a manager – they become CEOs in larger companies and receive higher compensation.

Alfons J. Weichenrieder, Tasneem Zafar, CESifo: Evaluating Real World Income Distributions Behind the Veil of Ignorance - How Risk Averse Do You Have to Be to Prefer Europe Over the US? The paper uses a veil of ignorance approach and income distribution data of developed countries to arrive at inequality corrected income rankings. While a risk neutral individual (based on year 2000 data) would have preferred to be born into the US rather than any European country in our sample except Luxembourg, a coefficient of relative risk aversion of 2 suffices to make several European countries look preferable. The paper also sheds light on the risk corrected average income on a gender basis and scans for times of diminished expectations, i.e. periods where the expected utility of being born into a country has reduced over time.

Dionissi Aliprantis, Cleveland Fed: When should children start school?  Our understanding of effects from kindergarten entrance age is complicated by at least two facts: a child’s age relative to their classmates may be just as important as their entrance age, and the choice of parents or schools to delay a child’s enrollment is likely to be correlated with entrance age effects. This paper addresses both of these issues by presenting a novel identification strategy for separately estimating effects from entrance and relative age at school entry that addresses the issue of essential heterogeneity. After first selecting a sample of children from the ECLS-K data set with quasi-random variation in entrance and relative ages, this paper then specifies and estimates education production functions for achievement. Entrance age parameters are positive, large, and persist until the spring of third grade. Relative age parameters are smaller, tend to be negative, and fade out for math achievement by third grade. The estimated parameters have the following implications for the average child in our sample: both an earlier entrance cutoff date and an earlier birth date will increase achievement if the child remains eligible. There is evidence of extreme heterogeneity in effects by gender and home environment, and these are likely to be the results most relevant for policy.

Kevin Drum, Mother Jones: Why Artifical Intelligence Is Closer Than We Realize. I haven't read Erik Brynjolfsson and Andrew McAfee's Race Against the Machine yet, but Matt Yglesias has and he says that one of their analogies has changed the way he thinks about technological progress. Basically, if something improves x% per year, then the level of change looks small at first but explodes later, even though the actual rate of change has stayed the same the entire time.  Assuming that Moore's Law doesn't break down, this is how AI is going to happen. At some point, we're going to go from 10% of a human brain to 100% of a human brain, and it's going to seem like it came from nowhere. But it didn't. It will have taken 80 years, but only the final few years will really be visible. As inventions go, video games and iPhones may not seem as important as radios and air conditioners, but don't be fooled. As milestones, they're more important. Never make the mistake of thinking that just because the growing intelligence of computers has been largely invisible up to now that it hasn't happened. It has.

Annerstedt, Matilda, Alnarp: Nature and public health. Nature’s potentially positive effect on wellbeing may serve as an important resource for population health. The aim of this thesis was to consider these effects from a public health perspective. The state of the art for nature as intervention was explored by a systematic review designed in accordance with the Cochrane principles. Different landscape types’ effect on stress and mental health were studied by one cross-sectional survey study and one longitudinal epidemiological study. Finally physiological stress recovery reactions by a standardized nature setting were examined in an experimental randomized between group study in a virtual reality laboratory. A very short and simplified conclusion of the thesis would be that a small evidence base of the efficiency of nature assisted therapy is in line with the findings of certain nature qualities as resources for recovery from stress and reducing the risk for mental health problems, and that this may partly be mediated by an active relaxation mechanism within the parasympathetic nerve system.

AGING AND RETIREMENT

Barry Bosworth, R. Kent Weaver, CRR: Social Security on Auto-Pilot: International Experience with Automatic Stabilizer Mechanisms. As the baby boom generation enters retirement, a long-forecast funding crisis of the Social Security system is about to become a reality. Many other high-income countries are faced with similar financial problems with their public pension systems.  Some of those countries have adopted legislative measures to reduce their funding deficits, and a few have included automatic adjustment mechanisms by which staged adjustments would be made in either benefits or revenues without the need for new legislation. We examine the cases of automatic stabilizer mechanisms (ASMs) in Canada, Sweden, Germany and Italy, with the former two being relatively successful examples, while the latter two are cases of ASMs that were more problematic. Drawing on these international examples, we examine various automatic mechanisms that could be implemented in the United States. We consider three reforms: increase in the retirement age, adoption of a chained Consumer Price Index, and adjustment of the indexation of the taxable wage ceiling so as to stabilize the ratio of taxable to covered wages at its 1983 value of 90 percent. Together, these three reforms would reduce the 75-year actuarial deficit to about ½ percent of taxable wages. We conclude, though, that until the current deficit is fully eliminated, an ASM aimed at maintaining financial balance would not make sense for the Social Security program. However, the international experience does offer a number of lessons for future reforms of the U.S. retirement system.

Priscilla D. Allen, Waldo C. Klein, APD: Productive Challenges and Opportunities in Work and Retirement: Background from the USA. There is no doubt that population aging raises enormous economic, social, and political considerations, not the least of which is the necessity to promote the rights, opportunities, and productivity of older workers in a society. In fact, Peterson (2002) suggests that the rights and opportunities of older workers may be one of the most challenging policy issues of the 21st century. The upcoming years will determine how the labor market entices, engages, and retains older workers, requiring a philosophical shift in viewing the employment of older workers. The perception that older workers are more expensive and time-consuming is false, and capturing the unused labor force capacity of older adults is something that is of global interest (Gruber and Wise, 2007).

Hans Fehr, Manuel Kallweit, Fabian Kindermann, University of Würzburg:  Should Pensions Be Progressive? Yes, at Least In Germany! Recent reforms that aim at reducing the upcoming burdens of population aging might seriously harm low income individuals. An increase in old-age poverty and disability will be the result. Under this prospect, the present paper quantitatively characterizes the optimal progressivity of unfunded pension systems in an overlapping generations model with idiosyncratic income, disability and longevity risk as well as endogenous labor supply at the intensive and extensive margin. Focusing on the German pension system, our model features the most recent demographic projections and distinguishes three skill classes with skill-dependent risk profiles. Starting from a baseline path that reflects a purely earnings related pension system, we increase the degree of progressivity and compute the resulting macroeconomic, welfare and efficiency effects. For our most preferred parametrization we find an optimal flat-rate pension share of 40 percent. This indicates that in Germany recent reforms that aim at raising retirement age and cutting benefit levels should be complemented by increases in pension progressivity, since improved insurance provision dominates higher labor supply distortions. In addition, we also find that reductions in the benefit level (i.e. privatization) will only reduce economic efficiency.

NOVEMBER 18 2011

Willem Buiter (Citi); Businessinsider: Europe Could Just Have Days Before A Financial Catastrophe. Time is running out fast. I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now. The only two guns in town, one is only theoretical, and that is increasing the size of the EFSF to 3 trillion.  It should happen but it can't for political reasons. The other one, the only remaining share is the ECB.  They may have to hold their noses while they do it, and if they don't do it, it's the end of the euro zone.

Ryan Avent: Economist Blog: When will they meet again? America's has pulled out of its nose dive. Congress hasn't done anything too dangerous in a few months, the Federal Reserve is once again moving to support recovery, and labour markets are looking more buoyant than they have in some time. Europe, on the other hand, is sinking. The euro-zone economy grew 0.2% from the second quarter of 2011 to the third, but all signs indicate that that will be the last flicker before a return to recession. Indeed, a number of large economies, including the Netherlands, were already flirting with recession in the third quarter (Greece and Portugal have been contracting for some time now). European industrial production cratered in September, in core economies like Germany and France as well as around the periphery. Given the near-panic in European financial markets, conditions are not exactly supportive of growth.

Ambrose Evans-Pritchard, Telegraph: The great euro Putsch rolls on as two democracies fall. Europe’s scorched-earth policies have begun in earnest. The inherent flaws of monetary union have created a crisis of such gravity that EU leaders now feel authorized to topple two elected governments.

Spiegel: Saving the Euro: Germany's Central Bank against the World. Jens Weidmann, the new president of Germany's Bundesbank, is strongly opposed to making the European Central Bank the lender of last resort in efforts to prop up the common currency. It's a lonely fight, however, and the pressure from Germany's European partners is intense. Some warn that Weidmann's course could end up destroying the euro.

Selim Elekdag, Yiqun Wu, IMF: Rapid Credit Growth: Boon or Boom-Bust? Episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises. This paper presents the findings of a comprehensive event study focusing on 99 credit booms. Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies. In particular, domestic policy rates were below trend during the pre-peak phase of credit booms and likely fuelled macroeconomic and financial imbalances. For emerging economies, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity) are virtually flat during these periods. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies.

Massimiliano Caporin, Angelo Ranaldo, Paolo Santucci de Magistris, SnB: On the Predictability of Stock Prices. Contrary to the common wisdom that asset prices are hardly possible to forecast, we show that high and low prices of equity shares are largely predictable. We propose to model them using a simple implementation of a fractional vector autoregressive model with error correction (FVECM). This model captures two fundamental patterns of high and low prices: their cointegrating relationship and the long memory of their difference (i.e. the range), which is a measure of realized volatility. Investment strategies based on FVECM predictions of high/low US equity prices as exit/entry signals deliver a superior performance even on a risk-adjusted basis.

Ivan O. Kitov, Cornell: Okun's law revisited. Is there structural unemployment in developed countries? Okun's law for the biggest developed countries is re-estimated using the most recent data on real GDP per capita and the rate of unemployment. Our results show that the change in unemployment rate can be predicted with a high accuracy. The link needs the introduction of a structural break which might be caused by the change in monetary policy or/and in measurement units. Statistically, the link between the studied variables is characterized by the coefficient of determination between 0.40 (Australia) and 0.84 (the USA). The residual errors can be associated with measurement errors. The obtained results suggest the absence of structural unemployment in the studied developed countries

ILO: World of Work report 2011. Social unrest is on the rise, especially in advanced economies …Out of the 119 countries for which 2009 and 2010 Gallup survey data are available, 40 per cent of the countries show an increase in the scores for the social unrest index (the higher the score, the higher the estimated unrest).

Thomas Bauer, Michael Fertig, Matthias Vorell, IZA: Neighborhood Effects and Individual Unemployment. Using a unique dataset for Germany that links individual longitudinal data from the GSOEP to regional data from the federal employment agency and data of real estate prices, we evaluate the impact of neighborhood unemployment on individual employment prospects. The panel setup and richness of the data allows us to overcome some of the identification problems which are present in this strand of literature. The empirical results indicate that there is a significant negative impact of neighborhood unemployment on the individual employment probability.

Eric A. Hanushek, Susanne Link, Ludger Woessmann, NBER: Does School Autonomy Make Sense Everywhere?  Panel Estimates from PISA.D ecentralization of decision-making is among the most intriguing recent school reforms, in part because countries went in opposite directions over the past decade and because prior evidence is inconclusive.  We suggest that autonomy may be conducive to student achievement in well-developed systems but detrimental in low-performing systems.  We construct a panel dataset from the four waves of international PISA tests spanning 2000-2009, comprising over one million students in 42 countries.  Relying on panel estimation with country fixed effects, we identify the effect of school autonomy from within-country changes in the average share of schools with autonomy over key elements of school operations.  Our results show that autonomy affects student achievement negatively in developing and low-performing countries, but positively in developed and high-performing countries.  These results are unaffected by a wide variety of robustness and specification tests, providing confidence in the need for nuanced application of reform ideas.

Authors: Jaison R. Abel, Richard Deitz, NY Fed: The Role of Colleges and Universities in Building Local Human Capital. Colleges and universities can contribute to the economic success of a region by deepening the skills and knowledge—or human capital—of its residents. Producing graduates who join the region’s educated workforce is one way these institutions increase human capital levels. In addition, the knowledge and technologies created through research activities at area universities may not only attract new firms to a region but also help existing businesses expand and innovate. These “spillover effects” can in turn raise the region’s demand for high-skilled workers.

Ive Marx, Pieter Vandenbroucke, Gerlinde Verbist, IZA: Can Higher Employment Levels Bring Lower Poverty in the EU? Regression Based Simulations of the Europe 2020 Target. At the European level and in most EU member states, higher employment levels are seen as key to better poverty outcomes. But what can we expect the actual impact to be? Up until now shift-share analysis has been used to estimate the impact of rising employment on relative income poverty. This method has serious limitations. We propose a more sophisticated simulation model that builds on regression based estimates of employment probabilities and wages. We use this model to estimate the impact on relative income poverty of moving towards the Europe 2020 target of 75 percent of the working aged population in work. Two sensitivity checks are included: giving priority in job allocation to jobless households and imputing low instead of estimated wages. This paper shows that employment growth does not necessarily result in lower relative poverty shares, a result that is largely consistent with observed outcomes over the past decade.

Christina Felfe, Michael Lechner, Andreas Steinmayr, VoxEU: Sports and child development. Does all work and no play make Jack a dumb boy as well as a dull one? This column presents one of the first empirical studies on the effects of sporting activity on the cognitive ability of children in Germany. Our findings indicate strong positive effects of participation in sport on children's cognitive and non-cognitive skills. The size of the effects is in a similar range to the effects other studies find for largescale educational programmes, as Head Start in USA.

AGING AND RETIREMENT

Volker Meier, Andreas Wagener, Ifo Institute: Do Mobile Pensioners Threaten the Deferred Taxation of Savings? We investigate optimal taxation of lifetime income with and without an emigration option during old age. The government sets the rates of deferred taxation and of possibly reduced taxation of interest. If agents are immobile, the optimal policy consists in full deferral of income taxes on savings and a full taxation of interest. Mobility of the old calls for lower degrees of deferral and reduced taxation of interest. However, the optimum never entails full immediate taxation of savings in combination with full tax exemption on capital income.

Dean Baker, CEPR: The Myth of the Wealthy Elderly. The austerity gang seeking cuts to Social Security and Medicare has been vigorously promoting the myth that the elderly are an especially affluent and privileged group. Their argument is that because of their relative affluence, cuts to the programs upon which they depend is a simple matter of fairness. There were two reports released last week that call this view into question.

NOVEMBER 11 2011

Ryan Avent, Economist Blog: Finito? Silvio Berlusconi's promise to resign has done nothing to calm European bond markets. Italian bond yields are soaring today; both the 2-year and the 10-year are above 7%. There are rumours that the ECB is in the market and buying heavily. If so, it's not having the desired effect. The ECB can't hope to keep yields reasonable through brute force. It will need to make an expectations-changing announcement. Will it? Italy's yields aren't the only ones rising. Markets are ditching Irish, Spanish, Belgian, and French debt too. ...I have been examining and re-examining the situation, trying to find the potential happy ending. It isn't there. The euro zone is in a death spiral. Markets are abandoning the periphery, including Italy, which is the world's 8th largest economy and 3rd largest bond market. This is triggering margin calls and leading banks to pull credit from the European market... The cycle will continue until something breaks. Eventually, one economy or another will face a true bank run and severe capital flight and will be forced to adopt capital controls. At that point, it will effectively be out of the euro area. What happens next isn't clear, but it's unlikely to be pretty.

Economic and Financial Affairs, EU: A symbol for Europe. Inspiration for the € symbol itself came from the Greek epsilon (Є) – a reference to the cradle of European civilisation – and the first letter of the word Europe, crossed by two parallel lines to ‘certify’ the stability of the euro.

J.O., Free Exchange Blog: How it could happen; why it would be horrible. The bond-market run on Italy has increased the chances of an eventual break-up of the euro, even if no one can be sure what the precise odds now are. If Italy is unable to finance itself at reasonable rates, and the resources of the rest of the euro zone cannot (in the case of the EFSF, the bloc's rescue fund) or will not (in the case of the ECB) stretch to a bail-out of such a big, indebted sovereign, then one of the attractions of euro membership (ie, low interest rates) is gone. That weakens the argument for staying in. If default is forced upon Italy, goes the argument, why would it not go the whole hog and create a new domestic currency?

Ruben Durante, Giovanna Labartino, Roberto Perotti, University of Padua: Academic Dynasties: Decentralization and Familism in Italian Academia. To what extent does the impact of decentralization depends on the prevailing sociocultural norms of the targeted communities? We investigate this issue in the context of Italy by looking at the evolution of practices related to familism and nepotism in the Italian academia before and after the 1998 reform which decentralized the recruitment of professors from the national to the university level. To measure familism we use a novel dataset on Italian university professors between 1988 and 2008 with a particular focus on the informative content of last names. In particular, we construct two indices of “homonymy” which capture the concentration of last names in a given academic department relative to that in the underlying general population. Our results suggest that increased discretionality by local university officials resulted in a significant increase in the incidence of familism (both at the recruitment and the promotion stage) in areas characterized by low civic capital but not in areas with higher civic capital.

Dani Rodrik, Project Syndicate: Europe’s Next Nightmare. A chaotic eurozone breakup would cause irreparable damage to the European integration project, the central pillar of Europe’s political stability since World War II. It would destabilize not only the highly-indebted European periphery, but also core countries like France and Germany, which have been the architects of that project. The nightmare scenario would also be a 1930’s-style victory for political extremism. Fascism, Nazism, and communism were children of a backlash against globalization that had been building since the end of the nineteenth century, feeding on the anxieties of groups that felt disenfranchised and threatened by expanding market forces and cosmopolitan elites.

Gary Becker, Becker-Posner Blog: Greece and the Euro. Should Greece vote yes on a potential referendum to withdraw from the euro? The advantages of leaving are that Greece could greatly devalue its own currency, and default on much of its debt. The main disadvantage is that it would lose the substantial bailout assistance from the other EU members, especially France and Germany. Since Greek banks are also major creditors of the Greek government and Greek companies, default on the Greek debt would place these banks in unsustainable positions unless they received aid from the IMF or elsewhere. In addition, depositors would try to pull funds out of Greek banks to protect against losses from a depreciated drachma, and companies with euro-denominated debt would face financial ruin. In light of this, the best solution for Greece would be to stay with the euro for the present while it receives additional aid from the EU and the IMF. But Greece should seriously contemplate pulling out of the euro zone later on, especially if by staying in Greece is forced to continue to undergo a painful and prolonged depression of its economy.

Larry Summers, MIT News: To end slump, United States must spend. Summers also weighed in on economists’ performance in light of the largely unanticipated economic crisis. For the most part, Summers defended economists, arguing that the profession has made world leaders better informed in recent decades. “I’ve had meetings with vice premiers, number-two people in China, who have asked me questions about NBER [National Bureau of Economic Research] working papers in macroeconomics,” Summers said. “That says the work has an enormously positive and important impact.” However, Summers asserted… “In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought,” Summers said, adding: “I think the profession is not entirely innocent.” Still, Summers said, the complaint that economists should have seen the crisis coming represents “a confusion” on the part of critics. Identifying financial bubbles and knowing when they will burst, he claimed, “is to ask more of the profession than it can reasonably expect to discover.”

Harald Uhlig, University of Chicago: Economics and Reality: This paper is a non-technical and somewhat philosophical essay, that seeks to investigate the relationship between economics and reality. More precisely, it asks how reality in the form of empirical evidence does or does not influence economic thinking and theory. In particular, which role do calibration, statistical inference, and structural change play? What is the current state of affairs, what are the successes and failures, what are the challenges? I shall tackle these questions moving from general to specific. First, is there a Phillips curve? Second, are prices sticky? Third, does contractionary monetary policy lead to a contraction in output? Forth, what causes business cycles? The general points as well as the specific cases each have their own implication for the central question at hand. Armed with this list of implications, I shall then attempt to draw a summary conclusion and provide an overall answer.

Johan Carlstrom, Bloomberg: Sweden’s Tough Love of Banks is World Model. Sweden’s bank rescue model has protected taxpayers, turned a profit and left the Nordic country less indebted than when the financial crisis started in 2007. It’s the opposite of what’s happening in the U.K., where the government’s debt burden has doubled in the past four years and taxpayers are still footing the bill to bail out banks.

Richard Blundell, Antoine Bozio, Guy Laroque, IZA: Extensive and Intensive Margins of Labour Supply: Working Hours in the US, UK and France. This paper documents the key stylised facts underlying the evolution of labour supply at the extensive and intensive margins in the last forty years in three countries: United-States, United-Kingdom and France. We develop a statistical decomposition that provides bounds on changes at the extensive and intensive margins. This decomposition is also shown to be coherent with the analysis of labour supply elasticities at these margins. We use detailed representative micro-datasets to examine the relative importance of the extensive and intensive margins in explaining the overall changes in total hours worked

Yann Algan, Pierre Cahuc, Andrei Shleifer: Teaching Practices and Social Capital. We use several data sets to consider the effect of teaching practices on student beliefs, as well as on organization of firms and institutions. In cross-country data, we show that teaching practices (such as copying from the board versus working on projects together) are strongly related to various dimensions of social capital, from beliefs in cooperation to institutional outcomes. We then use micro-data to investigate the influence of teaching practices on student beliefs about cooperation and students' involvement in civic life. A two-stage least square strategy provides evidence that teaching practices have an independent sizeable effect on student social capital. The relationship between teaching practices and student test performance is nonlinear. The evidence supports the idea that progressive education promotes social capital.

Herwig Immervoll, Linda Richardson, IZA: Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades? In most countries, inequality among "non-elderly" households has widened during most phases of the economic cycle and any episodes of narrowing income differentials have usually not lasted long enough to close the gap between high and low incomes that had opened up previously. With progressive redistribution systems in place, greater inequality automatically leads to more redistribution, even if no policy action is taken. We find that, in the context of rising market-income inequality, tax-benefit systems have indeed become more redistributive since the 1980s but that this did not stop income inequality from rising: market-income inequality grew by twice as much as redistribution. Between the mid-1990s and the mid-2000s, the redistributive strength of tax-benefit systems then weakened in many countries. While growing market-income disparities were the main driver of inequality trends between the mid-1980s and mid-1990s, reduced redistribution was often the main reason why inequality rose in the ten years that followed. Benefits had a much stronger impact on inequality than social contributions or taxes, despite the much bigger aggregate size of direct taxes. As a result, redistribution policies were often less successful at counteracting growing income gaps in the upper parts of the income distribution.

Michael Lewis, Vanity Fair: The King of Human Error. The moment the psychologists uncover some new kink in the human mind, they bestow a strange and forbidding name on it (“the availability heuristic”). In their most cited paper, cryptically titled “Prospect Theory,” they convinced a lot of people that human beings are best understood as being risk-averse when making a decision that offers hope of a gain but risk-seeking when making a decision that will lead to a certain loss. In a stroke they provided a framework to understand all sorts of human behavior that economists, athletic coaches, and other “experts” have trouble explaining: why people who play the lottery also buy insurance; why people are less likely to sell their houses and their stock portfolios in falling markets; why, most sensationally, professional golfers become better putters when they’re trying to save par (avoid losing a stroke) than when they’re trying to make a birdie (and gain a stroke).

 

Alexey Stomakhin, Martin B Short, Andrea L Bertozzi, UCLA: Reconstruction of missing data in social networks based on temporal patterns of interactions. Retaliatory gang violence is a major problem in many metropolitan areas around the globe, and to curtail such violence, law enforcement agencies need to know who the participants were in a given altercation. We have shown that, under the assumptions that retaliatory violence on a gang network follows a Hawkes process of form, incomplete data on the participants of the offenses can be reconstructed using a computationally effective algorithm that maximizes an energy functional under a set of constraints.

AGING AND RETIREMENT

Yves Carrière, Diane Galarneau, StatCan: Delayed retirement: A new trend? The influence of the age structure of workers on the average retirement age  makes the average retirement age a poor indicator of recent changes in retirement behaviour. A more representative indicator of the retirement decisions of Canadians can be constructed on the basis of methods used to calculate life expectancy. This expected working-life indicator shows a significant increase in delayed retirement starting in the mid-1990s. In 2008, a 50-year-old Canadian could expect to be working for 16 years, compared to 14 years in 1977.

Richard Fry, D’Vera Cohn, Gretchen Livingston, Paul Taylor, Pew Research: The Rising Age Gap in Economic Well-Being. Households headed by older adults have made dramatic gains relative to those headed by younger adults in their economic well-being over the past quarter of a century, according to a new Pew Research Center analysis of a wide array of government data. In 2009, households headed by adults ages 65 and older possessed 42% more median1 net worth (assets minus debt) than households headed by their same-aged counterparts had in 1984. During this same period, the wealth of households headed by younger adults moved in the opposite direction. In 2009, households headed by adults younger than 35 had 68% less wealth than households of their same-aged counterparts had in 1984.

NOVEMBER 4 2011

Kenneth Rogoff, Reuters Blog: Why the euro needs to fall. Although I appreciate that exchange rates are never easy to explain or understand, I find today’s relatively robust value for the euro somewhat mysterious. Do the gnomes of currency markets seriously believe that the eurozone governments’ latest “comprehensive package” to save the euro will hold up for more than a few months? The new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding. Even the best part of the plan, the proposed (but not really agreed) 50% haircut for private-sector holders of Greek sovereign debt, is not sufficient to stabilize that country’s profound debt and growth problems. So how is it that the euro is trading at a 40% premium to the US dollar, even as investors continue to view southern European government debt with great skepticism? I can think of one very good reason why the euro needs to fall, and six not-so-convincing reasons why it should remain stable or appreciate.

Rebecca Wilder, Angry Bear Blog: Worries About Italy: Growth and Politics. Kash points out that the [market] “is worried about Italian debt dynamics simply and purely because of skyrocketing interest rate expenses that the Italian government is now facing thanks to the eurozone debt crisis.” I disagree and comment that his argument is circular in nature. Interest rates are rising as a consequence of the deteriorating economic fundamentals and questionable politics; that’s what the market is worried about. I do agree with Kash, though, that austerity is not the answer. But that’s how the Germans are rolling. This idea of fiscal austerity and gaining competitiveness is the new mantra for Europe - a mantra that will probably make or break the EA.

Chris Dillow, Stumbling and Mumbling blog: It's not a debt crisis. Instead, there’s another reason to fear. There’s a massive difference between US equities in 2000 and Italian government debt. US shares were held mostly in small sums by millions of investors. The losses were thus small and manageable for most sensible investors, and even where they weren’t, the losers were not strategically significant for the economy. Italian debt, however, is heavily held by a few banks and their losses - unlike the larger losses on US shares - threaten to have multiplier effects via a reduction in bank lending.

Arnaud Mehl, Marcel Fratzscher, Isabel Vansteenkiste, ECB: 130 Years of Fiscal Vulnerabilities and Currency Crashes in Advanced Economies. This paper investigates the empirical link between fiscal vulnerabilities and currency crashes in advanced economies over the last 130 years, building on a new dataset of real effective exchange rates and fiscal balances for 21 countries since 1880. We find evidence that crashes depend more on prospective fiscal deficits than on actual ones, and more on the composition of public debt (i.e. rollover/sudden stop risk) than on its level per se. We also uncover significant nonlinear effects at high levels of public debt as well as significantly negative risk premia for major reserve currencies, which enjoy a lower probability of currency crash than other currencies ceteris paribus. Yet, our estimates indicate that such premia remain small in size relative to the conditional probability of a currency crash if prospective fiscal deficits or rollover/sudden stop risk are high. This suggests that a currencys international status is not necessarily sufficient to shelter it from collapse.

Margherita Fort, Nicole Schneeweis, Rudolf Winter-Ebmer, IZA: More Schooling, More Children: Compulsory Schooling Reforms and Fertility in Europe. We study the relationship between education and fertility, exploiting compulsory schooling reforms in Europe as source of exogenous variation in education. Using data from 8 European countries, we assess the causal effect of education on the number of biological kids and the incidence of childlessness. We find that more education causes a substantial decrease in childlessness and an increase in the average number of children per woman. Our findings are robust to a number of falsification checks and we can provide complementary empirical evidence on the mechanisms leading to these surprising results.

 

Joanne Lindley, Stephen Machin: Rising Wage Inequality and Postgraduate Education. We document increases in the number of workers with a postgraduate qualification in the United States and Great Britain. We also show their relative wages have risen over time as compared to all workers and more specifically to graduates with only a college degree. Consideration of shifts in demand and supply shows postgraduates and college only workers to be imperfect substitutes in production and that there have been trend increases over time in the relative demand for postgraduate vis-à-vis college only workers. These relative demand shifts are significantly correlated with technical change as measured by changes in industry computer usage and investment. Moreover, the skills sets possessed by postgraduates and the occupations in which they are employed are significantly different to those of college only graduates. Over the longer term period when computers have massively diffused into workplaces, it turns out that the principal beneficiaries of this computer revolution has not been all graduates, but those more skilled workers who have a postgraduate qualification. This has been an important driver of rising wage inequality amongst graduates over time.

Timm Bönke, Giacomo Corneo, Holger Lüthen, IZA: Lifetime Earnings Inequality in Germany. This paper documents the magnitude, pattern, and evolution of lifetime earnings inequality in Germany. Based on a large sample of earning biographies from social security records, we show that the intra-generational distribution of lifetime earnings of male workers has a Gini coefficient around .2 for cohorts born in the late 1930s and early 1940s; this amounts to about 2/3 of the value of the Gini coefficient of annual earnings. Within cohorts, mobility in the distribution of yearly earnings is substantial at the beginning of the lifecycle, decreases afterwards and virtually vanishes after age forty. Earnings data for thirty-one cohorts reveals striking evidence of a secular rise of intra-generational inequality in lifetime earnings: West-German men born in the early 1960s are likely to experience about 80 % more lifetime inequality than their fathers. In contrast, both short-term and long-term intra-generational mobility have been rather stable. Longer unemployment spells ! of workers at the bottom of the distribution of younger cohorts contribute to explain 30 to 40 % of the overall increase in lifetime earnings inequality.

Claire Crawford, Lorraine Dearden, Ellen Greaves, IFS: Does when you are born matter? The impact of month of birth on children’s cognitive and non-cognitive skills in England. Previous research published by the Institute for Fiscal Studies (IFS) has shown that children born at the start of the academic year achieve better exam results, on average, than children born at the end of the academic year. In England, this means that children born in the autumn tend to outperform those born in the summer. New research published today by IFS, and funded by the Nuffield Foundation, shows that month of birth also matters for other characteristics and outcomes of young people growing up in England today.

Christoph Basten, Frank Betz, ECB: Marx vs. Weber: does religion affect politics and the economy? We investigate the effect of Reformed Protestantism, relative to Catholicism, on preferences for leisure and for redistribution and intervention in the economy. With a Fuzzy Spatial Regression Discontinuity Design, we exploit a historical quasiexperiment in Western Switzerland, where in the 16th century a so far homogeneous region was split and one part assigned to convert to Protestantism. We find that Reformed Protestantism reduces the fraction of citizens voting for more leisure by 13, and that voting for more redistribution and government intervention by respectively 3 and 11 percentage points. These preferences are found to translate into greater income inequality, but we find no robust effect on average income.

Fabrice Murtin, Romain Wacziarg, VoxEU: The democratic transition. As witnessed during this year’s Arab Spring, democracy doesn’t always emerge smoothly. This column examines the long march toward political freedom since 1800. It argues that while both income and education affect democracy, the rise in primary education has been the main driver of democratisation over 1870-2000.

Erich Gundlach and Matthias Opfinger, GIGA: Religiosity as a Determinant of Happiness. We find a U‐shaped relation between happiness and religiosity in cross‐country panel data after controlling for income levels. At a given level of income, the same level of happiness can be reached with high and low levels of religiosity, but not with intermediate levels. A rise in income causes an increase in happiness along with a decline of religiosity. Our interpretation of the empirical results is that the indifference curves for religiosity and other commodities of the utility function are hump‐shaped.

AGING AND RETIREMENT

James M. Poterba, Steven F. Venti, David A. Wise,  NBER: The Composition and Draw-down of Wealth in Retirement. Even if households used all of their financial assets inside and outside personal retirement accounts to purchase a life annuity, only 47 percent of households between the ages of 65 and 69 in 2008 could increase their life-contingent income by more than $5,000 per year. At the upper end of the wealth distribution, however, a substantial number of households could make large annuity purchases. Many households appear to treat housing equity and non-annuitized financial assets as “precautionary savings,” tending to draw them down only when they experience a shock such as the death of a spouse or a period of substantial medical outlays. Because home equity is often conserved until very late in life, for many households it may provide some insurance against the risk of living longer than expected.

KT Whelan et al, IZA: Adverse Selection and Incentives in an Early Retirement Program. We evaluate potential determinants of enrollment in an early retirement incentive program for non-tenure-track employees at a large university. Using administrative records on the eligible population of employees not covered by collective bargaining agreements, historical employee count and layoff data by budget units, and public information on unit budgets, we find dips in per-employee finances in a budget unit during the application year and higher recent per employee layoffs were associated with increased probabilities of eligible employee program enrollment. Our results also suggest that, on average, employees whose salaries are lower than we would predict given their personal characteristics and job titles were more likely to enroll in the early retirement program. To the extent that employees’ compensation reflect their productivity, as it should under a pay system in which annual salary increases are based on merit, this finding suggests that adverse selection was not a problem with the program. That is, we find no evidence that on average the “most productive” employees took the incentive.

Alicia H. Munnell, Francesca Golub-Sass, Anthony Webb, CRR: How much to save for a secure retirement. People often ask how much individuals have to save for a secure retirement. This exercise takes an 80-percent replacement rate as the goal, assumes Social Security benefits remain as promised under current law, then calculates the required saving rates for individuals at different earnings levels, at different starting and ending ages, and at different rates of return. The basic message: starting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return. This strategy of saving for a longer period of time is especially effective given the greater risk that comes from attempting to earn that higher return.