AUGUST 21 2015

Lukasz Rachel, Thomas Smith, BoE: Drivers of long-term global interest rates – can weaker growth explain the fall? Long-term real interest rates have fallen substantially over the past thirty years.  The co-movement in real rates across both advanced and emerging economies suggests a common driver is at work – the global neutral rate may have fallen.  In this two-part blog post we attempt to identify which secular trends could have driven such a fall.  In Part 1 we highlight how weaker expectations for global trend growth can account for around 100bps of the 450bps fall in real rates since the 1980s.  But this effect seems to mainly apply to the post-crisis period – suggesting other factors are responsible for the protracted decline before the crisis.

Lukasz Rachel, Thomas Smith, BoE: Drivers of long-term global interest rates – can changes in desired savings and investment explain the fall? In this post we show how various secular trends – demographics, inequality and the emerging market savings glut – raised desired savings at the global level and put downward pressure on real rates.  We also show how desired investment could have fallen due to the decline in the relative price of capital goods, lower public investment and a rise in the spread between risk-free rates and the return on capital.  Together we think these secular trends can account for 300bps of the historic decline in the global real rate.  Moreover, we think these secular trends are likely to persist. This suggests the global neutral rate, which acts as an anchor for individual countries’ equilibrium rates in the long-term, will remain low, perhaps around 1%.

Barry Eichengreen, NBER: Secular Stagnation: The Long View. Four explanations for secular stagnation are distinguished: a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these four views.

Brad DeLong, The Washington Center for Equitable Growth: Is “Secular Stagnation” a Monetary-Financial Problem or a Fundamental-Technological Problem? On about four of the seven days in a week, my view is that the problems lumped under the heading of “secular stagnation” are primarily monetary-financial problems. Now comes Barry Eichengreen to review the case that these problems are at their root instead of also technological-fundamental. And I must say he has raised the frequency of my view that the problems are primarily monetary-financial from four days a week to five.

Martin Feldstein, Project Syndicate: Are US Middle-Class Incomes Really Stagnating? The challenge of raising the incomes of middle-class families has emerged as an important focus of the presidential election campaign in the United States. Everyone agrees that incomes at the top have surged ahead in recent decades, helped by soaring rewards for those with a high-tech education and rising share prices. And there is general support for improving programs – such as food stamps and means-tested retiree benefits – that help those who would otherwise be poor. But the public debate is largely about how to help the more numerous (and politically more important) middle class. With the traditional definition of money income, the CBO found that real median household income rose by just 15% from 1980 to 2010, similar to the Census Bureau’s estimate. But when they expanded the definition of income to include benefits and subtracted taxes, they found that the median household’s real income rose by 45%. Adjusting for household size boosted this gain to 53%.

Andreas Beerli, Giovanni Peri, VOX: The labour market effect of opening the border to immigrant workers. The case for immigration restrictions is periodically debated in the political arena. This column shows that fully opening the border to neighbouring countries increased immigrants to Switzerland only by 4% of the labour force over eight years. Such an increased inflow did not have significant aggregate effects. Highly educated workers, however, benefited in terms of higher wages, while middle-educated ones experienced employment losses.

David Card, Jochen Kluve, Andrea Weber, NBER: What Works? A Meta Analysis of Recent Active Labor Market Program Evaluations. We present a meta-analysis of impact estimates from over 200 recent econometric evaluations of active labor market programs from around the world. We classify estimates by program type and participant group, and distinguish between three different post-program time horizons. Using meta-analytic models for the effect size of a given estimate (for studies that model the probability of employment) and for the sign and significance of the estimate (for all the studies in our sample) we conclude that: (1) average impacts are close to zero in the short run, but become more positive 2-3 years after completion of the program; (2) the time profile of impacts varies by type of program, with larger gains for programs that emphasize human capital accumulation; (3) there is systematic heterogeneity across participant groups, with larger impacts for females and participants who enter from long term unemployment; (4) active labor market programs are more likely to show positive impacts in a recession.

Diane Whitmore Schanzenbach, NBER Reporter: Understanding the Effects of Early Investments in Children. A growing economics literature is seeking to understand the effects of early childhood influences on later life outcomes. While much recent work explores the effects of health measured at birth, my work and that of others demonstrates the importance of events in early life–but after birth–on long-term outcomes.      A recent review by Douglas Almond and Janet Currie concludes that child and family characteristics measured at school entry explain as much of the variation in adult outcomes as factors such as years of education that are more typically studied by economists. James Heckman argues that the rates of return to human capital investment in disadvantaged populations are highest in early life.

Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi, NBER: Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth. Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

Ulf-G Gerdtham ,Petter Lundborg, Carl Hampus Lyttkens, Paul Nystedt, Scandinavian Journal of Economics: Do Socioeconomic Factors Really Explain Income-Related Inequalities in Health? Applying a Twin Design to Standard Decomposition Analysis. In prior studies, where the decomposition analysis is based on OLS estimation of the health production function using cross-sectional data, the estimated contribution of income and education is probably substantially exaggerated. The WTP-based (within-twin-pair) analysis gives more rigorous estimates and provides an upper bound for the contribution of the health factors to the inequalities in health. The results are obviously important for policy makers, but leave them somewhat in limbo. The effects of income and education, which could be prime targets for policy interventions, are insignificant. If anything, among the observed socioeconomic factors, it is labor market variables (more specifically, the state of being economically inactive) which contribute most to the inequalities in health.