JUNE 15 2015

Gavyn Davies, FT: Has the rethinking of macroeconomic policy been successful? What should we expect from macro-policy makers in future, assuming the economic back-drop remains relatively benign? Probably, more of the same: broadly stable central bank balance sheets, very slow declines in public debt ratios and a gradual return to using interest rates as the main weapon of monetary policy. A more rapid return to pre-2008 norms for fiscal and central bank balance sheets is somewhat unlikely. The much more serious challenge of how policy should adjust in the event of another crisis – a renewed recession; a major outbreak of deflation; a permanent slowdown in productivity growth; a political crisis over rising inequality; or a financial disruption, such as a Chinese debt implosion or a break-up in the euro.

Jonathan D. Ostry, Atish R. Ghosh, and Raphael Espinoza, IMF: When Should Public Debt Be Reduced? Under these conditions, economic theory provides three insights. First, inherited public debt, though accumulated for good reasons, represents a deadweight burden on the economy, dimming both its investment and growth prospects; a corollary is that an economy that has inherited a lot of public debt (for example, because of a financial crisis) will rationally choose to invest less in public capital than one with a lower level of debt. Second, if fiscal space remains ample, policies to deliberately pay down debt are normatively undesirable. The reason is that for such countries, the distortive cost of policies to deliberately pay down the debt is likely to exceed the crisis-insurance benefit from lower debt. In such cases, debt-to-GDP ratios should be reduced organically through growth, or opportunistically when less distortionary sources of revenue are available. Third, public debt should be issued to smooth the taxes necessary to finance lumpy expenditures. This action yields a version of the golden rule whereby public investment is debt-financed and undertaken to the point that social returns equal the market interest rate, with the twist that the social return will itself be reduced by the need to raise distortive taxation on labor and capital to service the higher debt.

Amartya Sen, New Statesman: The economic consequences of austerity. As it is quite common these days to blame economists for failing to see the real world, I take this opportunity to note that very few professionally trained economists were persuaded by the direction in which those in charge of European finances decided to take Europe. The European debacle demonstrated, in effect, that you do not need economists to generate a holy mess: the financial sector can generate its own gory calamity with the greatest of elegance and ease. Further, if the policy of austerity deepened Europe’s economic problems, it did not help in the aimed objective of reducing the ratio of debt to GDP to any significant extent – in fact, sometimes quite the contrary. ...

Jason Zweig, WSJ: The Anti-Poverty Experiment. In the U.S. and abroad, a new generation of data-driven programs is testing ways to help the poor to save more, live better and find their own way to economic security. Many of these poverty fighters call themselves “randomistas,” after the randomized controlled trials that are at the heart of their methods. In such field experiments, people are randomly assigned either to a treatment group that receives an “intervention” or to a control group that does not. The experimenters meticulously collect and analyze data, then try to replicate the results elsewhere to see if they hold up. A report published in the journal Science in May found that the randomistas’ methods not only work but stick. In Ethiopia, Ghana, Honduras, India, Pakistan and Peru, 10,495 households—about half of them earning less than the equivalent of $1.25 a day—took part in two-year experiments intended to help them become more self-sufficient.

Sara B. Heller el al, NBER: Thinking, Fast and Slow? Some Field Experiments to Reduce Crime and Dropout in Chicago. We suggest that people often respond to situations without conscious deliberation. Interventions that reduce automaticity can lead to positive outcomes for disadvantaged youths. We test this hypothesis by presenting the results of three large-scale randomized controlled trials (RCTs) of interventions carried out on the south and west sides of Chicago that seek to improve the outcomes of low-income youth by teaching them to be less automatic. Two of our RCTs test a program called Becoming a Man (BAM) developed by Chicago-area non-profit Youth Guidance; the first, carried out in 2009-10, shows participation improved schooling outcomes and reduced violent-crime arrests by 44%, while the second RCT in 2013-14 showed participation reduced overall arrests by 31%. The third RCT was carried out in the Cook County Juvenile Temporary Detention Center (JTDC) in 2009-11 and shows reductions in return rates of 22%. We also present results from various survey measures suggesting the results do not appear to be due to changes in mechanisms like emotional intelligence or self-control. On the other hand results from some decision-making exercises we carried out seem to support reduced automaticity as a key mechanism.