OCTOBER 2 2015

Robert Martin, Teyanna Munyan, Beth Anne Wilson, US FED: Potential Output and Recessions: Are We Fooling Ourselves? This paper studies the impact of recessions on the longer-run level of output using data on 23 advanced economies over the past 40 years. We find that severe recessions have a sustained and sizable negative impact on the level of output. This sustained decline in output raises questions about the underlying properties of output and how we model trend output or potential around recessions. We find little support for the view that output rises faster than trend immediately following recessions to close the output gap. Indeed, we find little evidence that growth is faster following recessions than before; if anything post-trough growth is slower. Instead, we find that output gaps close importantly through downward revisions to potential output rather than through rapid post-recession growth. The revisions are made slowly (over years)--a process that leads to an initial underestimation of the effect of recessions on potential output and a corresponding under-prediction of inflation.

Executive Office of the President, Social and Behavioral Sciences Team: Annual Report. Over its first year, SBST focused on executing proof-of concept projects where behavioral insights could be embedded directly into programs at a low cost and lead to immediate, quantifiable improvements in program outcomes. To generate reliable evidence about the effectiveness of integrating behavioral insights into programs, SBST designed these projects, in nearly all cases, as randomized trials. This report presents the results of all completed SBST projects, including projects that did not yield statistically significant improvements.

Cass R. Sunstein, NYT: Making Government Logical. There wasn’t a lot of fanfare, but last week may turn out to be among the most consequential of President Obama’s second term. By executive order, Mr. Obama directed federal agencies to incorporate behavioral science — insights into how people actually make decisions — into their programs. When government programs fail, it is often because public officials are clueless about how human beings think and act. Federal, state and local governments make it far too hard for small businesses, developers, farmers, veterans and poor people to get permits, licenses, training and economic assistance.

The Behavioural Insights Team Update 2013-2015, UK: The Update Report covers the past two years of the Behavioural Insights Team’s work. It’s been an exciting period for the team. We’ve managed to expand the breadth and scale of our work (having now run more than 150 trials across almost every area of policy). But the core of what we do remains the same as when we started life in No. 10 5 years ago: making public services more cost-effective and easier for citizens to use; improving outcomes by introducing a more realistic model of human behaviour to policy; and wherever possible, enabling people to make ‘better choices for themselves’.

Simone Moriconi, Giovanni Peri, NBER: Country-Specific Preferences and Employment Rates in Europe. European countries exhibit significant differences in employment rates of adult males. Differences in labor-leisure preferences, partly determined by cultural values that vary across countries, can be responsible for part of these differences. However, differences in labor market institutions, productivity, and skills of the labor force are also crucial factors and likely correlated with preferences. In this paper we use variation among first- and second-generation cross-country European migrants to isolate the effect of culturally transmitted labor-leisure preferences on individual employment rates. If migrants maintain some of their country of origin labor-leisure preferences as they move to different labor market conditions, we can separate the impact of preferences from the effect of other factors. We find country-specific labor-leisure preferences explain about 24% of the top-bottom variation in employment rates across European countries.

Lars Kirkebøen, Edwin Leuven, Magne Mogstad, University of Chicago: Field of Study, Earnings, and Self-Selection. We find that different fields have widely different payoffs, even after accounting for institutional differences and quality of peer groups. For many fields the payoffs rival the college wage premiums, suggesting the choice of field is potentially as important as the decision to enroll in college. The estimated payoffs are consistent with individuals choosing fields in which they have comparative advantage. When disentangling the causal contribution of institution and field of study, we find that field of study drives the heterogeneity in the payoffs to post-secondary education. Indeed, we find little evidence of significance gains in earnings to graduating from a more selective institution once we hold field of study fixed.

Tyler Cowen: British inequality: not what you think. Policies that increased or cut welfare expenditure appear to have had very little impact on lifetime inequality. For instance, while the benefit cuts of the late 1980s reduced benefits and increased cross-sectional inequality, it had a much more muted effect on lifetime inequality. And, similarly, although Gordon Brown’s massive expansion of means-tested tax credits in the 2000s reduced cross-sectional inequality, they had very little impact on cutting lifetime inequality. The paper also finds that the redistribution performed by the British welfare state is, to a great extent, smoothing incomes over people’s lifetimes rather than over their entire lives. Whereas 36% of individuals receive more in benefits than they pay in tax in any given year, only 7% do so over their lifetimes. Over half of all redistribution is simply across peoples’ lifespans; the young pay in while they work, and take out when they retire (see second chart).

MIT Technology Review: Deep Learning Machine Teaches Itself Chess in 72 Hours, Plays at International Master Level. While Deep Blue was searching some 200 million positions per second, Kasparov was probably searching no more than five a second. And yet he played at essentially the same level. Clearly, humans have a trick up their sleeve that computers have yet to master. This trick is in evaluating chess positions and narrowing down the most profitable avenues of search. That dramatically simplifies the computational task because it prunes the tree of all possible moves to just a few branches. Computers have never been good at this, but today that changes thanks to the work of Matthew Lai at Imperial College London. Lai has created an artificial intelligence machine called Giraffe that has taught itself to play chess by evaluating positions much more like humans and in an entirely different way to conventional chess engines. Straight out of the box, the new machine plays at the same level as the best conventional chess engines, many of which have been fine-tuned over many years. On a human level, it is equivalent to FIDE International Master status, placing it within the top 2.2 percent of tournament chess players.

Thomas Hills, Eugenio Proto, Daniel Sgroi, VOXEU: Historical analysis of national subjective wellbeing using millions of digitised books: Introducing the HPS Index. With records of subjective wellbeing going back less than half a century, this column asks if we can know the impact of key past events on the happiness of our ancestors. It presents a new historical index that draws on millions of digitised books in the Google Books corpus of words using sentiment analysis. The index – which goes back to the 1776 US Declaration of Independence, 200 years earlier than any other index of happiness – makes it possible to analyse the historical drivers of happiness in France, Germany, Italy, Spain, the UK and the US.