OCTOBER 9 2015

Ludger Schuknecht, FT: What the bankers can teach stimulus-addicted economists. Germany’s sound public finances are the basis for European stability. Without guarantees and support from Berlin, the €500bn European Stability Mechanism, meant to protect against future crises, would not be credible. Were it not for the strength of Germany’s economy and balance sheet, the European Central Bank would have much less scope to use unconventional policies and remain credible. Not to mention the fact that Berlin is one of the largest contributors to the EU’s €150bn annual budget, a significant part of which is transferred to the poorer countries of Europe and beyond. In the increasingly globalised economy, nations lacking resilience increasingly rely on support from others who fear that, unless they commit their own resources to fighting faraway crises, they will find themselves engulfed by the gathering storm. This creates a new form of moral hazard: since countries that behave recklessly will be bailed out, they have little incentive to reform

Sushant Acharya, Alvaro Pedraza, FED NY:  Natural Experiment Sheds Light on the Market Effects of Herding. This blog analysis underscores how certain financial regulation might have unintended consequences by altering the behavior of investors in a perverse fashion. The Minimum Return Guarantee MRG is intended to protect the interests of pension-fund beneficiaries by limiting unnecessary risk-taking by fund managers. However, by relying on a benchmark based on peer returns, the regulation incentivizes herding. Consequently, asset prices can move in the short and medium run due to forces independent of fundamentals. Whether the welfare loss from this increased financial market inefficiency is clouded by the reduction in other forms of risk-taking is still an open question and requires further investigation.

Martin Wolf, Foreign Affairs (2015): Same as it Ever Was. Why the Techno-optimists Are Wrong. What we know for the moment is that there is nothing extraordinary in the changes we are now experiencing. We have been here before and on a much larger scale. But the current and prospective rounds of changes still create problems—above all, the combination of weak growth and significant increases in inequality. The challenge, as always, is to manage such changes. The only good reason to be pessimistic is that we are doing such a poor job of this.

American Educational Research Association: Are American schools making inequality worse? The answer appears to be yes. Schooling plays a surprisingly large role in short-changing the nation's most economically disadvantaged students of critical math skills. Findings from the study indicate that unequal access to rigorous mathematics content is widening the gap in performance on a prominent international math literacy test between low- and high-income students, not only in the United States but in countries worldwide. Using data from the 2012 Programme for International Student Assessment (PISA), conducted by the Paris-based Organisation for Economic Co-operation and Development (OECD), researchers from Michigan State University and OECD confirmed not only that low-income students are more likely to be exposed to weaker math content in schools, but also that a substantial share of the gap in math performance between economically advantaged and disadvantaged students is related to those curricular inequalities.

Eugenio J. Miravete, Maria J. Moral, Jeff Thurk, VX: Innovation, emissions policy, and competitive advantage in the diffusion of European diesel automobiles. Diesel vehicles have never been popular in the US, but have dominated sales in Europe. This column presents new evidence explaining why this is the case. A change in preferences and the numerous competing suppliers benefited the diffusion of diesel cars. But more important was a European environmental policy that favoured CO2 reductions. As diesel vehicles are only produced by European manufacturers, this policy provided a competitive advantage for domestic producers equivalent to a 20% import duty.

Jay Bhattacharya, Alan M. Garber, Jeremy D. Goldhaber-Fiebert, NBER: Nudges in Exercise Commitment Contracts: A Randomized Trial. We consider the welfare consequences of nudges and other behavioral economic devices to encourage exercise habit formation. We analyze a randomized trial of nudged exercise commitment contracts in the context of a time-inconsistent intertemporal utility maximization model of the demand for exercise. The trial follows more than 4,000 people seeking to make exercise commitments. Each person was randomly nudged towards making longer (20 weeks) or shorter (8 weeks) exercise commitment contracts. Our empirical analysis shows that people who are interested in exercise commitment contracts choose longer contracts when nudged to do so, and are then more likely to meet their pre-stated exercise goals. People are also more likely to enroll in a subsequent commitment contract after the original expires if they receive a nudge for a longer duration initial contract. Our theoretical analysis of the welfare implications of these effects shows conditions under which nudges can reduce utility even when they succeed in the goal of promoting habitual exercise.

Michael Grossman, NBER: The Relationship between Health and Schooling: What's New? Many studies suggest that years of formal schooling completed is the most important correlate of good health.  There is much less consensus as to whether this correlation reflects causality from more schooling to better health.  The relationship may be traced in part to reverse causality and may also reflect "omitted third variables" that cause health and schooling to vary in the same direction. The past five years (2010-2014) have witnessed the development of a large literature focusing on the issue just raised.  I deal with that literature and what can be learned from it in this paper.  I conclude that there is enough conflicting evidence in the studies that I have reviewed to warrant more research on the question of whether more schooling does in fact cause better health outcomes.

Simon Caulkin, Harvard Business Review: Staying Human in the Robot Age. Invasion has been interpreted in different ways, which is the beauty of imaginative human creations. Viewed today, however, one reading suggests itself above any other: the threat to human-ness is not communist or right-wing infiltration (the film came out when the Cold War was in full swing), but technology – particularly digital technology, whose seductions make all too easy the draining away of humanity that the doctor observes in his patients. New workplace technology makes possible an unprecedented degree of control over working (and sometimes private) life. A wealth of information creates poverty of attention. More and more of human lives are marketized and commodified on technology platforms. Homes and cars via Uber and Airbnb; personal and medical details, likes and preferences, are for sale via search and social media.

Elizabeth Palermo, Livescience: Sizzling Longevity: World's Oldest Person Eats Bacon Daily. Could it be that a few slices of bacon a day keep the doctor away? The world's oldest living person, Susannah Mushatt Jones of Brooklyn, New York, recently said that she eats a serving of bacon every day. Jones, who turned 116 on July 6 and was crowned the world's oldest living person by Guinness World Records that month, confessed her bacon habit in an interview published this week on the New York Post's site Page Six. So far, the Internet is having a field day with this information. "If the world's oldest woman eats bacon every day, we can too — right?"