MARCH 11 2016

Ian Talley, WSJ:  The IMF Is Sounding the Alarm. Is Anyone Listening? The International Monetary Fund is sounding louder and louder alarms about the state of the global economy. The problem is, few major economies seem to be hearing them. “The IMF’s latest reading of the global economy shows once again a weakening baseline,” the fund’s No. 2 official, David Lipton, warned Tuesday in a speech to the National Association for Business Economics.

Kenneth Rogoff, Project Syndicate: The Fear Factor in Global Markets. The idea is that investors become so worried about a recession, and that stocks drop so far, that bearish sentiment feeds back into the real economy through much lower spending, bringing on the feared downturn. They might be right, even if the markets overrate their own influence on the real economy. On the other hand, the fact that the US has managed to move forward despite global headwinds suggests that domestic demand is robust. But this doesn’t seem to impress markets. Even those investors who remain cautiously optimistic about the US economy worry that the US Federal Reserve will view growth as a reason to continue raising interest rates, creating huge problems for emerging economies.

Dani Rodrik, Project Syndicate: The Politics of Anger. The appeal of populists is that they give voice to the anger of the excluded. They offer a grand narrative as well as concrete, if misleading and often dangerous, solutions. Mainstream politicians will not regain lost ground until they, too, offer serious solutions that provide room for hope. They should no longer hide behind technology or unstoppable globalization, and they must be willing to be bold and entertain large-scale reforms in the way the domestic and global economy are run.

Courtney Coile, Phillip B. Levine, NBER: Recessions and Retirement: How Stock Market and Labor Market Fluctuations Affect Older Workers. Market fluctuations affect retirement, but the story is nuanced — weaker long-term stock returns lead more-skilled workers to delay retirement, while higher unemployment rates lead less-skilled workers to retire earlier. In one study, we estimated that if the unusual stock and labor market conditions experienced during the most recent downturn were to gradually return to normal over a five-year period, there would be a net increase in retirements of about 120,000, or 1.2 percent relative to the estimated 10 million workers retiring during this period.12 In fact, the stock market has rebounded more quickly and the labor market more slowly, so the actual net increase in retirements is likely larger.

Melissa Kearney, Phillip Levine, Brookings: Income Inequality, Social Mobility, and the Decision to Drop Out Of High School. We propose that one channel by which higher rates of income inequality might lead to lower rates of upward mobility is through lower rates of human capital investment among low-income individuals. Specifically, we posit that greater levels of income inequality could lead low-income youth to perceive a lower return to investment in their own human capital. Such an effect would offset any potential “aspirational” effect coming from higher educational wage premiums. The data are consistent with this prediction: low-income youth are more likely to drop out of school if they live in a place with a greater gap between the bottom and middle of the income distribution. This finding is robust to a number of specification checks and tests for confounding factors. This analysis offers an explanation for how income inequality might lead to a perpetuation of economic disadvantage and has implications for the types of interventions and programs that would effectively promote upward mobility among low-SES youth.

Simon H. Boserup, Wojciech Kopczuk, Claus T. Kreiner, VOX: Bequests and wealth inequality: Evidence from Denmark. It is often suggested that intergenerational bequests such as inheritances create and perpetuate wealth inequality. This column uses Danish data to explore the effects of bequests on the wealth distribution. While bequests are found to increase the dispersion of absolute wealth inequality, relative inequality declines. These findings suggest that inheritance alone need not increase wealth inequality.

Paul Raeburn, Kevin Zollman, Scientific American: Game Theory for Parents. Mathematically tested measures to make your kids cooperate—all on their own. Even kindergartners have a sense of fair play and will share more with specific groups—family, friends and people who have been generous with them. Parents can tap this notion of fairness to encourage children to cooperate with one another and avoid spiteful behavior. Using classic strategies from game theory, kids can learn to establish fair agreements on their own, without any intervention from a parent or other authority figure.

MARCH 3 2016

Larry Summers, Capital Ideas Blog: Four common-sense ideas for economic growth. Let me begin with two facts that I think should be cause for concern. First, since the summer of 2009, the US economy has grown at about 2 percent. Two percent isn't a very good growth rate. Second, the 10-year interest rate at the end of trading today ... was just a bit below 1.8 percent. ...What’s the way to think about these two facts together? I believe that we are dealing with a situation that goes beyond the usual cyclical issues associated with recession—and for many years the policy debate has been confounded by that. The Fed has been substantially too optimistic in its one-year-ahead forecast every year for the last six, and its forecasts are pretty close to the consensus forecasts. The prevailing expectation in markets has always been that significant tightening will take place in nine months. That’s been true for the last six years. It has not happened yet.

Srdan Tatomir, BoE: How do firms adjust to falls in demand? One important aspect of adjusting labour costs is via workers’ pay. When asked which methods of adjustment became more difficult over time, firms reported the striking result that they were less able to change wages. During 2010-2013, many firms experienced falls in demand and had to adjust wages downwards.  When wages are perfectly flexible, the distribution of wage changes should be symmetric.  But when there is DNWR, there will be a floor at 0%. According to the survey, the overall incidence of wage freezes was relatively high at around 25% of firms in 2010, although by 2014 this had fallen to around 10%. 

Giovanni Ganelli, Juha Tervala, IMF: The Welfare Multiplier of Public Infrastructure Investment. We analyze the welfare multipliers of public spending (the consumption equivalent change in welfare for one dollar change in public spending) in a DSGE model. The welfare multipliers of public infrastructure investment are positive if infrastructure is sufficiently effective. When the medium-term output multipliers are consistent with the empirical estimates (1-1.4), the welfare multiplier is 0.8. That is, a dollar spent by the government for investment raises domestic welfare by equivalent of 0.8 dollars of private consumption. This suggests that the welfare gains of public infrastructure investment, if chosen wisely, may be substantial.

Anna Louie Sussman, WSJ: How a Less-Skilled American Workforce May Be Holding Back Growth. Theories abound as to why U.S. productivity growth has stalled. Economists attribute it to everything from a slowdown in business investment to inadequate measurement techniques that fail to capture efficiency gains from new technologies. A recent research note from J.P. Morgan Chase offers another theory: It’s at least partly because the American workforce as a whole is simply less skilled than it used to be.

Stephen B. Billings, David J. Deming, Stephen L. Ross, NBER: Partners in Crime: Schools, Neighborhoods and the Formation of Criminal Networks. Why do crime rates differ greatly across neighborhoods and schools? Comparing youth who were assigned to opposite sides of newly drawn school boundaries, we show that concentrating disadvantaged youth together in the same schools and neighborhoods increases total crime. We then show that these youth are more likely to be arrested for committing crimes together – to be “partners in crime”. Our results suggest that direct peer interaction is a key mechanism for social multipliers in criminal behavior. As a result, policies that increase residential and school segregation will – all else equal – increase crime through the formation of denser criminal networks.

Bernt Bratsberg, Oddbjørn Raaum, Knut Røed, IZA: Job Loss and Immigrant Labor Market Performance. While integration policies typically focus on labor market entry, we present evidence showing that immigrants from low-income countries tend to have more precarious jobs, and face more severe consequences of job loss, than natives. For immigrant workers in the Norwegian private sector, the probability of job loss in the near future is twice that of native workers. Using corporate bankruptcy for identification, we find that the adverse effects of job loss on future employment and earnings are more than twice as large for immigrant employees.

Mevlude Akbulut-Yuksel, Adriana Kugler, IZA: Intergenerational Persistence of Health in the U.S.: Do Immigrants Get Healthier as They Assimilate? It is well known that a substantial part of income and education is passed on from parents to children, generating substantial persistence in socio-economic status across generations. In this paper, we examine whether another form of human capital, health, is also largely transmitted from generation to generation, contributing to limited socio-economic mobility. We find that the longer immigrants remain in the U.S., the less intergenerational persistence there is and the more immigrants look like native children. Unfortunately, the more generations immigrant families remain in the U.S., the more children of immigrants resemble natives' higher weights, higher BMI and increased propensity to suffer from asthma.

FEBRUARY 26 2016

Alan Krueger et al.: Letter to Sanders. We are former Chairs of the Council of Economic Advisers for Presidents Barack Obama and Bill Clinton. For many years, we have worked to make the Democratic Party the party of evidence-based economic policy. We are concerned to see the Sanders campaign citing extreme claims by Gerald Friedman about the effect of Senator Sanders’s economic plan—claims that cannot be supported by the economic evidence.

Whither Mortgages et al, NY FED: The Graying of American Debt. The U.S. population is aging and so are its debts. We find that aggregate debt balances held by younger borrowers have declined modestly from 2003 to 2015, with a debt portfolio reallocation away from credit card, auto, and mortgage debt, toward student debt. Debt held by borrowers between the ages of 50 and 80, however, increased by roughly 60 percent over the same time period. This shifting of debt from younger to older borrowers is of obvious relevance to markets fueled by consumer credit. It is also relevant from a loan performance perspective as consumer debt payments are being made by older debtors than ever before.

Ben S. Bernanke Blog: The relationship between stocks and oil prices. In this post we first confirm the positive correlation between stocks and oil prices, noting that it is not just a recent phenomenon. We then investigate the hypothesis that underlying changes in aggregate demand explain the oil-stocks relationship. We find that an underlying demand factor does account for much of the positive relationship, and that if, in addition, we account for shifts in market risk preferences, we can explain still more. However, even with these two factors included, a significant part of the oil-stocks correlation remains unexplained.

Eduardo Porter, NYT: Nudges Aren’t Enough for Problems Like Retirement Savings. Why don’t Americans save more for old age? Even when their employers promise to match their savings, workers often fail to salt away their earnings for the future, inexplicably leaving money on the table. Psychology has offered an answer: procrastination. And it has suggested a cure: rather than giving workers the choice to sign up for a 401(k), sign them up automatically and give them the choice to opt out.

Alistair Nolan, Dirk Pilat, OECD Benefiting from the Next Production Revolution: These new production technologies will be able to significantly boost productivity, particularly if they can be diffused across less productive firms and support an inclusive growth process. New technologies could also make production safer, as robots replace humans in the most dangerous manufacturing tasks. New production technologies also hold the promise of cleaner production and the creation of an array of products that could help meet global challenges. But there is still a low level of digital technology adoption in most businesses, preventing realisation of their full potential. Benefiting from new technology also rests on the ability of firms, workers and society to adjust to change, and on government policies that ensure that this transformation is inclusive and yields broad-based gains across the population

Wolfgang Dauth, Sebastian Findeisen, Jens Südekum, VOX: Globalisation and the nature of German manufacturing jobs. A common theme of recent trade theory models is that globalisation-related shocks induce worker sorting across industries, labour markets, and plants. However, there is little empirical evidence of shocks causing such endogenous mobility responses. This column explores how rising international trade exposure affected the job biographies and earnings profiles of German manufacturing workers since the fall of the Berlin Wall. Individuals are found to systematically adjust to globalisation, with a notable asymmetry in the individual labour market responses to positive and negative shocks. Critically, the push effects out of import-competing manufacturing industries are not mirrored by comparable pull effects into export-oriented branches.

Edward Rodrigue, Richard V. Reeves, Brookings: Four ways occupational licensing damages social mobility. It is often rather important that somebody knows what they’re doing. Few of us would board a commercial airplane, for instance, without feeling confident that the pilot was well trained and accredited. Occupational licenses are a way to set a clear competence bar in such activities. But licensing also acts to mute competition by creating barriers to market entry. There are plenty of activities where licensing is unnecessary, or unnecessarily strict, which limits market dynamism and possibly social mobility, too.

Gary Burtless, Brookings: The growing life-expectancy gap between rich and poor. Researchers have long known that the rich live longer than the poor. Evidence now suggests that the life expectancy gap is increasing, at least here the United States, which raises troubling questions about the fairness of current efforts to protect Social Security.

Danielle Paquette, Washington Post:The surprising reason why lesbians get paid more than straight women. Last year, Marieka Klawitter, professor of public policy at the University of Washington, examined 29 studies across the Western Hemisphere on wages and sexual orientation and found a 9 percent earnings premium for lesbians over heterosexual women. (Gay men, meanwhile, faced an 11 percent penalty, compared to straight men.) But another study from the University of Nevada, which used national data from the year 2000, adds a stunning asterisk to Klawitter's findings: Lesbians who had previously lived with male partners made 20 percent less than those who’d never cohabitated with a husband figure. Were men actually the drags on women’s earnings?

FEBRUARY 19 2016

Larry Summers, Summers blog: Increasingly Convinced of the Secular Stagnation Hypothesis. Unfortunately since I put forward the argument in late 2013, the data have been all too supportive.  Despite monetary policy being much more expansionary than was expected and medium term interest rates falling rapidly, growth and inflation throughout the industrial world have been much lower than anticipated.  This is exactly what one would expect if structural factors were increasing saving propensities relative to investment propensities. Bond markets are now saying that neither inflation rates approaching 2 percent targets or real interest rates substantially above zero are on the horizon anytime in the foreseeable future.  Growth forecasts are being revised downwards in most places and there is growing evidence in the United States that inflation expectations are becoming unanchored to the downside. I would put the odds of a US recession at about 1/3 over the next year and at over ½ over the next 2 years.

Chad Syverson, NBER: Challenges to Mismeasurement Explanations for the U.S. Productivity Slowdown. The U.S. has been experiencing a slowdown in measured labor productivity growth since 2004. A number of commentators and researchers have suggested that this slowdown is at least in part illusory, because real output data have failed to capture the new and better products of the past decade. I conduct four disparate analyses, each of which offers empirical challenges to this “mismeasurement hypothesis.” The complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.

Andrea F. Presbitero, Min Zhu, IMF: The Change in Demand for Debt: The New Landscape in Low-income Countries. Many low-income developing countries have joined the group of Eurobond issuers across the globe— in sub-Saharan Africa (for example, Senegal, Zambia, and Ghana), Asia (for example, Mongolia) and elsewhere, raising over US$21 billion cumulatively over the past decade. Tapping these markets provides a new source of funds, but also exposes borrowers to shifts in investor sentiment and rising global interest rates. We examined the experience of low-income developing countries with capital inflows in the last decade and a half in a recent report. We found that capital inflows have increased sharply since 2004, in two distinct waves: a first surge from 2.1 percent of GDP in 2004 to 6.9 percent in 2007, and, after a temporary dip during the global financial crisis, a strong rebound, reaching 6.3 percent of GDP in 2012.

Richard Baldwin, Francesco Giavazzi, VOX: How to fix Europe’s monetary union: Views of leading economists. Important progress has been made in repairing the design faults that the EZ Crisis revealed. This new VoxEU eBook argues that fixing the Eurozone is a job half done. The eBook, which presents 18 chapters by leading economists that hail from a broad range of nations and schools of thought, is surely the most comprehensive collection of solutions that has ever been assembled.

Dani Rodrik, Project Syndicate: The Return of Public Investment. The idea that public investment in infrastructure – roads, dams, power plants, and so forth – is an indispensable driver of economic growth has always held powerful sway over the minds of policymakers in poor countries. But this kind of public-investment-driven growth model – often derisively called “capital fundamentalism” – has long been out of fashion among development experts. It may be time to reconsider that change. If one looks at the countries that, despite strengthening global economic headwinds, are still growing very rapidly, one will find public investment is doing a lot of the work.

David H. Autor, et al, NBER: School Quality and the Gender Gap in Educational Achievement. Recent evidence indicates that boys and girls are differently affected by the quantity and quality of family inputs received in childhood.  We assess whether this is also true for schooling inputs. Using matched Florida birth and school administrative records, we estimate the causal effect of school quality on the gender gap in educational outcomes by contrasting opposite-sex siblings who attend the same sets of schools--thereby purging family heterogeneity--and leveraging within-family variation in school quality arising from family moves.  Investigating middle school test scores, absences and suspensions, we find that boys benefit more than girls from cumulative exposure to higher quality schools.

Larry Hardesty, MIT News: Automatic contingency planning. Planning algorithms are widely used in logistics and control. They can help schedule flights and bus routes, guide autonomous robots, and determine control policies for the power grid, among other things. In recent years, planning algorithms have begun to factor in uncertainty — variations in travel time, erratic communication between autonomous robots, imperfect sensor data, and the like. That causes the scale of the planning problem to grow exponentially, but researchers have found clever ways to solve it efficiently. Now, researchers at MIT and the Australian National University (ANU) have made the problem even more complex, by developing a planning algorithm that also generates contingency plans, should the initial plan prove too risky. It also identifies the conditions — say, sensor readings or delays incurred — that should trigger a switch to a particular contingency plan.

FEBRUARY 12 2016

Angus Foulis, Saleem Bahaj, BoE: Uncertainty is no excuse for not using macroprudential tools. These policy tools have not been used systemically in the past, so their impact and the FPC’s reaction function remain unclear. Moreover, in contrast to monetary policy, where price stability can be judged against inflation, the objective of macroprudential policymakers – the stability of the financial system – is inherently unobservable. Thus macroprudential policymakers face a high degree of uncertainty over the impact and effectiveness of their tools and a target variable they cannot perfectly observe.

Eugenio Cerutti, Stijn Claessens, VOX: The use and effectiveness of macroprudential policies: New evidence. Macroprudential policies are meant to reduce procyclicality in financial markets and associated systemic risks. However, empirical evidence on which policies are most effective is still preliminary and inconclusive. This column documents the use of macroprudential policies by a large set of countries over an extended period, and covering many instruments. It shows which policies are most effective in reducing the growth rates of overall credit and household and corporate sector credit, and explores differences across countries, degrees of avoidance, and whether policies work better during booms or busts.

Glenn D. Rudebusch, FED San Fransisco: Will the Economic Recovery Die of Old Age? Is the current recovery more likely to end because it’s lasted so long? Have various imbalances and rigidities accumulated to make the economy frailer and more susceptible to a recessionary shock? Recent history suggests the answer is no. Instead, a long recovery appears no more likely to end than a short one. Like Peter Pan, recoveries appear to never grow old.

Mathieu Coutteniery et al, University of Lausanne: The Violent Legacy of Conflict: Evidence on Asylum Seekers, Crimes and Public Policy in Switzerland. We first document that immigrants originating from countries with war history are more crime prone. Using a precise measure of individual war victimization, we find that the effect remains strong and significant, even when controlling for country-of-origin, times arrival year, fixed effects, as well as canton times year fixed effects. Cohorts exposed to civil conflicts/mass killings during childhood are on average 40 percent more prone to violent crimes than their co-nationals born after the conflict. Using dyadic data on both the origin of the perpetrator and the victims of all crimes committed during this period in Switzerland, we are able to say more about potential mechanisms at work. Further, we display external validity by replicating the findings on the violent legacy of conflict exposure for all Swiss immigrants, which account for more than a fifth of Swiss population.

Bob Davis, WSJ: Immigrants Push Down Wages for Low-Income Workers—But How Much? One of the reasons lower-income workers have taken such a hit over the past few decades is because of illegal immigration. But how much of a hit is a matter of great debate among economists. Harvard immigration specialist George Borjas finds that during the 1980s and 1990s, low-skilled immigration reduced the wages of U.S. born high-school dropouts by about 10%.

Andrea Albanese, Bart Cockx, Yannick Thuy, IZA: Working Time Reductions at the End of the Career: Do They Prolong the Time Spent in Employment? In this paper we study the effects on the survival rate in employment of a scheme that facilitates gradual retirement through working time reductions. We use information on the entire labour market career and other observables to control for selection and take dynamic treatment assignment into account. We also estimate a competing risks model considering different (possibly selective) pathways to early retirement. We find that participation in the scheme initially prolongs employment, as participants keep accumulating full pension rights. However, as participants become eligible for early retirement subsequently, these larger financial incentives induce them to leave the labour force prematurely. These adverse incentives are stronger for individuals who reduce their working time most. After two (four) years for men (women), the positive effects reverse. The more favourable effect for women is likely a consequence of their lower opportunities to enter early retirement. The gradual retirement scheme fails the cost-benefit test.

Catarina Saraiva, Michelle Jamrisko, Bloomberg:  These Are the World's Most Miserable Economies.. The ranking of 63 economies is compiled by adding a country's jobless rate and inflation, a long-standing calculation in which a higher score indicates more misery. Venezuela's 159.7 tally for the 2016 misery index done by Bloomberg quadruples the next-worst ranking Argentina.

FEBRUARY 5 2016

Fernando Eguren-Martin, Karen Mayhew, BoE: How important are interest rates for exchange rates? Many would say that when domestic interest rates rise (relative to abroad) the domestic currency will appreciate. But is it right to think like this? In this blog we use exchange rate theory to inform this discussion and to assess the importance of relative interest rates in accounting for past exchange rate moves. We find that relative interest rates typically move in the same direction as exchange rates but most of the time they account for a small share of exchange rate variation. However, academics might question our use of such a theory as its failure to forecast exchange rates is well documented. We show that this is somewhat unfair, as even if the framework is not very useful in terms of forecasting it is still a useful tool for decomposing past moves in exchange rates.

Robert Hall, Nicolas Petrosky-Nadeau, FED San Fransisco: Changes in Labor Participation and Household Income. A decline in labor force participation, particularly among workers in their prime, is a significant concern for policymakers. Over the past 15 years, the labor force participation (LFP) rate in the United States has fallen significantly. Various factors have contributed to this decline, including the aging of the population (Daly et al., 2013) and changes in welfare programs (Burkhauser and Daly, 2013). In this Economic Letter, we look at another potential contribution, the changing relationship between household income and the decision to participate in the labor force.

Kenneth Rogoff, Project Syndicate: The Great Escape from China. Since 2016 began, the prospect of a major devaluation of China’s renminbi has been hanging over global markets like the Sword of Damocles. No other source of policy uncertainty has been as destabilizing. Few observers doubt that China will have to let the renminbi exchange rate float freely sometime over the next decade. The question is how much drama will take place in the interim, as political and economic imperatives collide.

Lawrence Summers, Prospects: Will our children really not know economic growth? Not so fast, Robert Gordon. While as already noted, I find Gordon persuasive in his claim that the slowdown in productivity growth is not a figment of mis-measurement, the fact that measured median incomes will be stagnant does not mean that most people will not see rising standards of living over time. Incomes rise as people get further into their careers. And quality improvements and new products are improving life in ways that do not show up in economic statistics, though possibly less so than in the past. So it would be a mistake to regard our children as condemned to economic stasis even before considering Gordon’s various ideas for accelerating growth.

Ariel Kalil et al, Demography: Diverging destinies: maternal education and the developmental gradient in time with children. More highly educated mothers spent more time in all four parenting categories compared to less-educated mothers. College-educated mothers spent 67 more minutes in total care time with their children aged 0 to 2 compared to mothers with only a high school diploma. For children aged 3 to 5, the total care time increase was 21 more minutes and 22 minutes more for children aged 6 to 13. College-educated mothers spent 42 percent more time in basic care and 94 percent more time in play compared to mothers with a high school education. Highly educated mothers also invested 130 percent more time in management activities when their children were 6 to 13 years of age compared to mothers with a high school education.

Raj Chetty et al, NBER: Childhood Environment and Gender Gaps in Adulthood. The traditional gender gap in employment rates is reversed for children growing up in poor families: boys in families in the bottom quintile of the income distribution are less likely to work than girls. Second, these gender gaps vary substantially across counties and commuting zones in which children grow up. The degree of variation in outcomes across places is largest for boys growing up in poor, single-parent families. Third, the spatial variation in gender gaps is highly correlated with proxies for neighborhood disadvantage. Low-income boys who grow up in high-poverty, high-minority areas work significantly less than girls. These areas also have higher rates of crime, suggesting that boys growing up in concentrated poverty substitute from formal employment to crime. Together, these findings demonstrate that gender gaps in adulthood have roots in childhood, perhaps because childhood disadvantage is especially harmful for boys.

Jörg Claussen, Eszter Czibor, Mirjam C. van Praag, IZA: Women Do Not Play Their Aces: The Consequences of Shying Away. The underrepresentation of women at the top of hierarchies is often explained by gender differences in preferences. We find support for this claim by analyzing a large dataset from an online card game community, a stylized yet natural setting characterized by self-selection into an uncertain, competitive and male-dominated environment. We observe gender differences in playing behavior consistent with women being more averse towards risk and competition. Moreover, we demonstrate how "shying away" makes female players less successful: despite no gender gap in playing skills, women accumulate lower scores than men due to their relative avoidance of risky and competitive situations.

Orion Jones, Big Think: Iceland Is Officially Worshiping Norse Gods Again. For the first time since the Vikings sailed, the Icelandic publicare worshiping classical Norse gods like Odin, Thor, and Frigg at a public temple built in their honor. The worship of Odin, Thor, Freya and the other gods of the old Norse pantheon became an officially recognized religion exactly 973 years after Iceland’s official conversion to Christianity.