FEBRUARY 9 2017

Philip Bunn, Jeanne Le Roux, Kate Reinold, Paolo Surico. BoE: Do consumers respond in the same way to good and bad income surprises? If you unexpectedly received £1000 of extra income this year, how much of it would you spend? All? Half? None? Now, by how much would you cut your spending if it had been an unexpected fall in income? Standard economic theory (for example the ‘permanent income hypothesis’) suggests that your answers should be symmetric. But there are good reasons to think that they might not be, for example in the face of limits on borrowing or uncertainty about future income. That is backed up by new survey evidence, which finds that an unanticipated fall in income leads to consumption changes which are significantly larger than the consumption changes associated with an income rise of the same size.

Olivier Blanchard , Guido Lorenzoni, Jean Paul L'Huillier, PIIE: Short-Run Effects of Lower Productivity Growth: A Twist on the Secular Stagnation Hypothesis. Despite interest rates being very close to zero, US GDP growth has been anemic in the last four years largely due to lower optimism about the future, more specifically to downward revisions in growth forecasts, rather than legacies of the past. Put simply, demand is temporarily weak because people are adjusting to a less bright future. The authors suggest that downward revisions of productivity growth may have decreased demand by 0.5 to 1.0 percent a year since 2012. This explanation, if correct, has important implications for policy and forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates to sustain demand may be partly temporary. It also implies that, to the extent that investors in financial markets have not fully taken this undershooting into account, the current yield curve may underestimate the strength of future demand and the need for higher interest rates in the future.

Larry Summers, FT: Revoking trade deals will not help American middle classes: The idea that renegotiating trade agreements will “make America great again” by substantially increasing job creation and economic growth swept Donald Trump into office. More broadly, the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. ...The reality is that the impact of trade and globalisation on wages is debatable and could be substantial. But the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. ... My judgment is that these effects are considerably smaller than the impacts of technological progress. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges

Andrés Velasco, Project Syndicate: How Economic Populism Works. Anti-populists in the US, the UK, and elsewhere must come to terms with the reality that bad policies pay off, both economically and politically, long before they become toxic. Yes, the excessive private and public debt, the loss of export capacity, and the weakening of institutions harm the economy (and the polity) – but only in the long run. If critics do not understand that and act accordingly, populists will have as long (and destructive) a run in the rich countries as they once had in Latin America.

Michael A. Clemens, Ethan G. Lewis, Hannah M. Postel, NBER: Immigration Restrictions as Active Labor Market Policy: Evidence from the Mexican Bracero Exclusion. An important class of active labor market policy has received little rigorous impact evaluation: immigration barriers intended to improve the terms of employment for domestic workers by deliberately shrinking the workforce. Recent advances in the theory of endogenous technical change suggest that such policies could have limited or even perverse labor-market effects, but empirical tests are scarce. We study a natural experiment that excluded almost half a million Mexican ‘bracero’ seasonal agricultural workers from the United States, with the stated goal of raising wages and employment for domestic farm workers. We build a simple model to clarify how the labor-market effects of bracero exclusion depend on assumptions about production technology, and test it by collecting novel archival data on the bracero program that allow us to measure state-level exposure to exclusion for the first time. We cannot reject the hypothesis that bracero exclusion had no effect on U.S. agricultural wages or employment, and find that important mechanisms for this result include both adoption of less labor-intensive technologies and shifts in crop mix.

Gustavo A. Marrero, Juan Gabriel Rodríguez, Roy Van der Weide, VOX: Unequal opportunities, unequal growth. Inequality can be both good and bad for growth. Unequal societies may be holding back one segment of the population while helping another. This column exploits US data to argue that inequality affects negatively the future income growth of the poor and positively that of the rich. This relationship is largely driven by inequality of opportunity, which limits the growth prospects at the bottom of the income distribution. 

Alex Gibney, Zero Days: A black ops cyber-attack launched by the U.S. and Israel on an Iranian nuclear facility unleashed malware with unforeseen consequences. The Stuxnet virus infiltrated its pre-determined target only to spread its infection outward, ultimately exposing systemic vulnerabilities that threatened the very safety of the planet. Delve deep into the burgeoning world of digital warfare in this documentary thriller from Academy Award® winning filmmaker Alex Gibney. A must-see for everybody, recently on Svtplay.

Tyler Cowen, Marginal Revolution: Toni Erdmann, misunderstood masterpiece (full of spoilers). I say the optimal time to read this post is in the middle of the movie, not before, not after.  I’ll put the rest of under the fold…First, Toni Erdmann is one of the most stimulating and multi-faceted movies I’ve seen in years, utterly unique and wholly indefinable.  An elite female German management consultant is called in to advise on outsourcing to Bucharest, and during the course of the movie she discovers she cannot get away from her father so easily. Most of the core action unfolds after the woman’s father comes to visit her in Bucharest, and subjects her to an escalating series of escapades, mostly with co-workers.  At least on the surface, the woman is efficient and worldly but emotionally stunted.  Her father is rude and genuine and comic and self-destructive with his blundering interventions, unable to stop offending people, grabbing the attention, and repeatedly undercutting his daughter’s self-confidence.  Everything has to be about him.  As the movie progresses, however, the daughter learns she and her father are not so different after all.