AUGUST 20 2010

Ny Fed: Quarterly Report on Household Debt and Credit. The report shows that households steadily reduced aggregate consumer indebtedness over the past seven quarters. In the second quarter of 2010, they owed 6.4 percent less than they did in 2008, the peak year for indebtedness. Additionally, for the first time since early 2006, the share of total household debt in some stage of delinquency declined, from 11.9 percent to 11.2 percent. However, the number of people with a new bankruptcy noted on their credit reports rose 34 percent during the second quarter, considerably higher than the 20 percent increase typical of the second quarter in recent years.

Jason Saving, Dallas Fed: Can the Nation Stimulate Its Way to Prosperity? Compared with no stimulus, the stimulus plan in 2009 alone was expected to increase GDP by 1 to 3 percentage points, raise payroll employment by 500,000 to 1 million jobs and lower the unemployment rate by half a percentage point. At first glance, it doesn’t appear the stimulus achieved these objectives. In the year after the plan’s passage, the labor market continued to hemorrhage jobs and unemployment climbed above 10 percent. Indeed, the unemployment rate is now higher than it was expected to be without the stimulus plan—and has been every month since the plan’s passage. This seems inconsistent with official estimates of the plan’s performance. The first quarterly report, including data through September 2009, found that the plan had created or saved about 1 million jobs and boosted GDP 2 to 3 percentage points in the second and third quarters. Subsequent analysis from the Council of Economic Advisers and several private forecasting firms found even more favorable results, seeing the stimulus on track to save or create the 3.5 million jobs that were originally forecast for the 2009–10 period. How can this be?

Laurence Kotlikoff, Bloomberg: U.S. Is Bankrupt and We Don't Even Know It. Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.” But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance

Thorvaldur Gylfason, VoxEU: Mel Brooks and the bankers. In Mel Brooks’ hit film and Broadway musical The Producers, those charged with making their musical a success instead try to profit from making it a spectacular failure. This column argues that some bankers may have been playing the same game in the run up to the global crisis. If so, just as in The Producers, the perpetrators should be heading to jail.

Chris Willow, Stumbling and Mumbling Blog: Welfare states & public debt. Low public debt requires a generous welfare state. This sounds paradoxical. But it’s not. InFault Lines, Raghuram Rajan says that one reason why the US engages in big Keynesian counter-cyclical policy is precisely that it has a weak welfare state. The absence of significant protection against unemployment means that there’s greater demand upon governments to do something about recessions. The absence of a strong safety net…has made every one of the recent recessions “truly severe” from a political perspective. This has created tremendous pressure on governments to stimulate, both through fiscal means - tax cuts and spending increases - and through easy money policy. Although Rajan’s story focuses on the US, there is cross-country support for it. My chart shows that, across 21 major OECD nations, there has been a strong negative correlation (-0.41) between the size of the welfare state in the 90s and 00s and in the rise in the government debt-GDP ratio between 2007 and 2010. Countries with small welfare states - Ireland, Iceland, the US and UK - saw bigger rises in public debt than countries with more generous welfare states, such as Sweden

Stephen S. Roach, Foreign Policy: The Consumption Gap. They thought Asia would save the world economy. They were wrong. Developing Asia hasn't done enough. Most importantly, it has failed to wean itself from the export-led growth model that has long defined its economic character. It actually increased its dependence on external demand, boosting the export share of pan-regional GDP from 35 percent in 1997 to 45 percent by early 2007. That leaves the region in a very uncomfortable place in this post-crisis era -- more dependent on external demand than ever before. And, unfortunately, this dependence comes at precisely the time when the crisis-battered economies of the developed world are least equipped to deliver the external demand that export-led Asia needs as fuel for its growth machine.

Edmund S. Phelps, NYT: The Economy Needs a Bit of Ingenuity. The steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is “constrained” by a deficiency of aggregate demand. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall. The prescription will fail because the diagnosis is wrong. There are no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address — our skater has broken some bones and needs real attention. The decline in American dynamism is not the only problem. It has been accompanied by a decline of what I call inclusion. Not only were low-wage workers largely cut out of the economic gains of the 1990s and 2000s — much of the middle class was, too

David Card, Jochen Kluve, Andrea Weber, NBER: Active Labor Market Policy Evaluations: A Meta-Analysis. Our sample contains 199 separate “program estimates” – estimates of the impact of a particular program on a specific subgroup of participants – drawn from 97 studies conducted between 1995 and 2007. We find that job search assistance programs are more likely to yield positive impacts, whereas public sector employment programs are less likely. Classroom and on-the-job training programs yield relatively positive impacts in the medium term, although in the short-term these programs often have insignificant or negative impacts. We also find that the outcome variable used to measure program impact matters. In particular, studies based on registered unemployment are more likely to yield positive program impacts than those based on other outcomes (like employment or earnings).

Grading The Teachers, Who's teaching L.A.'s kids? Jason Felch, Jason Song, Doug Smith, Los Angeles Times: The Times obtained seven years of math and English test scores from the Los Angeles Unified School District and used the information to estimate the effectiveness of L.A. teachers — something the district could do but has not. The Times used a statistical approach known as value-added analysis. The Times will publish a series of articles and a database analyzing individual teachers' effectiveness in the nation's second-largest school district — the first time, experts say, such information has been made public anywhere in the country. Among the findings: Highly effective teachers routinely propel students from below grade level to advanced in a single year. There is a substantial gap at year's end between students whose teachers were in the top 10% in effectiveness and the bottom 10%. The fortunate students ranked 17 percentile points higher in English and 25 points higher in math. Contrary to popular belief, the best teachers were not concentrated in schools in the most affluent neighborhoods, nor were the weakest instructors bunched in poor areas. Rather, these teachers were scattered throughout the district. The quality of instruction typically varied far more within a school than between schools.

Ludger Woessmann, IZA: Cross-Country Evidence on Teacher Performance Pay. Combining country-level performance-pay measures with rich PISA-2003 international achievement micro data, this paper estimates student-level international education production functions. The use of teacher salary adjustments for outstanding performance is significantly associated with math, science, and reading achievement across countries. Scores in countries with performance-related pay are about one quarter standard deviations higher. Results avoid bias from within-country selection and are robust to continental fixed effects and to controlling for non-performance-based forms of teacher salary adjustments.

Christopher Honts et al, Central Michigan University: Manager's best friend. New research seems to indicate that just having a dog around can boost human cooperation levels—potentially altering well known game theory results. In the experiment, which used 13 groups, the researchers explored how the presence of an animal altered players’ behaviour in a game known as the prisoner’s dilemma. In the version of this game played by the volunteers, all four members of each group had been “charged” with a crime. Individually, they could choose (without being able to talk to the others) either to snitch on their team-mates or to stand by them. Each individual’s decision affected the outcomes for the other three as well as for himself in a way that was explained in advance. The lightest putative sentence would be given to someone who chose to snitch while the other three did not; the heaviest penalty would be borne by a lone non-snitch. The second-best outcome came when all four decided not to snitch. And so on. Having a dog around made volunteers 30% less likely to snitch than those who played without one. Fascinating to think through the implications. Are couples who get a dog more trusting of each other? And does this work with other animals? Do cats increase snitching?

Nancy Folbre, Economix Blog: Why Girly Jobs Don’t Pay Well. In a careful analysis of longitudinal data on earnings that includes survey questions regarding attitudes related to work preferences, Nicole Fortin, at economist at the University of British Columbia, finds that women tend to place less importance on money and more importance on people and family than men do. Those preferences help explain why women often choose to care for children and other family members, knowing full well that this will limit their career opportunities, lower their earnings and increase their economic vulnerability. Both biological and cultural factors can explain attitudinal differences between women and men. What’s striking is the high cost of femininity. A factor is women’s affinity for services that aren’t rewarded by a market-based economy. Indeed, market failures in the provision of these services help explain why we rely heavily on a welfare state that is, not incidentally, often dubbed a nanny state.

AUGUST 13 2010

Paul Krugman, NYT: America Goes Dark. The lights are going out all over America — literally. Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights, but similar things are either happening or being contemplated across the nation, from Philadelphia to Fresno. And a nation that once prized education — that was among the first to provide basic schooling to all its children — is now cutting back. Teachers are being laid off; programs are being canceled. The federal government is spending more. But state and local governments are cutting back. If you look at government spending as a whole you see hardly any stimulus at all. A large part of our political class is showing its priorities: given the choice between asking the richest 2 percent or so of Americans to go back to paying the tax rates they paid during the Clinton-era boom, or allowing the nation’s foundations to crumble — literally in the case of roads, figuratively in the case of education — they’re choosing the latter. America is now on the unlit, unpaved road to nowhere.

Travis J. Berge And Òscar Jordà, San Francisco Fed: Future Recession Risks. An unstable economic environment has rekindled talk of a double-dip recession. The Conference Board’s Leading Economic Index provides data for predicting the probability of a recession but is limited by the weight assigned to its indicators and the varying efficacy of those indicators over different time horizons. Statistical experiments with LEI data can mitigate these limitations and suggest that a recessionary relapse is a significant possibility sometime in the next two years.

Nelson D. Schwartz, NYT: 2 Top Economists Differ Sharply on Risk of Deflation. Mr. Hatzius is arguably Wall Street’s most prominent pessimist. He warns that the American economy is poised for a sharp slowdown in the second half of the year. That would send unemployment higher again and raise the risk of deflation. A rare occurrence, deflation can have a devastating effect on a struggling economy as prices and wages fall. He says he may be compelled to downgrade his already anemic growth predictions for the economy. Mr. Berner and his deputy, David Greenlaw, still expect a pickup in the second half of the year, which would help gradually bring down unemployment. They play down the danger posed by deflation, the malady that deepened the Great Depression and contributed to Japan’s lost decade of the 1990s. Their sharp disagreement over that question adds yet another twist to the fierce rivalry between the firms, Wall Street’s version of the New York Yankees and the Boston Red Sox.

Kenneth Rogoff, Project Syndicate: An Age of Diminished Expectations? In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese-style deflation, which would only exacerbate debt problems by lowering incomes relative to debts. With credit markets impaired, further quantitative easing may still be needed. As for fiscal policy, it is already in high gear and needs gradual tightening over several years, lest already troubling government-debt levels deteriorate even faster. Those who believe – often with quasi-religious conviction – that we need even more Keynesian fiscal stimulus, and should ignore government debt, seem to me to be panicking. Last but not least, however, it is important to try to preserve dynamism in the US and European economies through productivity-enhancing measures – for example, by being vigilant about anti-trust policy, and by streamlining and simplifying tax systems.

Dylan Matthews, Washington Post: Where does the Laffer curve bend? I decided to ask some tax experts and political activists where, in the current personal income tax, and particularly in the top tax bracket, they think that Laffer curve peaks -- that is, what that revenue-maximizing rate is. The responses were varied, to say the least.

Flavio Cunha, James J. Heckman, IZA: Investing in Our Young People. This paper reviews the recent literature on the production of skills of young persons. The literature features the multiplicity of skills that explain success in a variety of life outcomes. Noncognitive skills play a fundamental role in successful lives. The dynamics of skill formation reveal the interplay of cognitive and noncognitive skills, and the presence of critical and sensitive periods in the life-cycle. We discuss the optimal timing of investment over the life-cycle.

Előd Takáts, BIS: Ageing and asset prices. A small model is used to show that economic and demographic factors drive asset, and in particular house, prices. These factors are estimated in a panel regression framework encompassing BIS real house price data from 22 advanced economies between 1970 and 2009. The estimates show that demographic factors affect real house prices significantly. Combining the results with UN population projections suggests that ageing will lower real house prices substantially over the next forty years. The headwind is around 80 basis points per annum in the United States and much stronger in Europe and Japan. Based on the analysis, global asset prices are likely to face substantial headwinds from ageing.

Roland G. Fryer, Jr, NBER: Racial Inequality in the 21st Century: The Declining Significance of Discrimination. Relative to the 20th century, the significance of discrimination as an explanation for racial inequality across economic and social indicators has declined. Analyzing ten large datasets that include children ranging in age from eight months old to seventeen years old, I demonstrate that the racial achievement gap is remarkably robust across time, samples, and particular assessments used. The gap does not exist in the first year of life, but black students fall behind quickly thereafter and observables cannot explain differences between racial groups after kindergarten. There are several programs -- various early childhood interventions, more flexibility and stricter accountability for schools, data-driven instruction, smaller class sizes, certain student incentives, and bonuses for effective teachers to teach in high-need schools, which have a positive return on investment, but they cannot close the achievement gap in isolation. More promising are results from a handful of high-performing charter schools, which combine many of the investments above in a comprehensive framework and provide an "existence proof" -- demonstrating that a few simple investments can dramatically increase the achievement of even the poorest minority students.

Catherine Rampell, NYT: Was Today’s Poverty Determined in 1000 B.C.? Technology in A.D. 1500 is an extraordinarily reliable predictor of wealth today. 78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 A.D. – even BEFORE the slave trade and colonialism. What’s more, these differences in technological development between regions had actually appeared as far back as 1000 B.C.

AUGUST 6 2010

Martin Feldstein, Project Syndicate: The Hidden Future of the US Economy. Recent US data have clearly raised the probability that the economy will run out of steam and decline during the next 12 months. The key reason for increased pessimism is that the government stimulus programs that raised spending since the summer of 2009 are now coming to an end. As they have wound down, spending has declined. The government programs failed to provide the “pump-priming” role that was intended.

Alan S. Blinder, Mark Zandi: How the Great Recession Was Brought to an End. When we divide these effects into two components—one attributable to the fiscal stimulus and the other attributable to financial-market policies such as the TARP, the bank stress tests and the Fed’s quantitative easing—we estimate that the latter was substantially more powerful than the former. Nonetheless, the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are broadly consistent with those made by the CBO and the Obama administration. To our knowledge, however, our comprehensive estimates of the effects of the financial-market policies are the first of their kind.

J. Bradford DeLong, Project Syndicate: John Stuart Mill vs. the European Central Bank. The ECB contends that the core economies of the global North – Germany, France, Britain, the United States, and Japan – are now at the point where they need rapid fiscal retrenchment and austerity, because financial markets’ confidence in the quality of their debt is shaken, and may collapse at any moment. I see a very different picture – one in which markets’ trust in the quality of government liabilities of the global North’s core economies most certainly is not on the brink of collapse. I see production 10% below capacity, and I see unemployment rates approaching 10%. More importantly for near-term economic policy, I see a world in which investors have enormous confidence in core economies’ government debt – for many, the only safe port in this storm. In these circumstances, we can be sure of what Mill would have recommended.

Andrew K. Rose, Mark M. Spiegel, VoxEU: What do we know about the causes of the crisis? Despite a broad search, we have been unable to find consistent strong linkages between pre-existing variables that are plausible causes of the Great Recession and the actual intensity of the recession. It is natural for economists to generalise from experiences of a few particularly salient countries to make generalisations, though it is often inappropriate. Our poor results are simply telling us that the pre-conditions for the crisis in the US (or Iceland, or Latvia …) often do not describe other countries particularly well. Credit growth was high before 2008 in Australia, Canada, and South Africa, yet these countries seemed to have weathered the crisis well. Real housing prices actually fell in Japan, Germany and Portugal, yet these countries were hard hit. Since it is difficult to understand the cross-country incidence of the great recession even in retrospect, we are dubious about the potential for a comparable early warning forecasting model going forward.

CBO: Federal Debt and the Risk of a Fiscal Crisis. A sudden increase in interest rates would reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail. Foreign investors, who owned nearly half of U.S. debt held by the public in May 2010 (or about $4.0 trillion, $1.7 trillion of which was held by Japan and China alone), would also face substantial losses. If a fiscal crisis occurred in the United States, policy options for responding to it would be limited and unattractive.

Manmohan S. Kumar, Jaejoon Woo, IMF: Public Debt and Growth. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. There is some evidence of nonlinearity with higher levels of initial debt having a proportionately larger negative effect on subsequent growth. Analysis of the components of growth suggests that the adverse effect largely reflects a slowdown in labor productivity growth mainly due to reduced investment and slower growth of capital stock.

William T. Dickens, Brookings: A New Approach to Estimating the Natural Rate of Unemployment. This paper has presented a new method for estimating time variation in the NAIRU using the vacancy-unemployment relationship. A simple theory of this relationship based on a matching model suggests equations that do an uncannily good job of fitting transformed vacancy and unemployment data. When the Beveridge curve model is estimated simultaneously with a Phillips curve, the parameter estimates for both equations are reasonable and the parameters of the Beveridge curve are estimated with particular accuracy. The estimates suggest that the NAIRU is nearly exactly proportional to the residual in the Beveridge curve. Olivier Blanchard: Dickens’s paper offers a promising strategy to identify shifts in the natural rate of unemployment by looking jointly at the Beveridge curve and the Phillips curve.

Bas van der Klaauw, Jan C. van Ours, IZA: Carrot and Stick: How Reemployment Bonuses and Benefit Sanctions Affect Job Finding Rates. To increase their transition from welfare to work, benefit recipients in the municipality of Rotterdam were exposed to various financial incentives, including both carrots to sticks. Once their benefit spell exceeded one year, welfare recipients were entitled to a reemployment bonus if they found a job that lasted at least six months. However, they could also be punished for noncompliance with eligibility requirements and face a sanction, i.e. a temporary reducing of their benefits. In this paper we investigate how benefit sanctions and reemployment bonuses affect job finding rates of welfare recipients. We find that benefit sanctions were effective in bringing unemployed from welfare to work more quickly while reemployment bonuses were not.

David Leonhardt, NYT: The Case for $320,000 Kindergarten Teachers. Great teachers and early childhood programs can have a big short-term effect. However, research on the fade-out effect was based mainly on test scores, not on a broader set of measures, like a child’s health or eventual earnings. Mr. Chetty and five other researchers examined the life paths of almost 12,000 children who had been part of a well-known education experiment in Tennessee in the 1980s. The children are now about 30, well started on their adult lives. Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.

Yi Wen, St Louise Fed: Why Aren’t the Chinese Buying More American Goods? The important point is that both the Chinese trade surplus with the United States and the amassed foreign reserves result from the savings decisions of Chinese consumers. If consumers want to spend more on American goods, they can sell their government bonds and thus siphon some U.S. dollars from the Chinese government’s foreign reserves. This analysis suggests that lack of financial development in China—not the fixed exchange rate—has created the huge trade imbalance between China and the rest of the world. Hence, only financial development within China will ultimately resolve it.

Daniele Checchi, Vitorocco Peragine, Laura Serlenga, IZA: Fair and Unfair Income Inequalities in Europe. This paper analyses the extent of income inequality and opportunity inequality in 25 European countries. The present work contributes to understanding the origin of standard income inequality, helping to identify potential institutional setups that are associated to opportunity inequality. We distinguish between ex ante and ex post opportunity inequality. We find that ex ante equality of opportunity exhibits positive correlation with public expenditure in education, whereas ex post equality of opportunity is also positively associated to union presence and to fiscal redistribution.

Stephen Machin, Olivier Marie, Sunčica Vujić, IZA: The Crime Reducing Effect of Education. In this paper, we present evidence on empirical connections between crime and education, using various data sources from Britain. A robust finding is that criminal activity is negatively associated with higher levels of education. However, it is essential to ensure that the direction of causation flows from education to crime. Therefore, we identify the effect of education on participation in criminal activity using changes in compulsory school leaving age laws over time to account for the endogeneity of education. In this causal approach, for property crimes, the negative crime-education relationship remains strong and significant. The implications of these findings are unambiguous and clear. They show that improving education can yield significant social benefits and can be a key policy tool in the drive to reduce crime.

Torben M. Andersen, Allan Sørensen, Aarhus University: Globalization, tax distortions and public sector retrenchment. It is widely perceived that globalization is a threat to tax financed public sector activities. The argument is that public activities (public consumption and transfers) financed by income taxes distort labour markets and cause higher wages and thus a loss of competitiveness. Since this link is strengthened by globalization, it is inferred that the marginal costs of public funds increase and a retrenchment of the public sector follows. We challenge whether these conclusions have support in a general equilibrium model featuring standard effects from open macroeconomics and trade theory. Even though income taxation unambiguously worsens wage competitiveness, it does not follow that marginal costs of public funds increase with product market integration due to gains from trade. Moreover, non-cooperative fiscal policies do not have a race-to-the-bottom bias despite that taxes harm competitiveness. In fact we identify an expansionary bias in fiscal policies that is likely to increase with globalization when taxes finance either public consumption or transfers

JUNE 24 2010

Claudio Borio, Bent Vale and Goetz von Peter, BIS: Resolving the financial crisis: are we heeding the lessons from the Nordics? How does the management and resolution of the current crisis compare with the response of the Nordic countries in the early 1990s, widely regarded as exemplary? We argue that, while intervention has been prompter, the measures taken so far remain less comprehensive and in-depth. In particular, the cleansing of balance sheets has proceeded more slowly, and less attention has been paid to reducing excess capacity and avoiding competitive distortions. In general, policymakers have given higher priority to sustaining aggregate demand in the short term than to encouraging adjustment in the financial sector and containing moral hazard. We argue that three factors largely explain this outcome: the more international nature of the crisis; the complexity of the instruments involved; and, hardly appreciated so far, the effect of accounting practices on the dynamics of the events, reflecting in particular the prominent role of fair value accounting (and mark to market losses) in relation to amortised cost accounting for loan books. There is a risk that the policies followed so far may delay the establishment of the basis for a sustainably profitable and less risk-prone financial sector.

Niko Dötz, Christoph Fischer, Buba: What can EMU countries’ sovereign bond spreads tell us about market perceptions of default probabilities during the recent financial crisis? This paper presents a new approach for analysing the recent development of EMU sovereign bond spreads. Based on a GARCH-in-mean model originally used in the exchange rate target zone literature, spreads are decomposed into a risk premium, an expected loss component and a liquidity premium. Time-varying default probabilities are derived. The results suggest that the rise in sovereign spreads during the recent financial crisis mainly reflects an increased expected loss component. In addition, the rescue of Bear Stearns in March 2008 seems to mark a change in market perceptions of sovereign bond risk. The government bonds of some countries lost their former role as a safe haven. While price competitiveness always helps to explain sovereign spreads, it increasingly moved into investors’ focus as financial sector soundness weakened."

Jacopo Carmassi, Stefano Micossi, VoxEU, How politicians excited financial markets’ attack on the Eurozone. As the recent austerity measures can testify, Europe’s leaders are acutely concerned about government debt. This column tracks policy announcements from the start of the Eurozone crisis in December 2009, arguing that governments may have contributed to turmoil with their public display of confusion – ultimately undermining credibility. But if Eurozone governments show unity of purpose, this credibility can be restored.

John Taylor, Stanford University: Macroeconomic Lessons from the Great Deviation. You may not have heard much about the Great Deviation. I define it as the recent period during which macroeconomic policy became more interventionist, less rules-based, and less predictable. It is a period during which policy deviated from the practice of at least the previous two decades, and from the recommendations of most macroeconomic theory and models. My general theme is that the Great Deviation killed the Great Moderation, gave birth to the Great Recession, and left a troublesome legacy for the future.

Francis Warnock, CFR: How dangerous is US government debt? The dollar’s status as the world’s reserve currency has become a facet of U.S. power, allowing the United States to borrow effortlessly and sustain an assertive foreign policy. But the capital inflows associated with the dollar’s reserve-currency status have created a vulnerability, too, opening the door to a foreign sell-off of U.S. securities that could drive up U.S. interest rates. A sell-off came close to happening in 2009. How the United States uses this reprieve will affect the nation’s ability to borrow for years to come, with broad implications for the sustainability of an active U.S. foreign policy.

Michael D. Bordo, Thomas F. Helbling, NBER: International Business Cycle Synchronization in Historical Perspective. In this paper, we review and attempt to explain the changes in business cycle synchronization among 16 industrial countries and the over the past century and a quarter, demarcated into four exchange rate regimes. We find that there is a secular trend towards increased synchronization for much of the twentieth century and that it occurs across diverse exchange rate regimes. This finding is in marked contrast to much of the recent literature, which has focused primarily on the evidence for the past 20 or 30 years and which has produced mixed results. We then examine the role of global shocks and shock transmission in the trend toward synchronization. Our key finding here is that global (common) shocks generally are the dominant influence

Raven Molloy, Hui Shan, Fed: The Effect of Gasoline Prices on Household Location. Gasoline prices influence where households decide to locate by changing the cost of commuting. Consequently, the substantial increase in gas prices since 2003 may have reduced the demand for housing in areas far from employment centers, leading to a decrease in the price and/or quantity of housing in those locations relative to locations closer to jobs. Using annual panel data on ZIP codes and municipalities in a large number of metropolitan areas of the United States from 1981 to 2008, we find that a 10 percent increase in gas prices leads to a 10 percent decrease in construction after 4 years in locations with a long average commute relative to locations closer to jobs, but to no significant change in house prices. Thus, the supply response may prevent the change in housing demand from capitalizing in house prices. Because housing is durable, the resulting change in construction has a long-lived impact on the spatial distribution of housing units

Alicia H. Munnell et al, Center for Retirement Research: Valuing Liabilities in State and Local Plans. State and local plans generally follow an actuarial model and discount their liabilities by the long-term yield on the assets held in the pension fund, roughly 8 percent. Most economists contend that the discount rate should reflect the risk associated with the liabilities, and given that benefits are guaranteed under most state laws, the appropriate discount factor is a riskless rate, roughly 5 percent, as discussed below. Thus, the economists’ model would produce much higher liabilities than those currentlyreported on the books of states and localities. This brief attempts to separate the question of valuing liabilities from the questions of funding and investment. As background, it explains the current approach to valuing liabilities in the private and public sectors. Second, it discusses why, given their guaranteed status, state and local pension liabilities should be discounted at a riskless rate and shows how much measured liabilities would increase by applying such a rate. Third, it argues that valuing liabilities is only one factor entering the funding calculation, and that using a riskless discount rate does not necessarily mean that contributions should increase immediately.

Ryan D. Edwards, NBER: Trends in World Inequality in Life Span Since 1970. Previous research has revealed much global convergence over the past several decades in life expectancy at birth and in infant mortality. I examine life-span inequality in a broad, balanced panel of 180 rich and poor countries observed in 1970 and 2000. Convergence in infant mortality has unambiguously reduced world inequality in total length of life starting from birth, but world inequality in length of adult life has remained stagnant. Underlying both of these trends is a growing share of total inequality that is attributable to between-country variation. Especially among developed countries, the absolute level of between-country inequality has risen over time. The sources of widening inequality in length of life between countries remain unclear, but signs point away from trends in income, leaving patterns of knowledge diffusion as a potential candidate.

Andrew Leigh, Christine Neill, IZA: Do Gun Buybacks Save Lives? Evidence from Panel Data. In 1997, Australia implemented a gun buyback program that reduced the stock of firearms by around one-fifth. Using differences across states in the number of firearms withdrawn, we test whether the reduction in firearms availability affected firearm homicide and suicide rates. We find that the buyback led to a drop in the firearm suicide rates of almost 80 per cent, with no statistically significant effect on non-firearm death rates. The estimated effect on firearm homicides is of similar magnitude, but is less precise. The results are robust to a variety of specification checks, and to instrumenting the state-level buyback rate.

Edward L. Glaeser, NYT Blog: The Health of the Cities. For centuries, cities have been killing fields – places where proximity led to death and disease. In the 17th century, life expectancy at birth was 20 years lower in London than in the English countryside. Yet now, the average life expectancy in New York City is one and a half years higher than in the nation as a whole. How did city living get so healthy?

JUNE 21 2010

Jan C. van Ours, Martin A. van Tuijl, IZA: Country-Specific Goal-Scoring in the "Dying Seconds" of International Football Matches. We find that the national teams of Germany, England and the Netherlands are more likely than the three other national teams to score in the last minute – including stoppage time. However, for Germans this comes at a cost. Germany is more likely to concede a goal in the dying seconds of a match than other countries. During our period of analysis, the national teams of Brazil and Italy only conceded one goal in the last minute. As to winning penalty shootouts, Germany outperforms the other! five countries.

Macroadvisers: The Chances of a "Double-Dip" are Essentially Nil. Early in the recovery many forecasters, concerned that the nascent expansion was fueled only by temporary inventory dynamics and short-lived fiscal stimulus, fretted over the possibility of a double-dip recession. Now, with the emergence of the sovereign debt crisis in Europe, that concern has re-surfaced. Certainly we recognize that the debt crisis imparts some downside risk to our baseline forecast for GDP growth. However, based on current, high-frequency data — most of which is financial in nature and so is not subject to revision — we believe the chance of a double-dip recession is small.

Jessica Silver-Greenberg, Business Weeik: Time to Slip into Something Less Comfortable? The bearish forecasters who rose to fame in the market crash of 2008 have, for the most part, not surrendered their pessimism. Their moment could be coming back around. BW divides the dismal forecasters into three groups: The Grizzlies, the Bears with Less Bite, and the Domesticated. The Grizzlies: Nouriel Roubini, Robert Prechter, Peter Schiff, Michael Panzner, Nassim Nicholas Taleb, Marc Faber. Bears with Less Bite: Gary Shilling, Stephen Roach, Meredith Whitney, David Rosenberg. Domesticated: Jeremy Grantham, James Grant.

Raghuram Rajan, Project Syndicate: Jobless Recoveries and Manic Policies. America's fiscal and monetary policies are so accommodating in large part because the nature of US economic recoveries has changed since 1991, with output and employment taking much longer to return to their pre-recession levels. But such policies do not stimulate faster recovery, and US politicians should focus instead on modifying America's outdated social safety net.

David Brooks, NYT: Prune and Grow. Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798. Economists were divided then about whether this spending was worth it, and they are just as divided now. Edward L. Glaeser of Harvard compared the change in employment in each state to the amount of stimulus money it has received. He found a slight relationship between stimulus dollars and job creation, but none at all if you set aside three states: Alaska and the Dakotas. In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. So we are exiting a period of fiscal stimulus and entering a period of fiscal consolidation.

Masato Miyazaki, IMF: In Search of Lost Revenue: Why Restoring Fiscal Soundness After a Crisis is Harder than It Looks. This note argues that because fiscal deficit after a crisis owe much to a drop in tax revenues and a sluggish revenue growth, its adjustment has to rely more on revenue augmentation than commonly thought. Cutting extra spending in the wake of the crisis would not balance the book, while a natural growth of tax revenue after the recovery may take a long time before financing the pre-crisis level of expenditure. Faced with unpopular choices, the government may implicitly prefer seeing higher inflation.

Jesús Crespo Cuaresma, OECD: Can emerging asset price bubbles be detected? Bayesian Model Averaging techniques are used to analyse how robustly it is possible to identify factors that may lead to the bursting of asset price bubbles in OECD economies. The results indicate that asset price misalignments are not robust determinants of house price reversals unless their interaction with other characteristics of the economy (credit growth, population growth and interest rate developments) is taken into account. On the other hand, stock price reversals are affected by misalignments, as well as other real and monetary variables. Out-of-sample prediction exercises provide evidence that dealing explicitly with model uncertainty using Bayesian model averaging techniques leads to better forecasts of reversals in asset prices than relying on model selection.

Andrew Leigh, IZA: Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms. How are hourly wages affected by the Earned Income Tax Credit? Using variation in state EITC supplements, I find that a 10 percent increase in the generosity of the EITC is associated with a 5 percent fall in the wages of high school dropouts and a 2 percent fall in the wages of those with only a high school diploma, while having no effect on the wages of college graduates. Given the large increase in labor supply induced by the EITC, this is consistent with most reasonable estimates of the elasticity of labor demand. Although workers with children receive a much larger EITC than childless workers, and the effect of the credit on labor force participation is larger for those with children, the hourly wages of both groups are similarly affected by an EITC increase.

Elke J. Jahn, Michael Rosholm, IZA: Looking Beyond the Bridge: How Temporary Agency Employment Affects Labor Market Outcomes. We find evidence of large positive treatment effects, particularly for immigrants. There is also some indication that higher treatment intensity increases the likelihood of leaving unemployment for regular jobs. Our results show that agency employment is even more effective in tight labor markets, where firms use agency employment primarily to screen potential candidates for permanent posts. Finally, our results suggest that agency employment may improve subsequent match quality in terms of wages and job duration.

Edward L. Glaeser, NYT Blog: The Uncertain Impact of Merit Pay for Teachers. A vast body of evidence now documents the differences in effectiveness among teachers, even when those teachers face the same weak incentives. This suggests that schools could improve dramatically, even without any merit pay, if highly motivated principals had the resources to attract the best teachers and the strength to move the worst ones into other sectors. According to this view, the biggest role of student test scores may be to ensure that decisions about teacher retention are made wisely and fairly.

Philip S. Babcock, Mindy Marks, NBER; The Falling Time Cost of College: Evidence from Half a Century of Time Use Data. Using multiple datasets from different time periods, we document declines in academic time investment by full-time college students in the United States between 1961 and 2003. Full-time students allocated 40 hours per week toward class and studying in 1961, whereas by 2003 they were investing about 27 hours per week. Declines were extremely broad-based, and are not easily accounted for by framing effects, work or major choices, or compositional changes in students or schools. We conclude that there have been substantial changes over time in the quantity or manner of human capital production on college campuses.

Pierre Koning, Karen van der Wiel, IZA: School Responsiveness to Quality Rankings: An Empirical Analysis of Secondary Education in the Netherlands. The current analysis is the first to address the impact of quality scores that have been published by a newspaper (Trouw), rather than public interventions. Our research design exploits the substantial lags in the registration and publication of the Trouw scores and that takes into account all possible outcomes of the ratings, instead of the lowest category only. Overall, we find evidence that school quality performance does respond to Trouw quality scores. Both average grades increase and the number of diplomas go up after receiving a negative score. For schools that receive the most negative ranking, the short-term effects (one year after a change in the ranking of schools) of quality transparency on final exam grades equal 10% to 30% of a standard deviation compared to the average of this variable. The estimated long run impacts are roughly equal to the short-term effects that are measured.

Hunt Allcott, Nathan Wozny, CEEPR: Gasoline Prices, Fuel Economy, and the Energy Paradox. It is often asserted that consumers purchasing automobiles or other goods and services underweight the costs of gasoline or other "add-ons." We test this hypothesis in the US automobile market by examining the effects of time series variation in gasoline price expectations on the prices and market shares of vehicles with different fuel economy ratings. When gas prices rise, demand for high fuel economy vehicles increases, pushing up their relative prices. Market share changes - increased production of high fuel economy vehicles and scrappage of low fuel economy vehicles - attenuate these price changes. Intuitively, the less that equilibrium vehicle prices and shares respond to changes in expected gasoline prices, the less that consumers appear to value gasoline costs. Our results show that US auto consumers are willing to pay just $0.61 to reduce expected discounted gas expenditures by $1. We incorporate the estimated parameters into a new discrete choice approach to behavioral welfare analysis, which suggests with caution that a paternalistic energy efficiency policy could generate welfare gains of $3.6 billion per year.

Jeff Goldblatt, FOX: More Crashes at Chicago Intersections With Red Light Cameras. Using data provided by the Illinois Department of Transportation, Assistant Professor Rajiv Shah compared the total number of accidents the year before the cameras were installed and the year after. What surprised him most is that car accidents have declined city-wide, except at red-light intersections. "The clearest thing is the red light cameras have not changed driving behavior in any significant pattern," he said.

Sebastian Rausch et al, NBER: Distributional Implications of Alternative U.S. Greenhouse Gas. We find that the allocation schemes in all proposals are progressive over the lower half of the income distribution and proportional in the upper half of the income distribution. We also find that carbon pricing by itself (ignoring the return of carbon revenues through allowance allocations) is proportional to modestly progressive. This striking result follows from the dominance of the sources over uses side impacts of the policy and stands in sharp contrast to previous work that has focused only on the uses side. Lower income households derive a large fraction of income from government transfers and, reflecting the reality that these are generally indexed to inflation, we hold the transfers constant in real terms. As a result this source of income is unaffected by carbon pricing, while wage and capital income is affected.

Matt Richtel, NYT: Your Brain on Computers. Hooked on Gadgets, and Paying a Mental Price. Scientists say juggling e-mail, phone calls and other incoming information can change how people think and behave. They say our ability to focus is being undermined by bursts of information. These play to a primitive impulse to respond to immediate opportunities and threats. The stimulation provokes excitement — a dopamine squirt — that researchers say can be addictive. In its absence, people feel bored. Researchers worry that constant digital stimulation like this creates attention problems for children with brains that are still developing, who already struggle to set priorities and resist impulses.

JUNE 11 2010

Goldman Sachs: The World Cup and economics 2010. There seems to be a relationship between the improvement in FIFA ranking since the last World Cup and the improvement in Growth Environment Scores (GES) over the same period, particularly for developing countries. This correlation is 0.28 if we include all the participating countries (except North Korea), and without Brazil and Argentina, it is even higher at 0.34. The relationship is stronger if we look at the developing countries only (0.51).

Commerzbank: Football crazy: The Economics of World Cup 2010. The World Cup captures the imagination like no other sporting event. You either love football or hate it, but throughout June, it will be impossible to ignore. Irrespective of one's personal preferences, it is undeniable that football today is more than just a game. It is a cultural and economic phenomenon and has become an industry in its own right. In this note, we look at some of these aspects and, as is now de rigueur, we offer a statistical analysis of who we believe is likely to win the 2010 World Cup.

Economist Intelligence Unit: World economy: Will euro woes spark global contagion? A full-scale double-dip recession in Europe, with renewed financial strains, would be a serious matter even for other regions. It would lead to renewed sharp capital outflows from emerging markets. And while a moderate weakening of emerging-market GDP growth might be welcome, there is substantial uncertainty about the underlying momentum of the recovery. In the US, Japan and many other developed economies, uncertainty about the momentum of autonomous private demand is high, as it is difficult to separate the impact of stimulus and the genuine recovery. In most countries, developed and emerging, the room for fiscal stimulus has largely been exhausted, so policymakers would have little room to combat a renewed sharp downturn. Moreover, the fiscal crisis in Europe has increased the risk that markets will force other countries with high deficits, including the US and Japan, to tighten fiscal policy abruptly.

Sylvester Eijffinger, Edin Mujagic, Project Syndicate: Our Deep Debt Future. The 1980’s was the decade in which high inflation was supposedly consigned to the dustbin of history, while the 1990’s were all about the so-called new economy. Governor Mervyn King of the Bank of England once called it the NICE decade (No Inflation, Continuing Expansion) – a time when the economy reached the promised land of high growth and price stability. During the last 20 years, economic growth has been based on rising asset prices and declining borrowing costs for consumers and companies. That mechanism is broken beyond repair. In the absence of some miraculous improvement in productivity growth of the same order as the Internet or globalization, the world can expect a lengthy period of low growth and exceedingly difficult fiscal consolidation. The NICE era is well and truly over. Welcome to the BAD (Big Annual Deficits) decade of public debt.

Robert Price, OECD: The political economy of fiscal consolidation. A number of factors will aggravate the difficulty of consolidating. Interest rates on government debt are currently low and if they were to stay low while growth picked up, debt dynamics would be favourable. But monetary policy is more likely to have to turn towards restraint than to be available to assist consolidation, both globally and, especially, in those countries which have experienced substantial quantitative easing. At the same time, the synchronisation of the consolidation after the crisis will complicate its implementation. Usually, smaller open economies face fewer costs in consolidating because of the relatively high import-content of supplies, but this benign situation will not hold where the OECD area at large is consolidating. That may not augur well for the peer pressure on which the momentum to consolidate will depend, since countries could see delayed adjustment in its trading partners as being to their own advantage.

Jack Ewing, NYT: Debtors’ Prism: Who Has Europe’s Loans? It’s obvious that Greek and Spanish banks hold large amounts of their own government’s bonds. Guessing also falls heavily on public and quasipublic institutions like the German Landesbanks, which are owned by German states sometimes in conjunction with local savings banks. According to the Royal Bank of Scotland study, banks in France have the largest exposure to debt from Greece, Spain and Portugal, with 229 billion euros; German banks are second, with 226 billion euros. British and Dutch banks are next, at about 100 billion euros each, with American banks at 54 billion euros and Italian banks at 31 billion euros.

Dani Rodrik, Project Syndicate: Who Lost Europe? Financial meltdown has been averted in Europe – for now. But the future of the European Union and the fate of the eurozone still hang in the balance. If Europe doesn’t find a way to reactivate the continent’s economy soon, it will be doomed to years of gloom and endless mutual recrimination about “who sabotaged the European project. If Germany wants the rest of Europe to swallow the bitter pill of fiscal retrenchment, it will eventually have to recognize the implicit quid pro quo. It must pledge to boost domestic expenditures, reduce its external surplus, and accept an increase in the ECB’s inflation target. The sooner Germany fulfills its side of the bargain, the better it will be for everyone.

Stefano Scarpetta, Anne Sonnet, Thomas Manfredi, OECD: Rising Youth Unemployment During the Crisis: How to Prevent Negative Long-Term Consequences on a Generation? A promising avenue is to promote more extensively apprenticeship contracts for low-skilled youth where they can acquire at the same time skills and work experience. In fact, apprenticeships could pay a “double dividend”: securing the transition towards employment and lowering labour costs compensated by a training commitment from the employer. The jobs crisis may also be an opportunity to tackle underlying factors affecting the school-to-work transition. Further efforts should be made in many countries to ensure that no youth enters the labour market without a recognised and valued qualification.

Sagiri Kitao, Ayşegül Şahin, Joseph Song, NY Fed: Subsidizing Job Creation in the Great Recession. We consider the equilibrium effects of a hiring subsidy, a payroll tax reduction, and an employment subsidy. While calibrating parameters that characterize these policies, we try to mimic the policies in the Hiring Incentives to Restore Employment (HIRE) Act of 2010. We find that a hiring subsidy and a payroll tax deduction, as in the HIRE Act, can stimulate job creation in the short term, but can cause a higher equilibrium unemployment rate in the long term. Employment subsidies succeed in lowering the unemployment rate permanently, but the policy entails high fiscal costs.

Wat Tyler, Burning Our Money Blog: How The Poor Got Richer. A standard measure of poverty is net income of the poorest 25% of households (specifically, the bottom quartile point). And as it happens, the Institute for Fiscal Studies have recently published a compilation of the official figures going back to 1961. The figures show that the real income of this poorest group has approximately doubled since 1961, an average annual growth rate of 1.4% pa (ie the growth in income at the bottom quartile point). In fact, it turns out that in real terms the bottom 25% are now considerable richer than were the top 25% in 1961.

Nicholas Bloom et al, Stanford University: The Impact of Competition on Management Quality: Evidence from Public Hospitals. We analyze the hospital sector where geographic proximity is a key determinant of competition, and English public hospitals where political competition can be used to instrument for market structure. We develop a new survey tool to measure management quality and implement this in 61% of all acute hospitals. Our measure of management quality is strongly correlated with financial and clinical outcomes (e.g. survival rates from heart-attacks). More importantly, we find that higher competition (as indicated by a greater number of neighboring hospitals) is positively correlated with increased management quality, and this relationship strengthens when we instrument with local political competition. Adding three more rival hospitals increases the index of management quality by over a standard deviation, which is associated with a 6% reduction in heart-attack mortality rates.

N. Gregory Mankiw, NYT: Can a Soda Tax Save Us From Ourselves? To what extent should we use the power of the state to protect us from ourselves? If we go down that route, where do we stop? Taxing soda may encourage better nutrition and benefit our future selves. But so could taxing candy, ice cream and fried foods. Subsidizing broccoli, gym memberships and dental floss comes next. Taxing mindless television shows and subsidizing serious literature cannot be far behind. Even as adults, we sometimes wish for parents to be looking over our shoulders and guiding us to the right decisions. The question is, do you trust the government enough to appoint it your guardian?

JUNE 4 2010

Paul Krugman, NYT: The Pain Caucus. What’s the greatest threat to our still-fragile economic recovery? Dangers abound, of course. But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain. the O.E.C.D. declares that interest rates in the United States and other nations should rise sharply over the next year and a half, so as to head off inflation. Yet inflation is low and declining, and the O.E.C.D.’s own forecasts show no hint of an inflationary threat. So why raise rates? The answer, as best I can make it out, is that the organization believes that we must worry about the chance that markets might start expecting inflation, even though they shouldn’t and currently don’t. A similar argument is used to justify fiscal austerity. O.E.C.D. predicts that high unemployment will persist for years. Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year. What’s particularly remarkable about this recommendation is that it seems disconnected not only from the real needs of the world economy, but from the organization’s own economic projections.

Felix Salmon, Reuters: How soon might Greece default? I spent most of this afternoon attending a fascinating discussion looking at Greece from the perspective of emerging-market veterans who are used to sovereign debt default and restructurings. There was quite a lot of consensus on the panel, and not in a good way: everybody agreed that the bailout of Greece was only postponing the inevitable, and many people reckoned that it wasn’t going to postpone it very long. It won’t happen during the World Cup. But once that’s over, it might happen any time — and Europe will respond by turning its liquidity firehose on the Spanish banks, to try to contain the problem.

Peter Boone, Simon Johnson, NYT Blog: Maginot Lines and Illusions. Investors have already begun to extrapolate from euro-zone problems, recognizing that the world remains a highly dangerous place. The latent dangers include our overreliance on rapid Asian growth that might falter, the pressure for sharp fiscal tightening in nations with high deficits, and highly leveraged banks that continue to own toxic real estate, weak sovereign debt and other assets. If world financial markets once again decide their risk appetite is low, many unsustainable leveraged institutions and governments are in for a tough ride. Spain has a fighting chance for survival without serious economic disruption, but only if the world economy remains at the least benign. To get out of its difficulties, the Spanish government needs to be far more determined than the light approach taken by its Irish and Portuguese counterparts (which face far worse problems).

John Robertson, Atlanta Fed: The recovery: Job rich or job poor? Okun's law has underpredicted the rise in unemployment, and some commentators call for a jobless recovery. The fastest way to employment growth is faster GDP growth—recessions that are immediately followed by very strong GDP growth also tend to have strong employment growth. But productivity remains an important contributor to growth, and that contribution has been especially large during the early phases of the past three recessions.

Kenneth Rogoff, Project Syndicate: The BP Oil Spill’s Lessons for Regulation. The disaster poses a much deeper challenge to how modern societies deal with regulating complex technologies. The accelerating speed of innovation seems to be outstripping government regulators’ capacity to deal with risks, much less anticipate them. The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency. Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures. Economics teaches us that when there is huge uncertainty about catastrophic risks, it is dangerous to rely too much on the price mechanism to get incentives right. Unfortunately, economists know much less about how to adapt regulation over time to complex systems with constantly evolving risks, much less how to design regulatory resilient institutions. Until these problems are better understood, we may be doomed to a world of regulation that perpetually overshoots or undershoots its goals.

OECD: Prospects for Growth and Imbalances Beyond the Short Term. This scenario builds in additional fiscal consolidation from 2011 onwards, over and above that built into the baseline scenario, in order to bring government debt-to-GDP ratios back close to pre-crisis levels by 2025, except for Japan where debt is reduced by half that amount. The effects of the additional fiscal consolidation are evaluated using simulations of the OECD Global Model. GDP growth rate would be lowered in 2011 and 2012, depending on the extent of the required consolidation, with beneficial effects from lower interest rates gaining the upper hand and leading to a boost in growth (relative to the baseline scenario) in 2013 and beyond. It is likely that the recovery would be more seriously delayed in a number of euro area countries (including Portugal, Ireland, Spain and Greece) which would have to undergo substantial fiscal consolidation to reduce debt to pre-crisis levels and which would receive little support from a more accommodative monetary policy which is set to reflect area-wide conditions.

Qianying Chen et al, IMF: International Transmission of Bank and Corporate Distress. The paper evaluates how increases in banks’ and nonfinancial corporates’ default risk are transmitted in the global economy, using in a vector autoregression model for 30 advanced and emerging economies for the period from January 1996 to December 2008. The results point to two-way causality between bank and corporate distress and to significant global macroeconomic and financial spillovers from either type of distress when it originates in a systemic economy. Corporate distress in advanced economies has a larger impact on economic growth in emerging economies than bank distress in advanced economies has. In contrast, activity in advanced economies is more vulnerable to bank distress than to corporate distress

Prakash Loungani, IMF: On Seven Questions about House Price Cycles. On average, the previous housing slumps lasted 18 quarters, with prices dropping 22% from peak to trough. By contrast, the current housing slump has lasted only 14 quarters, during which prices have dropped just 15%. But the latest boom was so much bigger than the previous ones that it’s logical to anticipate an even more brutal downturn, Prices rose 113% over 41 quarters, compared with 39% average price increase over 39 quarters seen in the previous booms. The current cycle is like a rollercoaster which has roared up a steep hump and now needs to come down again.

Steven R. Kopits, Econobrowser: EIA: Hard Core Peak Oil Forecast. The EIA, the statistics arm of the US Department of Energy, recently released its International Energy Outlook (IEO) for 2010. This is an important document for forecasters, as it represents the EIA's integrated view of the global energy markets in the years to come and contains a long term forecast on the range of energy sources and CO2. Like it or hate it, the IEO is a touchstone for the energy industry and is treated as the authoritative government forecast in the press and in capital raising documents like prospectuses. It influences policy-makers, the media, public opinion and investors. What it says matters. And what does it say? That peak oil is all but on us. And that's new. In its forecast, the EIA, normally the cheerleader for production growth, has become amongst the most pessimistic forecasters around.

Robert J. Shapiro, Jiwon Vellucci, NPI: The Impact of Immigration and Immigration Reform on the Wages of American Workers. A careful review shows that high levels of immigration have not slowed overall wage gains by average, native-born American workers. Most studies suggest that recent waves of new immigrants are associated with increases in the average wage of native-born Americans in the short-run and with even larger increases in the long term as capital investment rises to take account of the larger number of workers. Studies have found that immigrants are 30 percent more likely to start new businesses than native-born Americans; and even immigrants without high school diplomas, who account for 31 percent of all immigrants, comprise 27 percent of immigrant business owners. Studies show that immigrants have a net positive effect on the federal budget.

Damon Clark, Heather Royer, NBER: The Effect of Education on Adult Health and Mortality: Evidence from Britain. There is a strong, positive and well-documented correlation between education and health outcomes. Our approach exploits two changes to British compulsory schooling laws that generated sharp differences in educational attainment among individuals born just months apart. The cohorts affected by these changes completed significantly more education. We find little evidence that this additional education improved health outcomes or changed health behaviors.

Sam Allgood et al, NY Fed: Is Economics Coursework, or Majoring in Economics, Associated with Different Civic Behaviors? We find that undergraduate coursework in economics is strongly associated with political party affiliation and with donations to candidates or parties, but not with the decision to vote or not vote. Nor is studying economics correlated with the likelihood (or intensity of) volunteerism. While we find that the civic behavior of economics majors and business majors is similar, it appears that business majors are less likely than general majors to engage in time-consuming behaviors such as voting and volunteering. Finally, we extend earlier studies that address the link between economics coursework and attitudes on public policy issues, finding that graduates who studied more economics usually reported attitudes closer to those expressed in national surveys of U.S. economists. Interestingly, we find the public policy attitudes of business majors to be more like those of general majors than of economics majors.