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"EconWeekly" - 5 new articles

  1. Surprises from the 2014 Global Wealth Report
  2. New paper on the mechanisms behind the eurozone crisis
  3. Interview with Jean Tirole, the Toulouse school, French economists
  4. The slowdown of re-allocation (and productivity) in the U.S.
  5. What caught my eye
  6. More Recent Articles
  7. Search EconWeekly
  8. Prior Mailing Archive

Surprises from the 2014 Global Wealth Report

1. Wealthy French:
"Although just 1.1% of the world's adults live in France, in terms of aggregate household wealth in current USD, it ranks fourth among nations --behind China and just ahead of the U.K. [...] This reflects the high average net worth of French households, rather than unusually high wealth inequality."
Here's a count of the world's millionaires, by country. France ranks second.

2. Wealth inequality fell, between 2000 and 2014, in: Switzerland, Denmark, Germany, Japan, Philippines, France, Colombia, Canada, Mexico, Malaysia, New Zealand, Singapore, Saudi Arabia, and Poland.
Moreover, among the G7, only the U.K. recorded rising inequality.

That's from Credit Suisse's Global Wealth Report 2014.

New paper on the mechanisms behind the eurozone crisis

Philippe Martin and Thomas Philippon have written a new paper about the mechanisms of private leverage and fiscal policy within the eurozone, from its creation through the Great Recession. (NBER link, ungated version).

From the introduction (emphasis mine):

There is wide disagreement about the nature of the eurozone crisis. Some see the crisis as driven by fiscal indiscipline and some by fiscal austerity, some emphasize excessive private leverage, while others focus on external imbalances, sudden stops or competitiveness divergence due to fixed exchange rates. Most observers understand that all these “usual suspects” have played a role, but do not offer a way to quantify their respective importance. In this context it is difficult to frame policy prescriptions on macroeconomic policies and on reforms of the eurozone.


...we propose a simple model that focuses on three types of shocks: household leverage, fiscal policy, interest rate spreads and exports. A key challenge is then to empirically identify private leverage shocks that are orthogonal to shocks on fiscal policy and shocks on spreads. To help us identify the eurozone shocks, we use the US as a control.


The key difference between the US and the eurozone experience is the sudden stop in capital flows starting in 2010 in the later.


Contrary to the eurozone, the US states did not experience any shock on spreads in borrowing costs and no fear an a potential exit of the dollar zone. This allows us, for the eurozone, to identify the part of the private deleverage dynamics that is not due to the spreads shocks by the private deleveraging predicted in the US on the period 2008-2012. We call this the “structural” private leverage shock.


Starting in the Spring of 2010, sovereign spreads widen and several European countries find it difficult to borrow on financial markets. The US and EZ experiences then start to diverge. While US states grow (slowly) together, eurozone countries experience drastically different growth rates and employment. A state variable that correlates well with labor markets performance in 2010-2011 in the Eurozone is the change in social transfers during the boom. Eurozone countries where spending on transfers (and also government expenditures) increased the most from 2003 to 2008 are those that are now experiencing severe recessions in the later stage. This suggests that in the second stage past fiscal policy, because of its effect on accumulated debt, had an impact on the economy through spreads and the constraint on fiscal policy it generated after 2010.


In this paper, we analyze a model where borrowing limits on “impatient” agents drive consumption, income, the saving decisions of “patient” agents and employment in small open economies belonging to a monetary union. We introduce nominal wage rigidities which translate the change of nominal expenditures into employment. We first consider the predictions of the model taking as given the observed series for private debt, fiscal policy and interest rate spreads between 2000 and 2012.
Maybe I don't understand the paper, but it seems to me that using U.S. states to identify the causal mechanisms is crucial. It also seems (and I might be wrong) that the identifying vehicle are the spread shocks. Now, there exist important differences between U.S. states and eurozone countries: fiscal, political, labor markets, cultural, etc. Insofar as those differences are not reflected in spreads or spread shocks, but played a role in determining the path of unemployment, deficits, etc., the identification strategy is flawed. Comments?

Putting those doubts aside, I love this paper.

Summary of main findings, from the conclusion:

1. The private leverage boom (in 2000-2008) was the key igniting element of the crisis, especially in Spain and Ireland.

2. Pro cyclical fiscal policy during the boom worsened the situation, especially in Greece.

3. In Ireland and Spain, a more conservative fiscal policy during the boom would have helped, but would have entailed an implausibly large fall of public debt.

4. A macro-prudential fiscal policy to limit private leverage during the boom would have stabilized employment in all countries. However, in the absence of more prudent fiscal policy, this would have induced a larger buildup in public debt.

5. Fiscal and macro-prudential policies are thus complements, not substitutes, in order to stabilize the economy.

6. The sudden stop in the eurozone worsened the crisis by further constraining fiscal policy. If the ECB's "whatever it takes" line had come earlier (and had been successful at that earlier time), Ireland, Spain, Greece and Portugal would have been able to avoid the latest part of the slump.

Interview with Jean Tirole, the Toulouse school, French economists

Les Échos relays today's interview (in French) with Jean Tirole, by Europe 1. Tirole opines talks about the future of France, the job market, the need for reforms, sovereign debt, the euro, and the role of industrial regulation.

Jean Tirole : l'assurance chômage "incite au... by Europe1fr

Also on Les Échos: The Toulouse school of economics.

I can't help drawing parallels between Toulouse's school of economics and Universitat Pompeu Fabra's (where I did my undergrad econ). Both are young schools, started in the 1990s with the ambition of becoming world class schools of economics, on par with the best U.S. schools. Both are located in the "periphery" of their respective countries. And both are mostly staffed by faculty with Ph.D.'s from U.S. schools.

And the most promising French economists, according to the IMF:

1. Xavier Gabaix (NYU)
2. Esther Duflo (MIT)
3. Emmanuel Farhi (Harvard)
4. Hélène Rey (LSE)
5. Emmanuel Saez (UC Berkeley)
6. Thomas Philippon (NYU)
7. Thomas Piketty (Paris School of Economics)

The slowdown of re-allocation (and productivity) in the U.S.

People are not losing low productivity jobs, becoming unemployed, and then getting high productivity jobs. People are staying in low productivity jobs, and new high productivity jobs are not being created. So the GR is not “cleansing”. It is, in some ways, “sullying”. The GR is pinning people into *low* productivity jobs.

This holds for firm-level reallocation well. In recessions prior to the GR, low productivity firms tended to exit, and high productivity firms tended to grow in size. So again, we had productivity-enhancing recessions. But again, the GR is different. In the GR, the rate of firm exit for low productivity firms did not go up, and the growth rate of high-productivity firms did not rise. The GR is not “cleansing” on this metric either.


In a related piece of work Davis and Haltiwanger have a new NBER working paper that discusses changes in workers reallocations over the last few decades. They look at the rate at which workers turn over between jobs, and find that in general this rate has declined since 1980 to today. Some of this may be structural, in the sense that as the age structure and education breakdown of the workforce changes, there will be changes in reallocation rates.

But what Davis and Haltiwanger find is that even after you account for these forces, reallocation rates for workers are declining. No matter which sub-group you look at (e.g. 25-40 year old women with college degrees) you find that reallocation rates are falling over time. So workers are flipping between jobs *less* today than they did in the early 1980s. Which is probably somewhat surprising, as my guess is that most people feel like jobs are more fleeting in duration these days, due to declines in unionization, etc.. etc..

The worry that Davis and Haltiwanger raise is that lower rates of reallocation lower productivity growth, as mentioned at the beginning of this post.


So we appear to have, on two fronts, declining dynamic reallocation in the U.S. This certainly contributes to a slowdown in productivity growth, and may perhaps be a better explanation than “running out of ideas from the IT revolution” that Gordon and Fernald talk about. The big worry is that, if it is regulation-creep, as Davis and Haltiwanger suspect, we don’t know if or when the slowdown in reallocation would end.

That is from The Growth Economics Blog, by Dietrich Vollrath, and it's worth reading in full.

What caught my eye

1. Labor under-utilization: We keep thinking, long and hard, about how much slack there is in the job market. Gavyn Davies brings our attention to a timely conference put on by the Peterson Institute. The "consensus" --at least as gauged by Davies-- is that the unemployment rate in the U.S. under-represents the true amount of slack, due to the effect of the participation gap and involuntary part-time employment. Moreover, because of long-term unemployment and the potential rise of productivity growth, a decline of labor slack need not be as inflationary as it normally would. Everybody, however, acknowledges the "great uncertainty" around these assessments.

The Peterson Institute has posted the videos and ppt files of all the conference presentations here.

2. "Grapho-tainment": Twenty-two maps and charts that will surprise you, by I love these: #1, #3, #7, #10, #15, #17, and #19.

3. Speech by Vítor Constâncio, vice-president of the ECB, on "understanding the yield curve." I liked this [emphasis mine]:
Moreover, high sovereign spreads in the euro area have raised the question of what is the appropriate yield curve to monitor. In an article in the July Monthly Bulletin we discussed this issue in the context of measuring the euro area risk-free rate. Should we use Bund yields, euro area average AAA rates or OIS rates, or does it depend on the matter at hand?

Incidentally, an intriguing question in a currency union is the following: if it is difficult to identify a risk-free rate in a currency union, this means that there is no risk-free asset either, besides the central bank's own liabilities, the currency
4. David Keohane at FTAlphaville shares a report by HSBC, on the uneven conditions for growth across states in India.

5. From this week's batch of NBER working papers [emphasis mine]:
We employ a model of precautionary saving to study why household saving rates are so high in China and so low in the US. The use of recursive preferences gives a convenient decomposition of saving into precautionary and non precautionary components. This decomposition indicates that over 80 percent of China’s saving rate and nearly all of the US saving arises from the precautionary motive. The difference in the income growth rate between China and the US is vastly more important for explaining saving rate differences than differences in income risk. We estimate the preference parameters and find that Chinese and US households are more similar in their attitude toward risk than in their intertemporal substitutability of consumption.
I find the statement in bold very, very hard to believe, given this.

The paper is by Horag Choi, Steven Lugauer, and Nelson Mark, and here's an ungated version.

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