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Global Economic Watch


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Women and the Negotiating for Better Pay

04-08-2014 2:16 PM with no comments

It is no coincidence that the Obama administration chose today to announce new executive actions designed aimed at narrowing the pay gap between women and men.  Today is Equal Pay Day, marking the day when the average American woman's income matches that of the average man's for the previous year.  The average woman had to work into the fourth month of 2014 to match what the average man's salary for 2013.  Of course, there are many many factors involved in pay disparity.  In a piece for NPR, Ashley Milne-Tyte focuses on salary negotiation:

Posted by Graham Griffith

Benefits of EU Membership for Rich Nations

04-08-2014 1:35 PM with no comments

With the relatively healthy EU member states on the hook for helping lift the economies of less healthy member states, many Finns and Germans, for example, are asking, "what's in EU membership for us?"  European economists Nauro Campos, Fabrizio Coricelli, and Luigi Moretti have been looking at the benefits of EU membership, and they find that joining the club came with many economic benefits.  But interestingly, those benefits varied based on when a nation joined. From Vox:

Figures 1 and 2 show SCM results for the 1973 and 1995 EU enlargements.2 The dark line is for actual per capita GDP (or labour productivity), and the red line for the estimated synthetic counterfactual.

A measure of the magnitude of the economic benefits from EU membership is given by the difference between the actual per capita GDP for each country (or labour productivity) and that of its SCM artificial control group. We find substantial benefits for the 1973, and modest benefits for the 1995 enlargement. For the first ten years post-accession, per capita incomes for the former would be approximately 12% lower, while that for the latter would be about 4% lower (without EU membership). Alternatively, if we consider all years since accession, the respective figures would be about 34% for the former, and 5% for the latter. We find that per capita incomes in the UK and Denmark would have been 25% lower (if they had not joined the EU in 1973), but that the benefits for Ireland are even larger. Our estimates suggest that per capita income in Ireland would have been about 50% lower if it had not joined the EU in 1973.

This column presents new estimates of the economic benefits from EU membership focusing on the 1973 and 1995 enlargements. The main conclusion is that of substantial and positive pay-offs with benefits from EU membership clearly above direct costs, and with larger gains for the 1973 than for the 1995 enlargement.6 Moreover, the difference between the estimated benefits for 1973 and 1995 enlargements is considerable and, thus, should not be attributed solely to differences in per capita incomes at the time of joining. We conjecture that institutions may provide a more promising explanation of these differences if one believes that Austrian, Finnish, and Swedish institutions were better developed or aligned with the EU when these countries joined the European Union.

Read The eye, the needle and the camel: Rich countries can benefit from EU membership here.

Posted by Graham Griffith

Dan Ariely on the Cost of Dishonesty

04-08-2014 8:46 AM with no comments

Most organizations have problems with dishonesty.  Not necessarily big acts of cheating (those exist, of course), but rather a lot of little acts of cheating.  Those little acts don't seem so bad when looked at one at a time.  But added up they are problematic.  Dan Ariely's latest book is The Honest Truth About Dishonesty: How We Lie to Everyone -- Especially Ourselves, and he has spent a lot of time examining the costs of dishonesty.  He speaks openly about the experience in this conversation with Knowledge@Wharton's Adam Grant

Posted by Graham Griffith

The Rise and Fall of Real Interest Rates

04-07-2014 7:39 AM with no comments

Ahead of biennial meetings with the World Bank in Washington this week, the IMF's research department has put out an interesting analysis of interest rates around the world. In the last thirty years, real interest rates have plummeted, from an average of 5.5% in the early 1980s to 0.33% post global economic crisis.  From the report:

The decline in real interest rates in the mid-2000s has often been attributed to two factors:

• a glut of saving stemming from emerging markets economies, especially China; and

• a shift in investors’ preferences toward fixed income assets—such as bonds—rather than equity, such as stocks.

Both these factors put downward pressure on real interest rates globally while the expected return to invest in equities increased.

The substantial increase in saving in emerging market economies, especially China, in the middle of the first decade of the 21st century was responsible for more than half of the decline in real rates (Chart 2). This was only partly offset by the reduction in saving in advanced economies. High-income growth in emerging market economies during this period seems to have been the most important factor driving the increase in savings.

The IMF is now projecting a rise in real interest rates, but not to anywhere near the levels of the 1980s:

Read the report here.

Posted by Graham Griffith

Marketplace Whiteboard: Indexes as Baskets

04-04-2014 12:44 PM with no comments

If you have students who can’t quite get their heads around how indexes work, Paddy Hirsch is ready to help. In his latest  Marketplace Whiteboard, your mate Paddy tells us to just think of indexes as baskets:

Posted by Graham Griffith

Unemployment Rate Stays at 6.7% as Employment, Labor Force Increase

04-04-2014 9:53 AM with no comments

The U.S. economy added 192,000 jobs in March, according to the Department of Labor.  There was a slight increase in the labor force participation, as it rose 0.2% to 63.2%.  The headline number--the unemployment rate--stayed at 6.7%.  Here's a look at the unemployment trends from the Bureau of Labor Statistics:

Here are some of the key data from other areas we like to track in the monthly jobs report:

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 7.4 million in March. These individuals were working part time because their hours had been cut back or because they were unable to find full-time work.

In March, 2.2 million persons were marginally attached to the labor force, little changed from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 698,000 discouraged workers in March, down slightly from a year earlier. (These data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.5 million persons marginally attached to the labor force in March had not searched for work for reasons such as school attendance or family responsibilities.

Read the full report from the BLS here.

Posted by Graham Griffith

Nouriel Roubini's Top Six Risks for Global Markets

04-03-2014 5:51 AM with no comments

At Project Syndicate, Nouriel Roubini writes that the major risks to global markets have shifted.  The leading risks from the last two years, while not quite resolved, are not as predominant.  But there is plenty to be concerned about.  Namely:

For starters, there is the risk of a hard landing in China. The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment. This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt. By next year, there may be no road left down which to kick the can.

There is also the risk of policy mistakes by the US Federal Reserve as it exits monetary easing. Last year, the Fed’s mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a “taper” tantrum in global financial markets and emerging markets. This year, tapering is priced in, but uncertainty about the timing and speed of the Fed’s efforts to normalize policy interest rates is creating volatility. Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves.

Third, the Fed may actually exit zero rates too late and too slowly (its current plan would normalize rates to 4% only by 2018), thus causing another asset-price boom – and an eventual bust. Indeed, unconventional monetary policies in the US and other advanced economies have already led to massive asset-price reflation, which in due course could cause bubbles in real estate, credit, and equity markets.

Fourth, the crises in some fragile emerging markets may worsen. Emerging markets are facing headwinds (owing to a fall in commodity prices and the risks associated with China’s structural transformation and the Fed’s monetary-policy shift) at a time when their own macroeconomic policies are still too loose and the lack of structural reforms has undermined potential growth. Moreover many of these emerging markets face political and electoral risks.

Fifth, there is a serious risk that the current conflict in Ukraine will lead to Cold War II – and possibly even a hot war if Russia invades the east of the country. The economic consequences of such an outcome – owing to its impact on energy supplies and investment flows, in addition to the destruction of lives and physical capital – would be immense.

Finally, there is a similar risk that Asia’s terrestrial and maritime territorial disagreements (starting with the disputes between China and Japan) could escalate into outright military conflict. Such geopolitical risks – were they to materialize – would have a systemic economic and financial impact.

Read The Changing Face of Global Risk here.

Posted by Graham Griffith

Michael Lewis on 'Flash Boys'

04-02-2014 9:19 AM with no comments

Michael Lewis takes on Wall Street in his latest book, Flash Boys.  The markets, Lewis argues, are rigged, as "a handful of insiders" have an inordinate amount of control.  Lewis sat down with Charlie Rose to talk about the book, about high frequency traders, and the problems with the system.  In this excerpt, he shares how he came across the story behind the book:

In this clip, Lewis discusses his intended impact for the book on behavior on Wall Street:

Watch the full episode here.

Posted by Graham Griffith

IMF Notes Progress on Elimination of Implicit Too-Big-To-Fail Government Subsidies

04-02-2014 8:08 AM with no comments

The IMF likens protections for too-big-to-fail, or too-important-to-fail, banks as de facto government subsidies that are costly to the global marketplace.  The good news is that reforms following the Great Recession have reduced the implicit subsidies across developed economies.  The bad news is that they have yet to be completely eliminated--which is the IMF's goal.  From the IMF:

In its latest analysis for the Global Financial Stability Report, the IMF shows that big banks still benefit from implicit public subsidies created by the expectation that the government will support them if they are in financial trouble. In 2012, the implicit subsidy given to global systemically important banks represented up to $70 billion in the United States, and up to $300 billion in the euro area, depending on the estimates.

Government support to banks during the crisis has taken different forms, from loan guarantees to direct injection of public funds into banks. The expectation of that support allows banks to borrow at cheaper rates than they would if the possibility of that support didn’t exist. Those lower funding costs represent an implicit public subsidy to large banks. Subsidy encourages risk-taking

This implicit subsidy distorts competition among banks, can favor excessive risk-taking, and may ultimately entail large costs for taxpayers. While policymakers may need to rescue big banks in distress to safeguard financial stability, such rescues are costly to governments and taxpayers. Moreover, the expectation of government support reduces the incentives of creditors to monitor the behavior of big banks, thereby encouraging excessive leverage and risk-taking.

Recent financial reforms and progress in banks’ balance sheet repair have contained the too-important-to-fail issue, albeit with unequal results across countries. The analysis found that particularly large subsidies persist in the euro area, and to a smaller extent in Japan and the United Kingdom.

Read Big Banks Benefit From Government Subsidies here.

Posted by Graham Griffith

Zachary Karabell on Making Statistics More Meaningful

04-01-2014 9:31 AM with no comments

Zachary Karabell is on a quest.  He wants us to have a healthier relationship with economic statistics.  And that means not placing too much pressure on those statistics to tell us more than they are designed to.  In his latest book, The Leading Indicators: A Short History of the Numbers That Rule Our World, Karabell knocks some of the magic shine off of GDP and other key data that we follow closely.  He recently spoke about GDP, income per capita, and other headline stats at the Carnegie Council.  Here is an excerpt:

For more information on the event, and to listen to the full talk, click here.

Posted by Graham Griffith

SF Fed Economic Letter: 'Career Changes Decline During Recessions'

04-01-2014 9:10 AM with no comments

The great recession has spawned something of a jobless recovery--at least for the long term unemployed.  As Carlos Carrillo-Tudela, Bart Hobijn, and Ludo Visschers note in a new Economic Letter for the San Francisco Fed, many of the jobs lost during the recession have gone away.  So it would make sense if we saw a lot of people changing careers.  But that isn't happening. 

Figure 1 shows the fraction of hires out of unemployment that change industries (panel A) and occupations, (panel B). The shaded areas depict recessions. Because industry and occupation definitions and classification systems have changed over time, data are not continuous for the period we study, as shown by the vertical dashed lines in 1983, 1992, and 2003. Two other dashed lines in 1985 and 1995 show periods when we cannot link CPS respondents across surveys.

The more detailed our industry and occupation categories are, the more career changes we identify. This is why the line showing changes in industry and occupation groups at the major level lies below that showing the most detailed code level in both panels. Though the levels of industry and occupational mobility vary with the level of detail, the fluctuations in mobility over the business cycle are remarkably similar for both levels. These patterns for occupational switches also appear in data from the U.S. Census Bureau’s Survey of Income and Program Participation (see Carillo-Tudela and Visschers 2013).

The common cyclical pattern between these series clearly shows that the fraction of unemployed people who change careers upon getting rehired declines during recessions. All the recessions in our sample follow this pattern, from those in the early 1980s to the Great Recession that started in 2007. Likewise, the figures show that career changes increase when the labor market is strong, as at the end of the 1980s and the 1990s.

The fact that the rate of career change for unemployed workers declines during recessions seems counterintuitive, but there are several possible explanations for this phenomenon. These explanations can be divided into two broad categories. The first focuses on why those unemployed during recessions are less likely to pursue a change in career. For example, Carrillo-Tudela and Visschers (2013) consider aggregate unemployment fluctuations based on unemployed workers’ decisions to change occupations. They argue that in recessions, two factors reduce the incentives for unemployed people to change careers. One, though their job opportunities in their old careers might have dried up during the recession, it is also harder to find jobs in the alternate careers that they consider pursuing. And two, workers take into account that they may be less likely to start a particularly successful career path during a recession, which further reduces their incentives to change careers.

Read the full letter here.

Posted by Graham Griffith

Markets, Bubbles, and Bowling

03-31-2014 8:54 AM with no comments

Over at Quartz, John McDuling gives us a bit of a history lesson on a forgotten bubble of half a century ago.  The bowling bubble.  It is a story of a popular pastime, but also of market behavior.

Bowling has been around in America since before the revolution: Versions of the pastime were brought across by Dutch settlers in the seventeenth century. But bowling really blossomed, particularly among blue-collar types, in the 1950′s and 1960′s after the introduction of the automatic pin setter. According to HighBeam Business research, the number of bowling alleys in America nearly doubled from 6,600 in 1955 to 11,000 by 1963. Over the same period, the number of people bowling in leagues increased from less than three million to seven million.

Around this time, “action bowling,” which the New York Times described as “a high-stakes form of gambling in which bowlers faced off for thousands of dollars” was particularly popular in New York City. ““You’d go at 1 in the morning, and there were 50 lanes and the place was packed,” one exponent of the sport, hall of famer Ernie Schlegel told the Times. “The action was huge back then, like poker is today.”

All of this ebullience was reflected in the stock prices of bowling companies such as Brunswick Corporation, which according to the Wall Street Journal (paywall) increased 1,590% between 1957 and its 1961 peak.

And then lifestyles changed and bowling leagues became less popular.  While the bowling business didn't exactly roll into the gutter, the glory days became little more than an interesting market case study.

Read the full article here.

Posted by Graham Griffith

Shiller on What Drives Markets

03-31-2014 8:02 AM with no comments

Robert Shiller recently sat down with David Wessel and took a step back from current events to talk about how his thinking on markets and market behavior developed.  The takeaway: academics can get caught up in "fadish" thinking, and good economists must be careful to always search widely for information.  He also says it would be nice to "tame" bubbles, but "we don't want to do draconian things that would upset the whole system." From WSJ.Money:

Posted by Graham Griffith

Planet Money: Greece's Economy May Stop Shrinking

03-28-2014 11:53 AM with no comments

Greece's economy has a had a bad six years.  At times, very very bad.  But it may be getting better.  The latest Planet Money podcast focuses on Greece, because the government there has put out a less-than-bad economic forecast.  If the forecast is accurate, "the amazing shrinking economy will finally stop shrinking." 

Posted by Graham Griffith

Personal Income and Spending Continue to Climb

03-28-2014 11:33 AM with no comments

Personal income is steadily rising, according to the Commerce Department.  Income and disposable personal income both rose by 0.3 percent in February, after rising 0.2% in January.  Spending is just a step behind income (perhaps as it should be).  Real consumer spending rose 0.2% after rising 0.1% in January. Take a look at the monthly change:

From the Bureau of Economic Analysis release:

Private wages and salaries increased $13.0 billion in February, compared with an increase of $17.2 billion in January. Goods producing industries' payrolls increased $5.2 billion in February and were unchanged in January; manufacturing payrolls decreased $0.3 billion in February, compared with a decrease of $2.8 billion in January. Services-producing industries' payrolls increased $7.8 billion, compared with an increase of $17.3 billion. Government wages and salaries increased $2.0 billion, compared with an increase of $1.2 billion.

Read the BEA's full report here.

Posted by Graham Griffith

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