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April 15, 2011, 6:44 pm

Podcast: Good Euros, Bad Euros and Market Worries

Gresham’s Law is a centuries-old economic principle that is often defined quite simply as “bad money drives out good money.”

Because gold is more valuable on the open market than copper, for example, copper coins with the same nominal value as gold coins would quickly drive the gold coins out of circulation; the gold coins would be hoarded or melted down, to extract every last bit of value from them.

There’s more to Gresham’s Law than that, though, and Tyler Cowen says it helps to explain some of the problems in the euro zone.

In the Economic View column in Sunday Business and in a conversation in the new Weekend Business podcast, Professor Cowen, who is based at George Mason University, says that many bank depositors in Ireland have begun to doubt that country’s commitment to the euro.

As a result, depositors have begun moving money from Ireland to banks elsewhere within the euro zone. In effect, euros held in a bank in, say, Germany, are being perceived as being more valuable than euros held in Ireland.

Gresham’s law is relevant in this case because it holds that if two assets — in this case, euros held inside and outside Ireland — are deemed by traders to have different values, sooner or later the legally fixed price parity will break down. This breakdown is already occurring, Professor Cowen says, and it is causing enormous problems within the euro zone. The various patches being applied won’t be enough to cure this problem, in his opinion.

The financial problems in Europe are part of the “wall of worry” that investors have been climbing in the long rally under way in many stock markets around the world since March 2009. Calamities abound, as I write in the Strategies column in Sunday Business, but markets have been rising anyway. Read more…


April 15, 2011, 5:43 pm

G.D.P. Estimates Slide Further

Earlier this week we wrote that several prominent economic forecasters had lowered their estimates of gross domestic product growth in the first quarter of this year. Today saw even further declines.

Macroeconomic Advisers, a forecasting firm, lowered its estimate to just 1.4 percent annualized, when just a few months ago they had pegged the number at 4.1 percent.

Capital Economics likewise brought its estimate down to 1 percent, writing in a client note:

Every data release last week seemed to necessitate a further downward revision to our first-quarter GDP growth forecast. By the end of the week when the dust had finally settled, that estimate was down to only 1% at an annualised pace. Indeed, there is now even a decent outside chance that the economy contracted outright.

The median estimate on Bloomberg is 1.8 percent annualized, although many of the usual forecasters have not yet submitted their numbers. We’ll get the Commerce Department’s preliminary number on April 28.

On the bright side, a few forecasters have also tentatively raised their estimates for output growth later this year.


April 15, 2011, 2:41 pm

Jonathan Levin Awarded Clark Medal

Jonathan Levin, 38, has been awarded the 2011 John Bates Clark Medal, an annual prize given to the most promising economist under 40.

Mr. Levin, a professor at Stanford, studies industrial organization, in particular how people and institutions contract with each other. His latest research has focused on a number of issues relevant to public policy, including college early admissions programs, subprime loans, health insurance and Internet markets.

He received his Ph.D. in Economics from M.I.T., an M.Phil. in economics from Oxford University and undergraduate degrees in math and English from Stanford.

The Clark Medal is often referred to as the “Baby Nobel” because so many of the recipients of this prestigious award have gone on to receive the Nobel memorial prize in economics, including Paul Krugman, Joseph Stiglitz and Milton Friedman.


April 15, 2011, 2:27 pm

‘The Pale King’: Battling Tax Boredom in Peoria

President Ronald Reagan began a radio speech 25 years ago by reading from “a very famous U.S. government document.” It wasn’t the Declaration of Independence or Lincoln’s Second Inaugural, but a notoriously tangled sentence from Section 509(a) of the Internal Revenue Code:

“For purposes of Paragraph (3), an organization described in Paragraph (2) shall be deemed to include an organization described in Section 501(c) (4), (5), or (6) which would be described in Paragraph (2) if it were an organization described in Section 509(a)(3).”

Reagan’s speech helped win passage of the bipartisan Tax Reform Act of 1986, which lowered marginal tax rates and eliminated many tax shelters. But it also may have helped inspire “The Pale King,” David Foster Wallace’s posthumous unfinished novel about a group of I.R.S. agents battling extreme boredom at a tax processing center in Peoria, Ill., in the years just before the 1986 reforms.

“The Pale King,” which is officially published on April 15, has drawn praise from literary critics for its powerful and often hilarious portrait of the bureaucratized American soul. But Mr. Wallace was interested in the I.R.S. as more than just a metaphor. In an article in Sunday’s Book Review, I write about the extraordinary research Mr. Wallace, who died in 2008, did on the tax system. Lots of novelists contemplate how much they can deduct for their home office. How many sign up for accounting classes and plow through I.R.S. white papers on how to deduct foreign tax payments?

Mr. Wallace also corresponded with several tax accountants, including Stephen Lacy of Evanston, Ill., a former philosophy student (as Mr. Wallace was) who could talk Wittgenstein and Derrida as fluently as NOLs and Schedule Cs. Mr. Lacy answered questions about the “tax gap” and exotic tax shelters like “the Silver Butterfly.” He may have also given Mr. Wallace ballast for one crucial conceit of “The Pale King”: that the soul-crushing boredom of tax work can lead to transcendent bliss, “a second-by-second joy and gratitude at the gift of being alive.”

In a letter written in September 2005 and now held in the Wallace archive at the Harry Ransom Center at the University of Texas, Mr. Lacy sent Mr. Wallace a copy of that sentence from section509(a) and described his reaction.

“I find that although I can never quite understand what it says, after I read it several times and concentrate, I can actually get into a kind of weird Zen-type meditation high!” he wrote, adding: “Then again sometimes it provokes a profound anxiety attack.”

Reagan clearly sympathized with that second reaction — not that it ultimately mattered. In an irony Mr. Wallace surely would have appreciated, the sentence in Reagan’s speech is still in the tax code.


April 15, 2011, 11:13 am

Core Inflation Rises, but Is Still Low

Friday’s inflation report was mostly as economists expected it to be. Core inflation — which excludes food and energy prices and is a better guide to future inflation — rose slightly less than expected, but only slightly.

How worrisome is core inflation? The Federal Reserve certainly needs to watch it. If it continues to accelerate, that would suggest the Fed may need to raise interest rates sooner than it now plans. But core inflation remains very low historically. Here it is over the last three months, compared with historical trends:

Bureau of Labor Statistics, via Haver Analytics

And here it is over the last year, again compared historically:

Bureau of Labor Statistics, via Haver Analytics

The recent signs of economic weakness remain a much bigger risk than inflation.


April 15, 2011, 10:00 am

Taxes Have Always Been Too Complicated

President Obama, like many Americans, has called for Congress to simplify the tax code.

Good luck with that.

With 14,000 pages of Internal Revenue Code and Federal Tax Regulations, today’s tax system is quite complicated. But Americans have been complaining about the complexity of the income tax system virtually since it was created.

Joseph J. Thorndike, the director of the Tax History Project at Tax Analysts, writes:

In 1915, Chicago lawyer Charles H. Hamill of Rosenthal & Hamill made headlines with some vigorous complaints about the new income tax, then less than two years old. The law, he said, was “the worst piece of legislative draftsmanship I have ever seen placed upon a statute book anywhere.” Indeed, it was very nearly incomprehensible:

“It is so complicated that it is utterly impossible to understand its meaning save by consulting a palmist.”

The year before, editors at The Washington Post had reacted in horror to the publication of new tax forms. “Complicated as the individual income tax blanks were this year, the return blanks for 1915 are even more so,” the paper whined.

By 1920, lawmakers were beginning to wrestle with serious proposals for simplification. Which prompted The New York Times to pose some hard questions:

What are the whys and wherefores of the elaborate forms which cause so much bother?
Why can’t we have a simpler method?
What are the excuses given by members of Congress for the complications?
Will they try to simplify the procedure?


April 15, 2011, 6:00 am

How Worrisome Is Student Debt?

Today's Economist

Judith Scott-Clayton is an assistant professor at Teachers College, Columbia University.

Student loan debt has risen to its highest level ever, with starting balances averaging $24,000 among the two-thirds of graduates who borrowed for their degree, Tamar Lewin noted in an article in The New York Times on Monday. This increase has heightened longstanding concerns that college students are borrowing too much.

Economists tend to be less troubled by the trend, Ms. Lewin noted, viewing student loan debt as a worthwhile investment that pays off over a lifetime. Many economists even raise the concern that an irrational aversion to debt may lead some capable students to forgo college.

So should we stop worrying about student debt? Or are students and their families right to be alarmed? The key question is this: Are graduates better off, even with all that debt, than if they hadn’t gone to college at all?

The answer seems clear: even with $24,000 in debt — comparable to the cost of a new midsize car — the average four-year college graduate is likely to be substantially better off over the long term than someone with only a high school education, data show.
Read more…


April 14, 2011, 2:00 pm

How Parenting Matters

Book Chat

Jane Waldfogel, a Columbia University professor who specializes in research on children, is the author of “Britain’s War on Poverty,” which was published last year. She previously wrote, “What Children Need,” an overview of research on child development. Several of Ms. Waldfogel’s research papers are available from the National Bureau of Economic Research.

Our conversation follows.

Jane Waldfogel, professor of social work and public affairs at Columbia University.Rose Lincoln Jane Waldfogel, professor of social work and public affairs at Columbia University.

Q. Bryan Caplan — the subject of our last Book Chat – argues in his new book that “parents barely affect their children’s prospects.” He says that the research on adopted twins suggests that nature trumps nurture over the long term: twins who grow up in very different families often end up very similar.

I’m somewhat skeptical of that claim. I don’t doubt that genes exert a powerful influence. But my sense is that environment does too, and not just in the short term. That sense stems in part from reading your work. Can you sketch out your view of what the research on nature and nurture shows?

Ms. Waldfogel: I think we need to be careful with the evidence from adoption and twin studies. Such studies rely on the assumption that twins adopted into different homes experience different environments, but in fact twins who are reared apart are often raised in quite similar homes. Another confounding factor is that the influence of genes seems to be stronger in more advantaged settings than it is in more disadvantaged settings. Think of corn planted in fertile, well-watered soil; the main thing that will matter in that context is genetic variation in seeds. Because adopted children more often grow up in advantaged homes, studies of adopted children will therefore tend to overstate the influence of genetics.
Read more…


April 14, 2011, 1:30 pm

What We’re Reading: Takes on the New Budget Proposals

  1. Macroeconomic Advisers, a forecasting firm, takes a whack at Representative Paul Ryan’s budget proposal, or at least the economic analysis supporting it.
  2. Keith Hennessey, a former economic adviser to President Bush, takes a whack at President Obama’s budget proposal.
  3. A look at the carbon footprint of indoor cannabis production.
  4. Beautiful people are happier.
  5. Baseball salaries over time, an allegory for what’s happening to “the super-rich.”
  6. A theme park, coming soon to the United States, that lets children “play at corporate-sponsored employment.”

April 14, 2011, 10:00 am

Up for Parole? Better Hope You’re First on the Docket

A new paper finds that experienced parole judges in Israel granted freedom about 65 percent of the time to the first prisoner who appeared before them on a given day. By the end of a morning session, the chance of release had dropped almost to zero.

After the same judge returned from a lunch break, the first prisoner once again had about a 65 percent chance at freedom. And once again the odds declined steadily.

DESCRIPTIONSource:Shai Danzigera, Jonathan Levav, and Liora Avnaim-Pessoa

The reason offered by the authors suggests the broader significance. They write that making successive decisions depletes a limited mental facility, just like curling a dumbbell wears out your arms. As people get tired, they look for shortcuts, and one of the easiest shortcuts is to uphold the status quo –- in this case, denying parole.

This suggests that college admissions committees are more likely to accept the first applicants they consider after a lunch break. Or that quality-control officers may be more likely to ignore possible flaws in products as a long day drags toward its close.
Read more…


Featured Posts

  • How Worrisome Is Student Debt?

    Student loans pose particular burdens to those who never complete college or who find only low-paying jobs when they do, an economist writes.

  • Is Goldman Sachs Too Big to Fail?

    If a bank like Goldman were in trouble, policy makers would face the unappealing options that existed for Lehman Brothers, to let it fail or bail it out, an economist writes.

  • Fear the Bond Market

    Why Wall Street — and the rest of the economy — should be concerned about the game of chicken over the debt ceiling.

  • Job Openings on the Rise

    The number of job openings rose at their fastest pace in almost seven years in February, according to a new report from the Labor Department.

  • The Burden of Supporting the Elderly

    The ratio of working-age people to retirement-age counterparts is dwindling across the developed world.

Economic Indicators

Staff Contributors

Catherine Rampell Catherine Rampell is an economics reporter for The New York Times.

David Leonhardt David Leonhardt writes the Economic Scene column, which appears in The Times on Wednesdays.

Motoko Rich

Motoko Rich is an economics reporter for The New York Times.

Michael Powell

Michael Powell is an economics reporter for The New York Times.

Steven Greenhouse

Steven Greenhouse writes about labor and workplace issues for The New York Times.

Liz Alderman

Liz Alderman writes about European economics, finance and business from Paris.

Jack Ewing

Jack Ewing writes about European economics and business from Frankfurt.

Daily Economists

Daily Economists

Economists offer readers insights about the dismal science.

Laura D'Andrea Tyson
University of California, Berkeley
Nancy Folbre
University of Massachusetts-Amherst
Edward L. Glaeser
Harvard University
Simon Johnson
M.I.T./Peterson Institute
Casey B. Mulligan
University of Chicago
Uwe E. Reinhardt
Princeton University
Judith Scott-Clayton
Columbia University

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Economics doesn't have to be complicated. It is the study of our lives — our jobs, our homes, our families and the little decisions we face every day. Here at Economix, Catherine Rampell, David Leonhardt and other contributors will analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.

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