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The political response to the European crisis so far has been denial and temporary patches. But policy makers are facing more than just a liquidity crunch; they also need to tackle a solvency crisis and possibly a structural one. One of the most pressing issues is addressing the over-leverage of the southern European nations.

Economic theory tells us that in situations of over- leverage there are multiple equilibrium points. If all parties expect a sovereign borrower to be able to pay, the market will refinance that creditor at low rates, ensuring it won’t default. Conversely, if lenders expect a default, it will happen. The enormous volatility we are witnessing is the result of the impossibility of knowing which of these outcomes will prevail.

Accounting Transparency

It is now believed that in the years preceding the recent financial turmoil, banks took excessive risks that weren’t disclosed, and regulators were only able to intervene after widespread panic had brought the system to its knees.

More transparency, it is argued, could have allowed the market to discipline such excessive risk-taking behavior. Yet there is evidence that, in many situations, greater disclosure may not be good corporate governance or even desirable.


Unemployment is high across the U.S., but some states are better than others at creating jobs. Texas Governor Rick Perry cast a spotlight on this when he entered the presidential race. His fast-growing state accounts for as much as half of all net U.S. jobs since mid-2009. Texas is part of a broader pattern, from which all states can learn.

Research shows that states keeping costs low for business have enjoyed better job growth during the past couple of decades. The low costs appear to be more important than other advantages often associated with higher spending, including infrastructure and an appealing quality of life.


Chad Syverson, Steven Levitt & John List

Secret to Productivity Found at Busy Auto Plant: Syverson, Levitt & List

over 4 years ago

Where do productivity gains come from? Economists have known for decades that the broadest measure of efficiency -- known as total factor productivity -- drives long-term income growth and prosperity. Progress occurs as firms figure out how to boost output without having to hire more workers or install more capital.

If total factor productivity sounds like something of a black box -- a quasi-magical ingredient that creates output out of seemingly nothing -- well, it sort of is. Sure, economists have some ideas about its sources: adoption of new technologies, better management practices, and improvements in production chains. But a more detailed understanding is emerging.


The Bureau of Labor Statistics reports that the time American workers spent at their paying jobs decreased by more than 8 percent between 2007 and 2010.

This sharp decline in aggregate market work hours occurred for two reasons: The unemployment rate  increased dramatically during this period, and the downturn reduced the average hours worked per week for those who were employed. It isn't surprising that the time people spend working in the labor market falls during recessions. But a close look at what individuals do with the lost work hours yields important insights into how they adjust to the hardships of a weak economy.


Tobias J. Moskowitz

NFL Labor Peace Brings Employment Chaos: Business Class

over 4 years ago

Now that labor peace is at hand in the National Football League, the real chaos is beginning.

There is an unusually narrow timeframe for teams to sign (or pass on) the hundreds of free-agent players who remain on the market. Thus, the next few weeks promise to be a caffeine-fueled free-for-all.


On July 21, European leaders decided on a new plan for Greece and new rules for the European Financial Stability Facility. They also came up with two remarkable oxymorons: The private sector will voluntarily agree to losses and Greece won't default for now, but instead will selectively default on some of its obligations. President Nicolas Sarkozy of France and Angela Merkel, the German chancellor, seemed to be smiling.

Did they have reason to celebrate? While the leaders took a step in the right direction, I would argue that the glass is only one-third full. The euro zone still faces several thorny issues, but the proposals that were offered to resolve them are more in conflict than in harmony.


One of the biggest questions in determining the future sustainability of our health-care system is this: Will the 21st century witness as large an increase in the average life expectancy of the rich countries -- 30 to 40 years -- as occurred during the last century?

Most experts believe it won't. The middle estimate of the U.S. Census Bureau, for example, is that the increase in life expectancy between 2000 and 2050 will be only about seven years, and the estimated increase for the entire 21st century is just 13 years. This is less than half the increase that occurred during the 20th century. The same conservatism is evident in the projections of the United Nations, the Organization for Economic Cooperation and Development, and other national and international agencies.


Steven J. Davis

Why Employers Are Slow to Fill Jobs: Business Class

over 4 years ago
"Why Employers are Slow to Fill Jobs"

Bill Clinton put his finger on a distressing aspect of the U.S. jobs situation in a recent television interview. The former president remarked that openings are being filled at only half the rate of previous recessions, even though current unemployment is much higher. He stressed the bleak outlook for job-seeking construction workers and the need for retraining and skills development.

He has a point: Construction workers can't easily become nurses. And, given the weak housing market, an early return of boom times in construction is highly unlikely. So skill mismatch will persist. It slows the pace of job filling by making it harder for employers to find suitable hires.


In the midst of a downturn, good macroeconomic policy requires a solid understanding of the headwinds facing the economy. Unfortunately, policy makers often are more interested in their ideological biases than in facts. As a result, the debate has degenerated into sterile arguments: Those on the right are convinced that government intervention is holding back a robust recovery. The left argues that we need more public spending.

We need to move beyond this hackneyed debate, and doing so requires a reframing of the discussion. The optimal policy response can only be formed if we know why the economy remains weak. And in making the diagnosis, it is crucial to check ideology at the door and instead be guided by the data.


As always happens in the spring, companies reported the pay of their chief executive officers and other top leaders. And, as usual, the press and activists complained that CEOs are paid more and more, without regard for performance, and that boards aren't doing their jobs.

But there's a twist this year. The Say-on-Pay rules in the Dodd-Frank legislation required for the first time that shareholders vote on executive-pay packages. And to the surprise of many, those votes have been overwhelmingly positive. The pay policies at more than 98 percent of the companies in the Standard & Poor's 500 Index received majority shareholder support. Almost 90 percent of those companies received favorable votes exceeding 70 percent.


Christian Leuz

Accountants of the World Unite!: Business Class

over 4 years ago

The debate over whether the U.S. should abandon its long-standing accounting standards and adopt international rules that are used by most other countries often misses an important point.

While the economic case for the switch isn’t strong, failure to act carries substantial political risks for the U.S. It could also imperil the push for a global reporting regime and weaken efforts to reform other areas of global financial regulation.


Although China has been churning out its share of unpleasant news, many onlookers don't consider its problems as serious as those of other big economies.

They should think again. China’s biggest economic challenges are political in nature and daunting, and will almost certainly get worse. That is because its autocratic system, for all the stability it has provided, will struggle to handle the sustained economic slowdown the country is likely to confront during this decade.


It appears another rescue is on the way for Greece. It won't solve the currency union's problems. The real threat to the euro isn't that a weak peripheral country like Greece might withdraw in an effort to devalue its way to competitiveness, but rather that Germany might want to pull out.

Germany's incentive to leave grows with each bailout, and Berlin could ultimately make a simple calculation that extrication will be less costly than continuing the sacrifice needed to keep the euro.


John H. Cochrane

Is QE2 a Savior, Inflator, or a Dud?: Business Class

over 4 years ago
Interest Rates Through QE2

The Federal Reserve’s experiment with a second round of quantitative easing is nearing an end. Did it achieve its goal of lowering interest rates and stimulating the economy?

Should we remember QE2 as a brilliant innovation, a central piece of the Fed’s future recession and deflation-fighting toolkit? Or is it the first step toward hyperinflation? When the Fed stops buying government bonds, will interest rates rise sharply because no one else is buying?


Regulatory meetings devoted to dire topics are rarely fun. The May 10 roundtable on “Money Market Funds and Systemic Risk,” hosted by the Securities and Exchange Commission, was an exception.

To be sure, the systemic risk posed by money market funds, or MMFs, is no laughing matter. Three days after the September 2008 bankruptcy of Lehman Brothers Holdings Inc., the $62.5 billion Reserve Primary Fund posted a 3 percent loss on debt issued by the bank and collapsed. This so-called breaking the buck, in which the fund’s underlying assets were valued at less than $1 per share, caused panicked investors to withdraw about $310 billion from all funds. The demands from investors to cash out their deposits forced the funds to reduce their holdings of commercial paper by $200.3 billion, or 29 percent, creating a major liquidity crisis among the prime borrowers in this market. Without the guarantee the government introduced at the end of that week, the leak would have turned into a flood. Had the Federal Reserve not stepped in to buy commercial paper, major U.S. employers would have been unable to meet payrolls, with potentially catastrophic consequences. The ripple effects were felt in Europe, where banks that borrow heavily in the U.S. commercial paper market were squeezed, too.


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