Brookings Papers on Economic Activity

Fall 2015 Brookings Panel on Economic Activity

The Fall 2015 Brookings Panel on Economic Activity will take place September 10-11, 2015 at the Brookings Institution in Washington, DC.  The conference will be live-tweeted under the Chatham House rule using hashtag #BPEA. Follow the Twitter conversation here. 

The following papers will be presented at the conference:

Weather adjusting economic data

Macroeconomic data can and should be purged of the effects of bad weather to help policymakers and markets have a more accurate sense of the health of the economy. Unusual weather is not accounted for by applying “seasonal adjustment,” and the new research shows that the effects of unusual weather can be responsible for swings of as much as 100,000 jobs monthly. Michael Boldin of the Federal Reserve Bank of Philadelphia and Jonathan H. Wright of Johns Hopkins University find that unusual weather effects are important and are not reflected in the conventional seasonal adjustment that the Bureau of Labor Statistics currently uses. Adjusting for unseasonal weather (snowstorms, low temperature and snowfall) also impacts GDP data, with growth in the first quarter of 2015 increasing from 0.6 percentage points at an annualized rate to 1.4 percentage points, while the estimate of growth in the second quarter drops from 3.7 to 2.8 percentage points.
 

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“Dynamic scoring”: Why and how to include macroeconomic effects in budgetary estimates for legislative proposals  

Congress’ use of dynamic scoring – including the effects of legislation on overall output, employment, and similar variables in budget estimates – will give lawmakers important additional information about policies, but it needs to be used judiciously, according to a paper presented today by former Congressional Budget Office Director Douglas Elmendorf. In “’Dynamic Scoring’: Why and How to Include Macroeconomic Effects in Budgetary Estimates for Legislative Proposals,” Elmendorf, now a Visiting Fellow in Economic Studies at Brookings, notes the critical role the Congressional Budget Office (CBO) and Joint Committee on Taxation’s (JCT) “scores” – or estimated budgetary costs of proposed legislation – play in not only Congressional deliberations but also in public discourse.  

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Abenomics: An update

While Japan’s recent expansionary monetary policy known as Abenomics continued to weaken the yen, raise stock prices, and generate positive inflation, the real effects have been modest, with net exports and consumption contributing surprisingly little to growth since the program was launched 3 years ago. In an update to their Spring 2014 paper, Joshua K. Hausman of the University of Michigan and Johannes F. Wieland of the University of California at San Diego note that consensus forecasts are for the level of GDP over the next five years to be nearly the same as that forecast in October 2012 – before Abenomics began. This likely reflects the imperfect credibility of the 2 percent inflation target, the weak net export response, larger than expected negative impacts from past and future consumption tax increases, and a lack of progress on structural reforms. But while the magnitude of the current benefits from Abenomics appear to thus far be small, they may grow larger if Japan succeeds in raising inflation expectations from their current 1-1.5 percent to 2 percent. For this to occur, the Bank of Japan may need to implement additional stimulus measures to convince markets and firms that 2 percent inflation is feasible. More progress on structural reforms would also have large benefits, with many low cost but high return changes possible.

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Inflation targeting does not anchor inflation expectations: Evidence from firms in New Zealand

In spite of a quarter century’s worth of central bank efforts to communicate inflation targets and shape public expectations, firms are no better than the general public in estimating inflation and often fail to incorporate recent inflation data into their business decisions. In “Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand,” Saten Kumar of Auckland University of Technology, Hassan Afrouzi and Olivier Coibion of University of Texas at Austin, and Yuriy Gorodnichenko of University of California at Berkeley review the results of a series of surveys, finding that company managers have been forecasting much higher levels of inflation than has actually occurred, at short-run as well as very long-run horizons.

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A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attend contributed to rising loan defaults

The student loan crisis in the U.S. is largely concentrated among non-traditional borrowers attending for-profit schools and other non-selective institutions, who have relatively weak educational outcomes and difficulty finding jobs after starting to repay their loans, according to new government data. In contrast, most borrowers at four-year public and private non-profit institutions have relatively low rates of default, solid earnings, and steady employment rates. In “A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and the Institutions they Attend Contributed to Rising Loan Defaults,” Adam Looney of the U.S. Department of the Treasury and Stanford’s Constantine Yannelis find that most of the increase in default is because of an upsurge in the number of borrowers attending for-profit schools and, to a lesser-extent, community colleges and other non-selective institutions whose students had historically composed only a small share of student borrowing. By 2011, however, borrowers at for-profit and 2-year institutions represented almost half of student-loan borrowers leaving school and starting to repay loans, and accounted for 70 percent of student loan defaults. In 2000, only 1 of the top 25 schools whose students owed the most federal debt was a for-profit institution, whereas in 2014, 13 were. Borrowers from those 13 schools owed about $109 billion – almost 10 percent of all federal student loans.

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Looking for a success: The euro crisis adjustment programs

In spite of German Finance Minister Wolfgang Schäuble and the IMF declaring Portugal’s post-euro crisis adjustment program a “success,” Portugal’s public finances are still in shaky grounds, according to Columbia University’s Ricardo Reis in an update to his earlier paper on Portugal’s slump-crash. While deft management of the public debt makes a crisis in the near future unlikely, public debt is 130 percent of GDP, austerity was more mild than often reported, and a lack of reform of social security will push public spending higher thanks to Portugal’s generous pension system. At the same time, the Portuguese economy has changed in many directions that seem promising, including a reversal of its misallocation of resources, increases in exports, more educated workers, less protection of local interests, and increasing output in the least productive sectors. In the long run, the definite tests of economic adjustment will be whether fast economic growth in the next few years is able to offset the stagnation of the last 15, and whether an agreement with the troika allows for a fall in the market value of the public debt.

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For this conference, we have also arranged for four shorter papers on the Greek debt crisis:

Greek budget realities: No easy options

The size of fiscal adjustments required for Greece to meet its full debt obligations will be very large and very painful – and are even larger when taking into account how much the tax base will react (elasticity), and are substantially more costly given that Greece is a small open economy that is integrated with the larger European economy. In “Greek Budget Realities: No Easy Options,” Christopher L. House and Linda L. Tesar of the University of Michigan find that in the baseline case calibrated to the Greek economy, all of the budget measures produce sizable declines in output in both the short- and long-run, and even if delayed, it will merely cause greater economic hardship in the long-run.

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Is the Greek debt crisis one of supply or demand?

Even if Greece’s debt were eliminated tomorrow, the Greek economy will still not grow substantially enough to catch up with the rest of Europe, according to Yannis M. Ioannides of Tufts University and Nobel-prize winner Christopher A. Pissarides of the London School of Economics and University of Cyprus in “Is the Greek Crisis One of Supply or Demand?” While the Greek debt is too high to allow the government flexibility in its budgetary policies, Greece also suffers from serious structural problems such as low productivity and lack of competitiveness. Since joining the Eurozone, the Greek government collected less in taxes than it spent, the country consumed more than it produced, and had to import well above its exports. For implementation to succeed, market reforms that free up competition in trades such as taxis and pharmacies need to be “owned” by the Greek government and eased in gradually to give affected workers alternative means of support in the transition. There is likely to be a time lag for which Greece will need help from international institutions – longer than 3 to 4 years as has been the timeframe for other European economic reform programs.

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The pitfalls of external independence: Greece, 1829-2015

Greece has a nearly 200-year history of relying on external creditors for financing, only to later default after a period of heavy borrowing from foreign private creditors, and then as repayment difficulties arise, foreign governments step in, help to repay the private creditors, and demand budget cuts and adjustment programs as a condition for the official bailout loans. In “The Pitfalls of External Dependence: Greece, 1829-2015,” Carmen M. Reinhart of Harvard University and Christoph Trebesch of the University of Munich note that debt crises can be very protracted when foreign governments step in and arrange bailout programs, as was the case for Greece starting just after its independence. The Greek crisis of 1833 started out as a loan from private creditors, which Greece could not repay; the then-Troika (France, Great Britain and Russia) repaid the private creditors and Greece’s debts shifted to official hands, but even after decades in default and financial self-sufficiency, Greece still faced repayment of that loan more than 100 years later. Thus, a key ingredient in the resolution to the ongoing Greek crisis is a deep nominal haircut on the stock of official (and possibly private) external debt – shifting the balance to domestic sources of funding. Two hundred years of evidence supports the view that chronic reliance on external capital has repeatedly led to ruin.

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Diagnosing Greek debt sustainability: Why is it so hard?

There has been a serial misdiagnosis and underestimating of Greek debt sustainability by lenders, and their policies toward Greece are unsustainable and have damaged creditor institutions. In “Diagnosing Greek debt sustainability: Why is it so hard?” Julian Schumacher and Beatrice Weder di Mauro of the University of Mainz find that the International Monetary Fund (IMF) and the European Stability Mechanism (ESM) have become inappropriate for Greece since they ignore the highly concessional terms of Greek debt and their repeated accommodations have left the overall sound lending framework severely weakened. And yet, despite the extraordinary amount of private and public debt relief Greece has already received, including the granting of exemptions by creditors to their typically sound lending rules (34 times thus far), further debt restructuring will still be necessary. Repayment of loans to European institutions now could extend over several decades (past the 2054 terms in place), which may be problematic if political constellations change. Eurozone partner countries should consider some scheme akin to the Highly Indebted Poor Countries (HIPC) process, where multilateral debt forgiveness was granted after an extended period of good policy track record.

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Please see below for other conference materials:

Download Adam Looney's author slides
Download Kevin O'Rourke's discussant slides
Download Karen Pence's discussant slides
Download Claudia Sahm's discussant slides