New Economist

Curtains for the greenback?

The mighty greenback is slowly but surely losing its pre-eminence as the world's reserve currency. Consider the evidence:

1. The US dollar has fallen by more than 10 per cent against the euro and 14 per cent against the pound this year.

2. Asian central banks have been steadily diversifying their holdings away from USD-denominated assets into the euro, yen and pound.

3. Key petrodollar economies such as Iran, the UAE, Indonesia and Venezuela have said  they are looking to shift their reserves into euros or to price oil sales in the currency.

4. Today's Financial Times reports that Euro notes have overtaken the dollar:

The US dollar bill’s standing as the world’s favourite form of cash is being usurped by the five-year-old euro. The value of euro notes in circulation is this month likely to exceed the value of circulating dollar notes, according to calculations by the Financial Times. Converted at Wednesday’s exchange rates, the euro took the lead in October.

The figures highlight the remarkable growth in euro notes since their launch on January 1 2002, three years after the start of Europe’s monetary union, which in January welcomes its 13th member – Slovenia, the former Yugoslav republic.

“After the launch, we expected growth to stabilise – but it has continued over five years,” Antti Heinonen, head of the European Central Bank’s bank notes directorate, told the Financial Times.

Although the ECB does not deliberately promote the international use of the euro, it has become popular in official foreign exchange reserves – even if it is far from challenging the dollar’s lead as the most popular reserve currency.

Individually, these might be dismissed. Together, they point to a gradual erosion of the greenback's long standing dominance of global currency markets and central bank reserves.

I don't see this gradual diversification as a problem for markets - though there will be the odd exchange rate and asset class dislocation as large holdings shift. Nor does it augur the greenback's imminent collapse; more like a gradual weakening.

In time I expect it will be the yuan - rather than the euro - which comes to rival the dollar as the world's most traded currency (though clearly we are still a long way from that).

UPDATE: Felix Salmon of Economonitor offers five main reasons why there are more euros in circulation than greeenbacks. Meanwhile Dean Baker has this to say:

First, the dollar is not essential to world finance. People are happy to hold euros and other currencies, no one needs to hold dollars. Second, the euro passing the dollar is not some sort of cataclysmic event.

As long as people still have faith in the basic soundness of the dollar, they will be happy to hold it, even if it slides to number 2 by some measures. Of course, if investors become convinced that the currency is on a downward path, then it could lead to a serious run.

In short, the world does not need the dollar, but it is also not anxious to throw it in the toilet, or at least not yet.

Germany's baby bonus

People respond to incentives - even expectant mothers. We know from Andrew Leigh and Joshua Gans' recent paper, for example, that Australia's 'baby bonus' resulted in over 1,000 births being moved from late June to early July 2004, mostly via fewer C-sections and inducement procedures.

It looks like Germany is experiencing a similar effect, as expectant German mothers delay giving birth to cash in on benefits. Today's Scotsman reports:

Heavily pregnant German women are going to extreme lengths to delay giving birth until 1 January 2007 - because a new law will mean a difference of tens of thousands of pounds in benefits.

Parents of babies born in Germany on or after January 1 will benefit from generous new family subsidies. Consequently, all sorts of tips about keeping baby at bay are being traded on the internet, in magazines and in family planning classes.

"From Christmas onwards, I have been standing on my head," said expectant mother Antje Grimm. "I have heard that is one way to stop the child from becoming too overactive while not harming it."

Under the new Elterngeld, or "parents' money" law, parents who stay home to look after the newborn child will receive 67 per cent of their last net income tax free, or up to 1,800 - more than £1,300 - a month, for the first 12, or in some cases 14, months after the birth.

The already affluent, in particular, will be significantly better off. Currently, parents whose annual net income lies below a certain level - 30,000 per couple - can choose between up to 24 monthly payments of up to 300 or 12 monthly payments of up to 450.

...the motivation behind the plan to get Germans reproducing is based on sheer pragmatism: the German birth rate has fallen to an average of 1.3 children per woman - far lower than the 2.1 children per family replacement rate needed in industrialised countries. The Federal Statistics Office has ominously forecasted a drop in the population from today's 82 million people to just 69 million by 2050 - a decline it warned "cannot be halted".

That kind of demographic implosion would spell disaster for the country's creaking pension system. The shrinking population could also result in a shortage of skilled workers and lack of innovation.

German politicians hope the legislation can help reverse that trend.

Though the law may help in the long run, it has expectant mothers in their last days of pregnancy feeling a bit anxious. In recent weeks, soon-to-be parents have inundated doctors and midwives for advice on how to prolong pregnancy.

The great disconnect over the US economy

Do economists and policymakers speak a different language from US citizens? A new Economic Policy Institute report claim there is "a widening gap between the ways that everyday Americans and influential elites talk about the economy."

The report is Talking Past Each Other: What Everyday Americans Really Think (and Elites Don’t Get) About the Economy (full text available online) by David Kusnet, Lawrence Mishel and Ruy Teixeira. the authors argue there is a 'great disconnect' between elite opinion and the American middle class:

This disconnect is of profound importance. The elites are making and discussing economic policies in an environment in which—though they may not realize it—they are poorly informed about the views of the very people who will be affected by those policies.

This is of particular importance now that a relatively optimistic elite discourse about strong growth in the gross domestic product and other positive macroeconomic indicators coexists with a sharply negative assessment of economic conditions among the public. ...when they talk about economics, everyday Americans and influential elites seem to be describing two very different worlds and speaking two very different dialects.

This report is an effort to begin bridging the gap between everyday Americans’ understandings of economic issues and the official economic discourse. The issues that the people and the policy makers are trying to discuss are too important for them to be talking past each other.

Their conclusion?

If these findings point to a new synthesis about how policy makers should talk about and act upon the economy, it is this: The nation should provide greater economic security to hard working families so that they can make the most of expanded economic opportunity. Now, as in the eras of the Homestead Act and the G.I. Bill, Americans need to stand on a solid foundation so that they can reach for their futures. Policy makers who listen to the people will best be able lead in the years ahead.

The report includes a special section that offers 12 suggestions for how to 'speak American' when talking about economics. An interesting read.

See also a related report, The economic disconnect: How both the Left and the Right get it wrong (PDF) posted online. This is a pre-election report prepared for the EPI by Lake Research Partners based on a survey of 1,044 adults in March 2006 and six focus groups conducted with swing voters in Minneapolis, Columbus and Jacksonville in January. Among the key findings:

• While Americans are dissatisfied with the current state of the economy, neither conservative nor liberal elites speak for them. Conservative elites tout economic growth in the face of rising costs while liberal elites portray the middle class as helpless victims, causing average Americans to see both groups as out of touch.

• Over two thirds of the country view the economy negatively. At the same time, without any coherent, compelling narrative from the Right or the Left, many Americans are short on their own solutions to the economic problems facing the country. The public’s central perspective is of a middle class in decline, badly squeezed between rising costs, reduced benefits, and stagnant earnings. The public holds out little hope for the economy improving any time soon, suggesting that these current problems may reflect a structural change.

• While Americans have not quite discovered the solutions to the country’s economic challenges, they approach this debate with definite bad actors in mind. Americans see a close relationship between corporations and politicians that has created, or at least stoked, a culture of greed in America, threatening our national economy and eroding the middle class. These are the main, though not the only, culprits in explaining the current economy.

• Even while acknowledging the obstacles created by this environment of rising costs and stagnant incomes, the public is optimistic about their own chances for achieving economic stability in the future and see the American dream as a reachable goal.

• Those without a college degree are much less positive about how they are doing and hold much greater resentment toward elites and especially corporations.

• Americans see themselves as largely on their own in the current economy, but they are eager for the government to take on a more active role to help ease their financial burden in areas such as health care, energy and education and support greater regulation of the corporate interests that are seen as contributing to these rising costs.

That seems like ground for economic populism and, alas, protectionism.

Hat tip: Daniel Drezner.

Krugman on poverty in the UK

Paul Krugman has some nice things to say about the UK government's efforts to reduce poverty in his 25 December New York Times column. As usual, it's subscribers only - but Mark Thoma has some lengthy excerpts:

Helping the Poor, the British Way, by Paul Krugman, Commentary, NY Times:
It’s the season for charitable giving. And far too many Americans, particularly children, need that charity. ...

[F]our decades after L.B.J. declared war on poverty ..., I’m not sure whether people understand how little progress we’ve made. In 1969, fewer than one in every seven American children lived below the poverty line. Last year, although the country was far wealthier, more than one in every six American children were poor.

And there’s no excuse for our lack of progress. Just look at what the British government has accomplished over the last decade.

Although Tony Blair has been President Bush’s obedient manservant when it comes to Iraq, Mr. Blair’s domestic policies are nothing like Mr. Bush’s. Where Mr. Bush has sought to privatize the social safety net, Mr. Blair’s Labor government has defended and strengthened it. Where Mr. Bush and his allies accuse anyone who mentions income distribution of “class warfare,” the Blair government has made a major effort to reverse the surge in inequality and poverty that took place during the Thatcher years.

And Britain’s poverty rate, if measured American-style ... has been cut in half since Labor came to power in 1997.

Britain’s war on poverty has been led by Gordon Brown, ... Mr. Blair’s heir apparent. There’s nothing exotic about his policies, many of which are inspired by American models. But in Britain, these policies are carried out with much more determination.

For example, Britain didn’t have a minimum wage until 1999 — but ... Britain’s minimum wage rate is now about twice as high as ours. Britain’s child benefit is more generous than America’s child tax credit, and it’s available to everyone... Britain’s tax credit for low-wage workers is similar to the U.S. earned-income tax credit, but substantially larger. And don’t forget ... Britain’s universal health care system...

The Blair government hasn’t achieved all its domestic goals. ... But there’s no denying that the Blair government has done a lot for Britain’s have-nots. ... Providing a strong social safety net requires a higher overall rate of taxation than Americans are accustomed to, but Britain’s tax burden hasn’t undermined the economy’s growth.

What are the lessons...?

First, government truly can be a force for good. Decades of propaganda have conditioned many Americans to assume that government is always incompetent... But the Blair years have shown that a government that seriously tries to reduce poverty can achieve a lot.

Second, it really helps to have politicians who are serious about governing, rather than devoting themselves entirely to amassing power and rewarding cronies.

While researching this article, I was startled by the sheer rationality of British policy discussion, as compared with the cynical posturing that passes for policy discourse in George Bush’s America. Instead of making grandiose promises that are quickly forgotten — like Mr. Bush’s promise of “bold action” to confront poverty after Hurricane Katrina — British Labor politicians propose specific policies with well-defined goals. And when actual results fall short of those goals, they face the facts rather than trying to suppress them and sliming the critics.

The moral of my Christmas story is that fighting poverty isn’t easy, but it can be done. Giving in to cynicism and accepting the persistence of widespread poverty even as the rich get ever richer is a choice that our politicians have made. And we should be ashamed of that choice.

The British debate is much less upbeat, with most commentators from both the right and the left giving little credit to Blair and Brown for what they've achieved so far. True, low pay or child poverty or homelessness have not been eradicated in Britain - but they're considerably less of a problem now than in 1997. Some of that progress reflects specific anti-poverty programmes. Some reflects a longish period of stable growth and falling unemployment. Not all the praise should go to our political leaders - but some, surely?

Hotel India: No vacancies

India's growing economy is creating shortages in many areas. The latest? Hotel rooms. New York Times reporter Anand Giridharadas writes that "demand for hotel rooms is soaring in India as its economy blossoms".

Foreigners are flooding in to cut deals, attend conferences or just discover the caves of Ajanta and the sands of Rajasthan. The rise of low-fare airlines is also bringing domestic air travel within reach of more Indians, who, until recently, had little chance of ever boarding a jet.

Yet for all those travelers, India offers only 110,000 hotel rooms. China has 10 times as many, and the United States 40 times as many. The New York metropolitan region alone has about as many rooms as all of India.

The shortage is pushing peak season rates for basic rooms into the stratosphere, by Indian standards, and attracting some of the world’s best-known names in hotels — Accor, Hilton, Wyndham, Pan Pacific — to invest heavily in India.

“There’s enormous potential here,” said Dennis Oldfield, the general manager for the Indian branch of Accor, a French group with 4,100 hotels worldwide. Accor has plans for up to 200 hotels in India within a decade.

More on the US gender gap

The New York Times piece I posted about earlier today implies that the gender pay gap has stopped narrowing in the United States. In aggregate terms this is not the case - as the accompanying picture shows. The unadjusted median hourly pay gap continued to close through the late 1980s and early 1990s, reaching a low of 20.2% in 2003 compared with 25.0% in 1993. (Although the pay gap did widen a little in 2004 and 2005, to 20.4% and 20.6% respectively).

But when one adjusts the raw numbers for changing employee characteristics, especially education, the picture looks more bleak - suggesting little change in the gender pay gap since the early 1990s.

This chart comes from a very useful website on the End of the Gender Revolution?, maintained by David A. Cotter (Union College), Joan M. Hermsen (University of Missouri) and Reeve Vanneman (University of Maryland). The site also makes available most of the time series data used for the charts in Excel spreadsheets, updated to 2005. Recommended.

The US gender pay gap - slow progress

A long piece by the New York Times' David Leonhardt explains why in the United States the Gender Pay Gap, Once Narrowing, Is Stuck in Place. The accompanying graphic is worth clicking on.

Throughout the 1980s and early ’90s, women of all economic levels — poor, middle class and rich — were steadily gaining ground on their male counterparts in the work force. By the mid-’90s, women earned more than 75 cents for every dollar in hourly pay that men did, up from 65 cents just 15 years earlier.

Largely without notice, however, one big group of women has stopped making progress: those with a four-year college degree. The gap between their pay and the pay of male college graduates has actually widened slightly since the mid-’90s.

For women without a college education, the pay gap with men has narrowed only slightly over the same span.

These trends suggest that all the recent high-profile achievements — the first female secretary of state, the first female lead anchor of a nightly newscast, the first female president of Princeton, and, next month, the first female speaker of the House — do not reflect what is happening to most women, researchers say.

A decade ago, it was possible to imagine that men and women with similar qualifications might one day soon be making nearly identical salaries. Today, that is far harder to envision.

“Nothing happened to the pay gap from the mid-1950s to the late ’70s,” said Francine D. Blau, an economist at Cornell and a leading researcher of gender and pay. “Then the ’80s stood out as a period of sharp increases in women’s pay. And it’s much less impressive after that.”

Last year, college-educated women between 36 and 45 years old, for example, earned 74.7 cents in hourly pay for every dollar that men in the same group did, according to Labor Department data analyzed by the Economic Policy Institute. A decade earlier, the women earned 75.7 cents.

The reasons for the stagnation are complicated and appear to include both discrimination and women’s own choices. The number of women staying home with young children has risen recently, according to the Labor Department; the increase has been sharpest among highly educated mothers, who might otherwise be earning high salaries. The pace at which women are flowing into highly paid fields also appears to have slowed.

Explaining Italy's decline

What is Italy's problem? In a recent working paper, Italy’s decline: getting the facts right, Francesco Daveri and C. Jona-Lasinio provide an answer: sluggish labour productivity growth.

The Italian economy is often said to be on a declining path. In this paper, we document that: (i) Italy’s current decline is a labor productivity problem (ii) the labor productivity slowdown stems from declining productivity growth in all industries but utilities (with manufacturing contributing for about one half of the reduction) and diminished interindustry reallocation of workers from agriculture to market services; (iii) the labor productivity slowdown has been mostly driven by declining TFP, with roughly unchanged capital deepening. The only mild decline of capital deepening is due to the rise in the value added share of capital that counteracted declining capital accumulation.

Empirical labor search

I find survey articles a good way of keeping up with the burgeoning economic literature. The February 2007 edition of The Journal of Econometrics has just been posted online. It features an article by Zvi Eckstein and Gerard J. van den Berg: Empirical labor search: A survey. Here is the abstract:

This paper surveys the existing empirical research that uses search theory to empirically analyze labor supply questions in a structural framework, using data on individual labor market transitions and durations, wages, and individual characteristics. The starting points of the literature are the Mincerian earnings function, Heckman's classic selection model, and dynamic optimization theory. We develop a general framework for the labor market where the search for a job involves dynamic decision making under uncertainty. It can be specialized to be in agreement with most published research using labor search models. We discuss estimation, policy evaluation with the estimated model, equilibrium model versions, and the decomposition of wage variation into factors due to heterogeneity of various model determinants as well as search frictions themselves. We summarize the main empirical conclusions.

The authors conclude on an upbeat note:

Good data on many aspects of employment decisions are increasingly available. This opens up many avenues for research. One may think of the multi-dimensional nature of job offers, of simultaneous/directed search strategies for job offers, and of employment policies like firing costs and employment subsidies. One may also think of empirical equilibrium search models that allow for wage-tenure profiles and/or for stochastic productivity growth. Also, the recent availability of the rich new data that match employees and employers requires a conceptual framework for the empirical analysis. At this point equilibrium search theory is probably the only theory that empirical economists can use for this purpose. The survey here tells the researchers how far this literature has reached so far.

A 2005 version of the paper can be found here (PDF).

Which matters: nature or nurture?

Both do, according to a pathbreaking paper presented to Harvard's Inequality Summer Institute earlier this year. Using a quite remarkable Swedish dataset by merging data from administrative sources and censuses, the authors Anders Björklund (Stockholm University), Markus Jäntti (Abo Akademi University) and Gary Solon (University of Michigan) examine the correlation of socioeconomic status  between parents and children, and find that both nature and nurture matter. The paper, Nature and Nurture in the Intergenerational Transmission of Socioeconomic Status: Evidence from Swedish Children and Their Biological and Rearing Parents (PDF), concludes:

The adult socioeconomic status of Swedes born between 1962 and 1965 appears to be positively associated with the socioeconomic status of both their biological parents and their rearing parents, when those parents are not the same as each other as well as when they are. Accordingly, our paper is entitled “Nature and Nurture,” not “Nature vs. Nurture.” We see no logical or empirical need to choose between the two. Our evidence suggests substantial importance for both.

Note: An earlier paper by the two authors, Influences of Nature and Nurture on Earnings Variation:
A Report on a Study of Various Sibling Types in Sweden (PDF), published in 2005, used data from the Swedish Twin Registry, to examine the importance of genes and environment in accounting for earnings variation. It concluded that genetic influences were important:

Even our smallest estimates of the genetic component of earnings variation, however, suggest that it accounts for about 20 percent of earnings inequality among men and more than 10 percent among women.

However, almost two-thirds of earnings variation could be explained neither by genetics or environment:

Although our results point to a significant role for genetic variation, perhaps the most striking finding is the most obvious one – about the importance of non-shared environment. The largest sibling correlation in earnings that we estimate is a 0.36 correlation for monozygotic twin brothers. Even though these brothers have identical genes and, according to our preferred model, experience even more similar environments than other sibling pairs do, an estimated 64 percent of their earnings variation is explained by neither genetic nor environmental resemblance. In other words, much and perhaps most of earnings variation in Sweden stems from environmental factors that are not shared even by monozygotic twins.

Neither genes nor the environment in which we are raised determine (most of) our future earnings.