Better teachers and smaller classes make a huge difference

Mr. Chetty and his colleagues — one of whom, Emmanuel Saez, recently won the prize for the top research economist under the age of 40 — estimate that a standout kindergarten teacher is worth about $320,000 a year. That’s the present value of the additional money that a full class of students can expect to earn over their careers. This estimate doesn’t take into account social gains, like better health and less crime.

That's from a New York Times article summarizing impressive new research by Raj Chetty, John Friedman, Nathaniel Hilger, Emmanuel Saez, Diane Schanzenbach and Danny Yagan.

Here's a graph of their key results:



Students were randomly assigned to classrooms over 20 years ago, making this a valuable experiment. The results reflected a combination of teacher quality, smaller classrooms and peer effects.

We would be better off if we paid our teachers a lot more, and attracted more of the best and the brightest to this profession.

More Evidence of the Great Restructuring

Dave Altig at the Atlanta Fed provides more evidence that the Great Recession is also the Great Restructuring:




Specifically, even though the number of job openings is increasing, the number of unemployment workers remains unusually high. There appears to be a mismatch between the new jobs and the skills of the existing workforce.

As the New York Times puts it:

"Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed."

Part of the story, in my opinion, is the reorganization of work catalyzed by the increasing use and power of IT.

A Plan for Long Term Growth

A proper US investment recovery plan has five parts.

The first is a significant boost in investments in clean energy and an upgraded national power grid. ...

The second is a decade-long programme of infrastructure renovation, with projects such as high-speed inter-city rail, water and waste treatment facilities and highway upgrading...

The third component is more education spending at secondary, vocation and bachelor-degree levels, to recognise the reality that tens of millions of American workers lack the advanced skills needed to achieve full employment at the salaries that the workers expect. The unemployment crisis is largely a structural crisis of job skills. It is hitting young workers – many of whom should still be learning – and older workers who lack a degree....

That's from the five part economic recovery plan of Jeffrey Sachs which is squarely focused on long term growth, even as it helps us out of our current slump. Click on the link to learn parts four and five.

A Tipping Point: E-books Outsell Hardcovers at Amazon

The WSJ reports that e-books now outsell hardcover books at Amazon.

Since the marginal cost of reproducing and delivering e-books is close to zero, we are reaching a tipping point for new revenue models.

We already see some scattered examples like subscriptions, bundling, ad-supported books, subsidized or even free books that drive sales of complementary products, etc. It's also a sure bet that a lot more books will be simply given away the way authors donate articles to Wikipedia or bloggers blog. Digital music, software, videos, and news all offer possible glimpses at the future of book pricing.

The biggest barrier to these new models is not technological. Instead, it is in the myriad contracts and implicit culture that links together publishers, authors, distributors, retailers and consumers. For instance, Amazon would have trouble offering an all-you-can-eat subscription or bundle to its titles without the agreement of all the parties expecting royalties which are typically based on per-unit sales.

Over time, these institutions can and will evolve. In 10 years, will the traditional a la carte pricing model be the most common way books are distributed, or will an alternative model dominate?

Merle Hazard on the Greek Debt Crisis

My college classmate has a new song about the Greek debt crisis:

The Great Restructuring

This is not just the Great Recession. It's the Great Restructuring.





As growth resumes, millions of people will find that their old jobs are gone forever. The jobless recovery is one symptom.



I think one of the causes is a fundamental reorganization of work catalyzed by information technology.

Deflation, Recession and a Simple Cure

In his speech to the National Economists Club in November, 2002, Ben Bernanke said

"Sustained deflation can be highly destructive to a modern economy and should be strongly resisted."

Unfortunately, despite widespread concerns about inflation, it looks like we may now be trending toward deflation. Paul Krugman summarized data from the Cleveland Fed showing the downward trend in inflation for each month since January, 2008.



Similarly, Menzie Chinn looks at a set of other metrics and also sees a downward trend:



Recession

Meanwhile, there remains enormous slack in the economy. Recovery from each recession since 1981 has taken longer and longer. Since the current recession is the worst one since the 1930s, it looks like it will take years to recover:



A possible solution for both deflation and recession

Ben Bernanke has studied this situation, and in that same 2002 speech noted that we have the policy tools to cure deflation and stimulate the economy:

A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. … A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

For instance, in the current situation, a $5,000 tax cut or credit for every U.S. household could be financed by the Fed printing money. This would not only stimulate consumption and investment, but it would also counteract the current deflationary pressures. In periods of full employment, such a policy would be justly criticized as inflationary, but in the current situation, a bit of inflation would be welcome. If there are concerns about inflation growing too rapidly, the tax credit could be delivered in monthly installments and ended early if inflation rose above a pre-specified target.

Regrettably, having the tools does not mean that we will use them. For instance, Japan suffered through a lost decade or more of slow growth and deflation, and though they had the same tools we have today, they never solved the problem.

Let’s turn the microphone over to Bernanke for a final caution about Japan, and a hopeful thought about how our experience may differ:

I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate… [P]olitical constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.

UPDATE
Deflation is here: The CPI is down 0.1% this month and 0.3% in past 6 months. The gap between the yield on 5-year nominal Treasuries and Treasury Inflation-Protected Securities has decreased, implying lower inflation expectations over the next five years.


Deflation