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The Next Disaster Is Just a Few Days Away (NY Times, 6 min read) Nobel laureate Paul Krugman considers cancellation of the $600/week unemployment benefit on the basis that it discourages people from working to be a catastrophic idea given the depressed economy. He forecasts that the US economy will be under extreme financial distress in the coming months. [Bearish US Growth]
The Incentive Effects of Cash Transfers to the Poor (NBER, 27 page read) Using data from the first cash transfer program in the US (Mothers’ Pension Program), the paper shows that long-run transfers have no labour supply effects and do not improve the economic conditions of recipients. This is crucial evidence on the potential trade-off between the benefits of transfers versus the disincentives to work. In the short-term, they also find cash transfers reduce geographic mobility and delayed marriage of recipients.
The Short-Term Effect of Tax Changes: The Role of State Dependence (JME, 12 page read) In periods of high unemployment, the short-term effects of tax changes on output and employment are smaller. Furthermore, more labour market slack and tighter credit conditions in economic downturns reduce the responsiveness of labour supply to changes in labour income taxes. This can further dampen the effect of tax changes on output.
Mutual Fund Flows and Fluctuations in Credit and Business Cycles (JOF, 36 page read) A measure, based on intra-family flow shifts towards high-yield bond mutual funds, can be used to offer an early indication of GDP growth and unemployment. Specifically, it predicts growth in financial intermediary balance sheets, increases in shares of high-yield bond issuers and downturns in various measures of credit spreads.
Private and Public Debt Interlinkages in Bad Times (JIMF, 33 page read) This paper finds that if large private debt accumulations precede recessions, larger accumulations of public debt ensue. Furthermore, ex-post build-ups of public debt are associated with a sharper rise in financial distress. As such, the authors argue, private debt is a relevant factor in assessing the soundness of the fiscal position.