THE MYTH OF GOVERNMENT SPENDING MULTIPLIER

Robert Barro makes (link) a strong case on why Keynesian spending multiplier is a theoretical illusion resulted from the fact that government purchases can be hardly separated from real fluctuations.

THE MOST EDUCATED TOWNS IN THE U.S

Here (link) is an interesting research conducted by Forbes. It is the list and specific charateristics of the most educated towns in the U.S.

OIL SHOCKS AND RECESSION 2008

Those of you who enjoy grasping the macroeconomic reality with both hands and attend advanced macro classes will probably enjoy reading professor Hamilton's posts on the contribution of energy price spike to consumption spending and this year's recession (here and here)

SLOVAKIA ADOPTS EURO

On January 1, 2009, Slovakia left ERM II and became the 16th country of the eurozone (here and here). While fiscal consolidation has been sustained through capped deficit spending, inflationary pressures have been normalized due to substantial currency appreciation which also capped import prices. Reviewing data and macroeconomic forecast (here, here and here), output growth is expected to outperform the average of the Euroarea. Until 2013, output is expected to grow at an annual 5 percent rate. Robust output growth is partly due to continuing real convergence in output per capita and partly as a result of koruna appreciation and inflow of foreign direct investment. However, it will be interesting to observe inflationary pressures over the medium term. It is also essential for policymakers to capture fiscal surplus and set medium-term public spending cap. Nonetheless, competitive labor market is required to soften the inflationary pressures which could deteriorate in case of expansionary monetary policy while output gap is expected to close until 2010 despite robust short-term fluctuations.

FLAT TAX IN BELARUS

Belarus is another Eastern European economy joining the flat tax club. The Ministry of Finance has proposed the shift from progressive tax system (with 35 percent top tax rate) to 12 percent flat tax rate. Recently, Financial Times discussed (link) the state of Belarussian economy, focusing essentially on liberalization prospects, tax reform and regulatory reform. According to WB's Doing Business, Belarus's business climate is more favorable after liberalization efforts were endorsed (link).

RUSSIA'S ECONOMIC OUTLOOK

The Economist (link) has nicely discussed Russia's medium term macroeconomic outlook, focusing on energy prices, rubel's depreciation, inflation outlook and growth performance.

SLOVENIA'S ECONOMIC OUTLOOK IN 2009

As a candidate country, Slovenia has been under a detailed observation by the OECD, particulary in areas regarding macroeconomic outlook such as the stability of public finance, fiscal prudence and growth prospects in the short, medium and the long run. Recently, OECD published a preliminary edition of Slovenia's economic outlook in 2009 (link). As expected by estimates and short-term projections, output growth in 2009 will narrowly decline from this year's 4,8 percent to 2,1 percent. A detailed decomposition of growth contributions can be seen here.

Aside from curious structural analysis of the Slovene economy, this year has been accompanied by a turn in the election with center-left government being in charge of forming new coalition. Expectedly, the set of economic policies by the Ministry of Finance is fashioned in the light of this year's financial crisis and a lot of media attention has been devoted to the recovery from the financial crisis.

This year's financial crisis has affected the Slovene stock market. The annual return from SBITOP, Slovene blue-chip index, is -63,12 percent. The rate of return from SBI20, Slovene main stock market, hit -64,36 percent. The collapse of Lehman Brothers where the banking sector has put portfolio investment and mostly the stock market slump in the U.S, Asia and Europe has affected the Slovene economy respectively. Nonetheless, rachitic and inherent problems of the Slovene stock market are not a result of an integration with world capital markets but a harsh consequence of the prevailing insider trading and relative underdeveloped of Slovenia's capital market. The political opposition to the privatization of NKBM, Slovenia's second largest bank, resulted in a rapid decline in the rate of return of NKBM. From January to December, the share of NBKM yielded -73,48 percent respectively. While the correlation between annual yield trends for each enlisted share is very high for the entire SBI20 and SBITOP, the main structural weakness of the Slovene stock market is that stock prices have been heavily overrated as measured by the P/E ratio (link), reflecting the asymmetry of insider information with respect to the evaluation of share prices.

Macroeconomic outlook in 2009 is less favorable due to external shocks that would curb output activity and consequently restrain investment as well. The slowing of investment activity in construction sector, which contributed 1,7 percentage points to output growth in 2007, may curb output growth from medium-term trend line. While decreasing commodity prices boosted deflationary pressures in Q3, inflationary outlook, given ECB's accomodative monetary policy, will crucially depend on the nature of fiscal policy. A decrease in government spending or at least a neutral stance of fiscal policy is essential to the containment of inflationary pressures. Nonetheless, it is crucial to neutralize wage pressures that could boost the inflationary pressures and hinder macroeconomic stability.

TAX MISERY 2008

Forbes recently published 2008's Tax Misery Index (link).

THE WORLD IN 2009 IN FIGURES

The Economist designed an interactive mapping with data, factsheet and forecast for 80 countries in the world (link).

INCOME TAX RATES ARE FALLING, BUT NOT IN SLOVENIA

The newest study by the KPMG surveyed tax rates on individual income around the world (link). The study finds that average top rate on individual income is less than 29 percent. In Slovenia, it is 41 percent (link).

SAVE TAXPAYERS BY DROPPING THE BAILOUT

I will come back with more comments regarding government bailout of Detroit's "Big Three" auto industry. Gary Becker (link), Dan Mitchell (link), Matthew J. Slaughter (link), The Economist (link) and Mitt Romney (link) provided an opinion regarding the bailout of the auto industry.

IS KEYNES REALLY BACK?

Amity Shlaes nicely outlined (link) the upcoming return of Keynesian economic policy initiated by efforts to boost consumer spending despite the empirical evidence about the lifetime path of consumption pattern. While president Obama has a very smart and knowledgeable team of economic advisers such as Jason Furman, David Cutler and Jeff Liebman, he opposed free-trade agreements with South Korea and Columbia, while he supported the proposal to raise tariffs on Chinese goods in case Chinese government would not allow yuan to appreciate relative to the U.S dollar. There is an overwhelming evidence that an increase in government spending negatively affects output, employment and productivity while proposals to extend health care benefits over the boundaries of tax scheme are a worrying threat to growth and stability of the U.S economy and the overall fiscal stance of the United States.

WILL DEFLATION RESURGE?

Fed chairman says (link) deflation might resurge as a worrying threat to the U.S economy.

WHAT TO DO ABOUT HOUSING MARKET?

Allan Meltzer suggests an increase in demand for housing as a way to prevent mortgage defaults.

GLAESER ON EDUCATION

Ed Glaeser of Harvard University provides a detailed insight on the importance of human capital for economic growth (link):

"Schools can also attract more talent with an environment that welcomes talented outsiders instead of erecting bureaucratic barriers that prevent their success. The literature on teacher certification finds few benefits from that hurdle. By contrast, Teach for America has achieved remarkable results by putting capable young people, often with little formal training as teachers, in classrooms. The experience illustrates that it isn't easy to assess teacher quality with standard teaching credentials. If attracting a wave of good people into teaching is the first step, the second step is keeping the best teachers and redirecting the rest. Performance in the classroom is the best way to know if a teacher is a success. Teacher promotion and tenure needs to be based on clear performance measures, including student test scores. Perhaps teachers unions could start endorsing the use of test scores to evaluate their members and determine tenure."

DEFLATION SPREAD?

Nouriel Roubini writes that deflation is likely to spread through the global economy (link).

HARVARD ECONOMISTS ON FINANCIAL CRISIS

Here (link) is Harvard's Department of Economics web, listing articles and opinion by Harvard economists on current financial crisis.

Top suggesstions: here, here and here.

FED'S LIQUIDITY TRAP?

FT reports that Fed is likely to endorse a further interest rate cut (link):

"The Federal Reserve will probably end up cutting interest rates by as much as 50 basis points by the end of its policy meeting on Wednesday, but it will do so without any great conviction.
Senior policymakers do not think that reducing the federal funds rate from its already low level of 1.5 per cent will have a big effect on financial markets or the US economy..."

CHILLY NEWS FROM ICELAND

Iceland's central bank lifted the key interest rate to 18 percent from 12 percent after Icelandic krona lost 70 percent during this crisis (link). Secondly, Iceland's GDP is expected to contract by up to 10 percent, unemployment is expected to reach 8 percent or higher while inflation rate could hit as much as 20 percent. In fact, IMF recently predicted the rise in the inflation rate to 11,2 percent. Here (link) is a brief outline of Iceland's state of the economy, analyzing the macroeconomic background of country's current crisis as well as rapid expansion in the latter decade.

ARGENTINA'S STATIST SEIZURE OF PRIVATE PENSION FUNDS

Bloomberg reports that Argentina's president has announced a seizure of $29 billion of private pension funds (link).