APRIL 9 2010

Prakash Kannan, IMF: Credit Conditions and Recoveries from Recessions Associated with Financial Crises. Recoveries from recessions associated with a financial crisis tend to be sluggish. In this paper, we present evidence that stressed credit conditions are an important factor constraining the pace of recovery. In particular, using industry-level data, we find that industries relying more on external finance grow more slowly than other industries during recoveries from recessions associated with financial crises. Additional tests, based on establishment size, on alternative definitions of financial crises, and on corporate-government interest rate spreads, support the findings. Moreover, for subsets of industries where financial frictions are more severe, we find much stronger differential growth effects.

Sagiri Kitao, NY Fed: Short-Run Fiscal Policy: Welfare, Redistribution, and Aggregate Effects in the Short and Long Run. This paper quantifies the effects of two short-run fiscal policies, a temporary tax cut and a temporary rebate transfer, that are intended to stimulate economic activity. A reduction in income taxation provides immediate incentives to work and save more, raising aggregate output and consumption. A temporary rebate is mostly saved and increases consumption marginally. Both policies improve the overall welfare of households, and the rebate policy especially benefits low-income households. In the long run, however, the debt accumulated to finance the stimulus and a higher tax to service the debt can crowd out capital and reduce output and consumption, causing welfare to deteriorate.

Enrico Perotti, VoxEU: The governance of macro-prudential taxation. What should an effective macro-prudential policy framework look like? This column argues that financial stability and macroeconomic stability should be dealt with differently. One requires prompt corrective action; the other requires more gradual policy intervention. Systemic levies offer a policy that can tighten financial discipline without the need for a large increase in interest rates across the whole economy.

Kenneth Rogoff, Project Syndicate: The IMF Does Europe. With the International Monetary Fund playing a central role in the eurozone’s blueprint for a bailout of Greece, the multilateral lender has come full circle. In its early days after World War II, the IMF’s central task was to help Europe emerge from the ravages of the war. But, until the financial crisis, most Europeans assumed they were now far too wealthy to ever face the humiliation of asking the IMF for financial assistance. Welcome to the new era. Europe has become ground zero for the biggest expansion of IMF lending and influence in years. Several large Eastern European countries, including Hungary, Romania, and Ukraine, already have substantial IMF loan programs. Now, the eurozone countries have agreed that the Fund can come into Greece and, presumably, Portugal, Spain, Italy, and Ireland, if needed.

Maurizio Michael Habib, VoxEU: The exorbitant privilege from a global perspective. Does the dollar enjoy an “exorbitant privilege”, in which US residents pay relatively low interest on their foreign liabilities while receiving relatively high returns on their foreign assets? This column argues that the answer is “yes”, while the excess returns are not explained by different risks between the US and elsewhere.

Edward Hugh, A Fistful of Euros Blog: From A Greek Debt Crisis To A Eurozone Structural One? When we look back five years from now, will we see this week as marking a turning point in the short, but far from uneventful, ten year history of Europe’s common currency? Certainly recent comments by the deputy governor of the People’s Bank of China have made evident what was already implicit: the dependence of EU sovereign debt on sentiment in global markets, especially in Asia and the Americas. Simon Derrick, chief currency strategist at Bank of New York Mellon even went so far as to say the trauma of recent days might well signal the point that we stop talking about a “Greek debt crisis” and start talking about a “Eurozone structural crisis” . And while Herman Van Rompuy, president of the European Council, was telling us on the one hand that the eurozone will never let Greece fail, Jane Foley, research director at Forex.com busied herself explaining, on the other, that any involvement of the International Monetary Fund in helping Greece to stabilise its fiscal position only heightens the risk that the country might one day end up leaving the eurozone.

N. Gregory Mankiw, NBER: Spreading the Wealth Around: Reflections Inspired by Joe the Plumber. This essay discusses the policy debate concerning optimal taxation and the distribution of income. It begins with a brief overview of trends in income inequality, the leading hypothesis to explain these trends, and the distribution of the tax burden. It then considers the framework that economists use to address the normative problem of designing tax systems. The conventional utilitarian approach is found to be wanting, as it leads to prescriptions that conflict with many individuals moral intuitions. The essay then explores an alternative normative framework, dubbed the Just Deserts Theory,

according to which an individuals compensation should reflect his or her social contribution.

Edward L. Glaeser, NYT Blog: Teach Your Neighbors Well. The more than one-for-one relationship between metropolitan area unemployment and the rate predicted by educational composition is an example of what economists call “social multipliers,” which may exist when aggregate relationships are stronger than individual relationships. In this case, the aggregate or metropolitan area relationship between unemployment and education is stronger than the individual relationship between unemployment and education. Social multipliers may occur when one person’s actions, like being unemployment or getting educated, influence everyone else. If one layoff reduces the demand for another person’s work and that leads to another layoff, then the impact of anything that increases unemployment will be multiplied. This is a standard Keynesian argument, but there are reasons to suspect that this isn’t the story behind the overly strong relationship between local unemployment and local education.

David N.F. Bell, Robert A. Hart, Sterling: Retire Later or Work Harder? We compare two policies of increasing British state pension provision: (a) increase the pensionable age of men and women, (b) maintain the existing retirement age but require older workers to work longer per-period hours. There are reasons for policy makers to give serious consideration to the under-researched alternative (b). First, from wage - hours contract theory we know that there are potential gains to both workers and firms of allowing hours to rise in work experience. Second, there is strong evidence that job satisfaction rises in age. Third, there has in any case been a significant overall increase in the hours supplied by older workers in the last two decades. We review the relevant theory, model the trade-off between later retirement versus increased work intensity, produce relevant background facts, and provide estimates of the policy trade-offs.

Dirk Antonczyk, Thomas DeLeire, Bernd Fitzenberger, IZA: Polarization and Rising Wage Inequality: Comparing the U.S. and Germany. Between 1979 and 2004, wage inequality increased strongly in both the U.S. and Germany but there were various country specific aspects of this increase. For the U.S., we find faster wage growth since the 1990s at the top (80% quantile) and the bottom (20% quantile) compared to the median of the wage distribution, which is evidence for polarization in the U.S. labor market. In contrast, we find little evidence for wage polarization in Germany. Moreover, we see a large role played by cohort effects in Germany, while we find only small cohort effects in the U.S. Employment trends in both countries are consistent with polarization since the 1990s. We conclude that although there is evidence in both the U.S. and Germany which is consistent with a technology-driven polarization of the labor market, the patterns of t! rends in wage inequality differ strongly enough that technology effects alone cannot explain the empirical findings.

Nina Smith, Valdemar Smith, Mette Verner, IZA: The Gender Pay Gap in Top Corporate Jobs in Denmark: Glass Ceilings, Sticky Floors or Both? This paper analyses the gender gap in compensation for CEOs, Vice-Directors, and potential top executives in the 2000 largest Danish private companies based on a panel data set of employer-employees data covering the period 1996-2005. During the period, the overall gender gap in compensation for top executives and potential top executives decreased from 35 percent to 31 percent. However, contrary to many other studies, we do not find that the gender gap for Danish top executives disappears when controlling for observed individual and firm characteristics and unobserved individual heterogeneity. For CEOs, the raw compensation gap is 28 percent during the period while the estimated compensation gap after controlling for observed and unobserved characteristics increases to 30 percent. For executives below the CEO level, the estimated compensation gap is lower, ranging from 15 to 20 percent. Thus, we find evidence of both glass ceilings and sticky floors in Danish private firms.

Reyer Gerlagh, Tilburg University: Too Much Oil. Fear for oil exhaustion and its consequences on economic growth has been a driver of a rich literature on exhaustible resources from the 1970s onwards. But our view on oil has remarkably changed and we now worry how we should constrain climate change damages associated with oil and other fossil fuel use. In this climate change debate, economists have pointed to a green paradox: when policy makers stimulate the development of non-carbon energy sources to (partly) replace fossil fuels in the future, oil markets may anticipate a future reduction in demand and increase current supply. The availability of ‘green’ technologies may increase damages. The insight comes from the basic exhaustible resource model. We reproduce the green paradox and to facilitate discussion differentiate between a weak and a strong version, related to short-term and long-term effects, respectively. Then we analyze the green paradox in 2 standard modifications of the exhaustible resource model. We find that increasing fossil fuel extraction costs counteracts the strong green paradox, while with imperfect energy substitutes both the weak and strong green paradox may vanish.

A. Ross Otto and Bradley C. Love, University of Texas: You don’t want to know what you’re missing. When people learn to make decisions from experience, a reasonable intuition is that additional relevant information should improve their performance. In contrast, we find that additional information about foregone rewards (i.e., what could have gained at each point by making a different choice) severely hinders participants’ ability to repeatedly make choices that maximize long-term gains. We conclude that foregone reward information accentuates the local superiority of short-term options (e.g., consumption) and consequently biases choice away from productive long-term options (e.g., exercise). These conclusions are consistent with a standard reinforcement-learning mechanism that processes information about experienced and forgone rewards. In contrast to related contributions using delay-of-gratification paradigms, we do not posit separate top-down and emotion-driven systems to explain performance. We find that individual and group data are well characterized by a single reinforcement-learning mechanism that combines information about experienced and foregone rewards.

Roland Sturm, RAND: Soda Taxes, Soft Drink Consumption, And Children’s Body Mass Index. Taxes on sugar-sweetened beverages have been proposed to combat obesity. Using data on state sales taxes for soda and individual-level data on children, we examine whether small taxes are likely to change consumption and weight gain or whether larger tax increases would be needed. We find that existing taxes on soda, which are typically not much higher than 4 percent in grocery stores, do not substantially affect overall levels of soda consumption or obesity rates. We do find, however, that subgroups of at-risk children—children who are already overweight, come from low-income families, or are African American—may be more sensitive than others to soda taxes, especially when soda is available at school. A greater impact of these small taxes could come from the dedication of the revenues they generate to other obesity prevention efforts rather than through their direct effect on consumption.

Dalton Conley, Emily Rauscher, NBER: The Effect of Daughters on Partisanship. Washington (2008) finds that, controlling for total number of children, each additional daughter makes a member of Congress more likely to vote liberally and attributes this finding to socialization. However, daughters influence could manifest differently for elite politicians and the general citizenry, thanks to the selection gradient particular to the political process. This study asks whether the proportion of female biological offspring affects political party identification. Using nationally-representative data from the General Social Survey, we find that female offspring induce more conservative political identification. We hypothesize that this results from the change in reproductive fitness strategy that daughters may evince.

Francesco Cinnirella et al, CESifo: Why Does Height Matter for Educational Attainment? Evidence from German Pre-Teen Children. Several studies have shown that body height is positively associated with educational attainment. We show that (i) taller children are more likely to enroll in ‘Gymnasium’, the most academic secondary school track, and that (ii) primary school teachers give better recommendations to taller students. This holds even when controlling for academic achievement and parental background. In addition, we present some evidence that height and social skills are positively associated already at age 2-3. Our results imply that controlling for social skills would significantly reduce estimates of the height-school premium. With respect to education policy, our findings suggest that early school tracking might increase disadvantages for students with low social skills.