MARCH 18 2011

Ilan Noy, Econbrowser: The Macroeconomic Aftermath of the Earthquake/Tsunami in Japan. The likely indirect impacts of this horrific earthquake/tsunami event on growth in the Japanese economy will be quite minimal. The Japanese government and the Japanese people have access to large amounts of human and financial resources that can be directed toward a rapid and robust reconstruction and rebuilding of the affected region. Neither do we have any evidence to suggest that the earthquake is likely to have any enduring monetary effects. The fiscal expansion that will follow this disaster will further increase the Japanese government's debt levels, but since this debt largely stays in Japan, and since are likely to 'tighten their belts' and reduce consumption temporarily, these other affects are unlikely to be enduring as well.

Robert Peston, BBC: How will Japan finance its reconstruction? Japan is far less dependent on the vagaries of the sentiment of overseas investors than most big borrowers, such as the US. In the current circumstances where Japanese people and institutions face a huge test of their resolve, they may be more determined than ever to lend to the government - as an act of solidarity, as a tangible sign of the collective will to reconstruct their country. But even so, the Japanese government is in a hideous position, under pressure from markets to cut borrowing at just the time when the imperative of rebuilding the country will require a massive deployment of government money.

David H. Romer, IMF direct: An Important Starting Point—with One Gap. The current outlook for unemployment in the United States, Europe, and Japan is probably worse than it was in late 2008. Then, mainstream forecasts for 2009–2011 showed unemployment rising sharply—but generally to levels below what we are experiencing today—and then returning toward normal at a moderate pace. Today, not only is unemployment higher than most 2008 forecasts of its peak levels, but the expected pace of recovery is weaker. Despite this deterioration, the dire sense of urgency in late 2008 has not increased. Indeed, it has largely disappeared. I find this complacency in the fact of vast, preventable suffering and waste hard to understand

Fernanda Nechio, San Francisco Fed: Long-Run Impact of the Crisis in Europe: Reforms and Austerity Measures. The euro area faces its first sovereign debt crisis, highlighting the fiscal imbalances of member countries. Troubled countries are implementing austerity measures, with adjustments focusing on the short and medium run. However, a long-run solution to Europe's problems requires economic reforms that increase competitiveness and reduce labor costs in the peripheral countries. Such reforms would promote convergence of the euro-area economies and enhance the long-run sustainability of monetary union.

Nicolas Magud, Sebastián Sosa, VoxEU: When and why worry about real exchange-rate appreciation? The missing link between Dutch disease and growth. In the 1960s, the Netherlands discovered natural gas in the North Sea. Yet as its wealth increased, so did the value of its currency. Exports fell and the phrase “Dutch disease” was born. This column reviews the literature and finds no evidence that the Dutch disease actually reduces overall economic growth.

Kellogg Institute (Shane Greenstein et al): What has the Internet Done for the Economy? The puzzling spread of the commercial Internet could explain wage inequalities. There is widespread optimism among media commentators and policy makers that the Internet erases geographic and socioeconomic boundaries. The Death of Distance and The World Is Flat, two books that espouse that rosy view, were bestsellers. But in the early days of the Internet, the income gap between the upper and middle classes actually began to grow. Out of about 3,000 counties in the U.S., in only 163 did business adoption of Internet technologies correlate with wage and employment growth, the study found. All of these counties had populations above 150,000 and were in the top quarter of income and education levels before 1995. Between 1995 and 2000, they showed a 28 percent average increase in wages, compared with a 20 percent increase in other counties.

Alan Krueger, Andreas Mueller, Princeton: Job search in a period of mass unemployment. This paper presents findings from a survey of 6,025 unemployed workers who were interviewed every week for up to 24 weeks in the fall of 2009 and spring of 2010. Our main findings are: (1) the amount of time devoted to job search declines sharply over the spell of unemployment; (2) the self-reported reservation wage predicts whether a job offer is accepted or rejected; (3) the reservation wage is remarkably stable over the course of unemployment for most workers, with the notable exception of workers who are over age 50 and those who had nontrivial savings at the start of the study; (4) many workers who seek full-time work will accept a part-time job that offers a wage below their reservation wage; and (5) the amount of time devoted to job search and the reservation wage help predict early exits from Unemployment Insurance (UI).

James J. Heckman, IZA: The American Family in Black and White: A Post-Racial Strategy for Improving Skills to Promote Equality. In contemporary America, racial gaps in achievement are primarily due to gaps in skills. Skill gaps emerge early before children enter school. Families are major producers of those skills. Inequality in performance in school is strongly linked to inequality in family environments. Schools do little to reduce or enlarge the gaps in skills that are present when children enter school. Parenting matters, and the true measure of child advantage and disadvantage is the quality of parenting received. A growing fraction of American children across all race and ethnic groups is being raised in dysfunctional families. Investment in the early lives of children in disadvantaged families will help close achievement gaps. America currently relies too much on schools and adolescent remediation strategies to solve problems that start in the preschool years. Policy should prevent rather than remediate. Voluntary, culturally sensitive support for parenting is a politically and economically palatable strategy that addresses problems common to all racial and ethnic groups.

Eric Bonsang, Tobias J. Klein, IZA: Retirement and Subjective Well-Being. We provide an explanation for the common finding that the effect of retirement on life satisfaction is negligible. For this we use subjective well-being measures for life and domains of life satisfaction that are available in the German Socio-Economic Panel (GSOEP) and show that the effect of voluntary retirement on satisfaction with current household income is negative, while the effect on satisfaction with leisure is positive. At the same time, the effect on health satisfaction is positive but small. Following the life domain approach we then argue that these effects offset each other for an average individual and that therefore the overall effect is negligible. Furthermore, we show that it is important to distinguish between voluntary and involuntary retirement. The effect of involuntary retirement is negative because the adverse effect on satisfaction with household income is bigger, the favorable effect on satisfaction with leisure is smaller, and the effect on satisfaction with health is not significantly different from zero. These results turn out to be robust to using different identification strategies such as fixed effects and first differences estimation, as well as instrumental variables estimation using eligibility ages and plant closures as instruments for voluntary and involuntary retirement.

Christopher Heady, VoxEU: Tax policy to aid recovery and growth. Have governments been cutting the right taxes? And are they choosing the best taxes to increase now that they need to balance the books? Using data from 21 OECD countries, this column argues that the best taxes to cut early on are income taxes for low earners, while the best taxes to increase – later on – are property taxes and consumption taxes.

Indranil Dutta, James Foster, University of Manchester: Inequality of Happiness in US: 1972‐2008. Since happiness is an important indicator of subjective well-being, understanding the distribution of happiness across the population is also crucial. The happiness data is of ordinal nature thus the use of standard inequality indices to measure happiness inequality is problematic since the results may be inconsistent under different scales. In this paper, using a methodology developed by Allison and Foster (2004), we calibrate the happiness inequality in the US, from 1972 to 2008. We find that 1990 was the best year both in terms of lower happiness inequality and higher well-being. It was closed followed by 1988 and 1989. In terms of broad trends, happiness inequality decreased, from its highest level in 1970's, through the 1980's and 1990's. Only in the 2000's it has started to rise again. There, are however, considerable variation across gender, race and region.

Ruby Henry, IZA: Smart and Dangerous: How Cognitive Skills Drive the Intergenerational Transmission of Retaliation. A need exists to understand how people develop an aggressive, retaliatory conflict resolution policy vs. a more passive reconciliation stance. I contribute a choice-theoretic model that explains how cognitive skills drive the transmission of conflict resolution policies. A child’s resolution policy depends on parental effort and the influence of the outside environment. The model has the implication that high-cognitive parents socialize children to their conflict resolution culture more successfully than parents with low cognitive skills. Indeed, I test the model using the cognitive skills and conflict resolution skills of parents and children from the UK National Childhood Development Survey. I find that the parent’s effort is reinforced by the prevalence of their conflict resolution values in society. The data confirm that children of retaliating high-cognitive parents are more likely to be socialized to that resolution culture than children of low-cognitive retaliating parents when retaliation is more prominent in society.