This week from CEPR: April 01

Wednesday, March 31, 2021

Highlights from some of the latest research reports published in the Centre for Economic Policy Research (CEPR) network’s long-running series of discussion papers, as well as some other recent CEPR publications.

Also, links to some of the latest columns on Vox, the Centre’s policy portal, which provides ‘research-based policy analysis and commentary from leading economists’.

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    • New Discussion Papers


    • THE WELFARE COST OF VACCINE MISALLOCATION, DELAYS AND NATIONALISM: Evidence from France

    The welfare cost of vaccine misallocation, delays and nationalism
    Christian Gollier 
    Issue 74 Covid Economics | 30 March 2021

    A new study by Christian Gollier in CEPR’s Covid Economics estimates the dynamics of the pandemic and the impact of the health policies that are put in place to limit the consequences in terms of lost lives while taking into account the economic consequences of distancing and containment. The study calibrates an eco-epidemiological age-structured SIR model of the B.1.1.7 ‘British’ covid variant on the eve of the vaccination campaign in France, under a stop-and-go lockdown policy. Among the findings: 

    • Three-quarters of the welfare benefit of the vaccine can be achieved with a speed of 100,000 full vaccination per day. 
    • A 1-week delay in the vaccination campaign raises the death toll by approximately 2,500, and it reduces wealth by 8 billion euros. 
    • Because of the large heterogeneity of the rates of hospitalization and mortality across age classes, it is critically important for the number of lives saved and for the economy to vaccinate older people first. Any departure from this policy has a welfare cost. 
    • Prioritising the allocation of vaccines to the most vulnerable people saves 70k seniors, but it also increases the death toll of younger people by 14k. 
    • By vaccinating low-risk people in vaccine-rich countries before high-risk people in vaccine-poor countries, this worsens the global welfare consequences of the pandemic. While vaccine-rich countries will greatly benefit from hoarding their vaccines, this allocation is undesirable. 
    • Vaccine nationalism is modelled by assuming two identical Frances, one with a vaccine production capacity and the other without it. If the production country vaccinates its entire population before exporting to the other, the global death toll would be increased by 20%. 
    • The study also measures the welfare impact of the strong French anti-vax movement, and of the prohibition of an immunity passport.

    The key issue is to vaccinate the most vulnerable people quickly, so that the pressure on ICUs and hospitals can be relaxed, together with the intensity of the lockdown. For France, the planned speed of vaccination is not sufficient to compensate for the emergence of the highly transmissible variant, so that the intensity of the lockdown must be temporarily increased to ‘flatten the curve’. The race undertaken by the vaccination campaign against the variant cannot be won in the short term given its high virulence and the lack of vaccination capacity. 


    • CAN POLITICAL INCORRECTNESS AND SOCIAL EXTREMISM WORK AS A SIGNAL OF COMMITMENT TO POPULIST POLICIES?   

    Establishment and Outsiders: Can Political Incorrectness and Social Extremism work as a Signal of Commitment to Populist Policies?
    Jerome Gonnot, Paul Seabright     
    CEPR Discussion Paper No. 15971 | March 2021

    Why might voters vote for candidates who espouse extreme policies that voters do not support or behave in ways that they do not approve - such as the 53% of white women and 33% of Latino men who voted for Donald Trump in the 2016 US Presidential election? The willingness to display such ideology or behaviour could attract voters as it is signals that the candidate is not captured by the interests of the Establishment and may therefore be trusted more than rival candidates to enact policies that run counter to the interests of the Establishment. This effect is particularly pronounced when there are lower levels of trust in politicians.

    These are among the findings of a new CEPR study by Jerome Gonnot and Paul Seabright, which examines whether political incorrectness and social extremism work as a signal of commitment to populist policies, using data from Europe and the United States.

    The study finds that, when the credibility of politicians' economic policy announcements is low, voters may vote for candidates who either promise social policies that the voters do not want, or behave in ways that the voters do not personally like or admire, because these may be credible signals that the candidates in question do not belong to the political establishment and may therefore implement more radical economic policies than the political establishment would be prepared to accept. Such candidates often fit the description ‘populist’, and the description is apt to the extent that radically conservative candidates are indeed more likely than other candidates to be political Outsiders.

    Populist behaviour should be most common when voters' trust in economic policy announcement is low; when the credibility of social platforms is low; when the political cost of reneging on social policy announcements once elected is low; and when voters have alternative ways to evaluate the likelihood that the candidate will implement policies that run counter to the interests of the Establishment.


    • COUNTRIES WITH PAST EXPERIENCE OF PANDEMICS USED SMART CONTAINMENT POLICIES TO CONTAIN THE COVID-19 VIRUS   

    Smart Containment: Lessons from Countries with Past Experience
    Alexandra Fotiou, Andresa Lagerborg
    Issue 74 Covid Economics | 30 March 2021

    Countries with previous SARS experience acted fast and ‘smart’, and were able to contain the Covid-19 virus by relying mainly on public health measures —testing, contact tracing, and public information campaigns— rather than stay-at-home requirements. These countries were able to contain the virus in a smart way, reducing transmission and deaths while also experiencing higher economic growth in 2020.

    These are among the main findings of a new study by IMF economists Alexandra Fotiou and Andresa Lagerborg in Issue 74 of CEPR’s Covid Economics, which studies the economic and health impact of containment measures implemented in over 150 countries. Among the findings: 

    • Country success stories in containing Covid-19 have largely stemmed from acting with early stringency measures (monitoring international travel), and applying strong health measures (wide-scale testing, contact tracing, and public information campaigns).
    • Asian countries with previous experience in containing SARS outbreaks - namely Hong Kong SAR, Taiwan Province of China, Singapore, and Vietnam - acted very quickly with these strong health system measures and targeted stringency, focusing on measures such as international travel controls, school closures, and cancellation of public events, while they did not impose quicker or stricter stay at-home orders, closures of workplaces and transport, or restrictions on gatherings and internal mobility. 
    • Lower deaths and more successful containment of Covid-19 in 2020 (as measured by age-adjusted mortality rates) are associated with less stringent containment measures on average throughout the year. By contrast, more successful countries had stronger public health measures.
    • Lower deaths and more successful containment of Covid-19 are associated with better growth outcomes in 2020 without impacting countries’ fiscal balances.

    Overall, the key implication of the analysis is that there is not necessarily a trade-off between saving lives and saving the economy. Countries in the Asian region with past SARS experience serve as an example: they were effective in containing Covid-19 and mitigating lockdown-associated economic costs due to a common smart strategy marked by targeted stringency and mass testing, contact tracing, and public information campaigns.



    EUROPEAN COUNTRIES FOLLOWED A COVID STOP-AND-GO STRATEGY THAT PROVED TO BE MORE RESTRICTIVE, MORE DANGEROUS, AND MORE DAMAGING TO THE ECONOMY 

    Philippe Aghion, Patrick Artus, Miquel Oliu-Barton, Bary Pradelski            
    31 March 2021

    With the pandemic continuing now for over a year, it has become clear that there is no trade-off between health and wealth. Successful pandemic management has relied on aiming for and protecting Covid-free green zones, often via test, trace, and isolate (TTI) policies; travel restrictions; and timely outbreak management.

    A study by Philippe Aghion, Patrick Artus, Miquel Oliu-Barton and Bary Pradelski shows that by choosing a swift elimination strategy, several countries around the world have gained control over the virus. They did this by minimising fatalities and uncertainty, and are now already rebuilding their economies. By contrast, most European countries have followed a stop-and-go logic that turned out to be more restrictive, more dangerous, and more damaging to the economy.

     

    DATA FROM 152 COUNTRIES SUGGESTS LOCKDOWN DOES NOT WORK AS A CONTINUOUS CONTAINMENT POLICY IN THE EVENT OF A PROTRACTED PANDEMIC

    Patricio Goldstein, Eduardo Levy Yeyati, Luca Sartorio                      
    30 March 2021

    Initially, lockdowns are associated with a significant reduction in the spread of the virus and the number of related deaths, but this effect declines over time according to a new study by Patricio Goldstein, Eduardo Levy Yeyati and Luca Sartorio. Using data from 152 countries from the onset of the pandemic through 31 December 2020 to show that lockdowns do not work as a continuous containment policy in the event of a protracted pandemic.

    Restrictions applied for a long period or reintroduced late in the pandemic (for example, in the event of a resurgence of cases) would exert, at best, a weaker, attenuated effect on the circulation of the virus and the number of casualties. Lockdowns should thus be strict and brief.


    WITHOUT TRANSPARENCY AND DISCLOSURE, PROTRACTED DEFAULT SPELLS PUNCTUATED BY UNSUCCESSFUL RESTRUCTURING NEGOTIATIONS MAY AGAIN BECOME THE NORM

    Clemens Graf von Luckner, Josefin Meyer, Carmen Reinhart, Christoph Trebesch                   
    30 March 2021

    More than half of low-income countries eligible for relief under the Debt Service Suspension Initiative are either in debt distress or at high risk. Several emerging markets have either recently restructured (Argentina and Ecuador) or remain in default (Lebanon, Surinam, and Venezuela).

    A study by Clemens Graf von Luckner, Josefin Meyer, Carmen Reinhart and Christoph Trebesch reviews some of the features of external sovereign debt restructurings. They show that default spells are lengthy and that the road to debt-crisis resolution is often littered with serial restructuring agreements.  


    UNSTUFFING BANKS WITH FED DEPOSITS: Why and how

    Robert McCauley                   
    30 March 2021

    US banks currently hold almost $4 trillion in Fed deposits, as a result of the ongoing balance sheet expansion by the Federal Reserve. Meanwhile, a year-long exclusion of Fed deposits and US Treasuries from bank capital rules is set to expire on 31 March.

    Writing at Vox, Robert McCauley proposes a simple, feasible, and mandate-consistent strategy to replace $3 trillion in deposits with Treasury bills. These Treasuries could be held not only by banks, but also by mutual funds and non-residents, and this substitution could also save taxpayers money.


    TEENAGE BINGE DRINKING: The relationship between minimum legal drinking ages and alcohol abuse 

    Alexander Ahammer, Stefan Bauernschuster, Martin Halla, Hannah Lachenmaier                       
    27 March 2021

    Once teenagers reach the minimum legal drinking age, they significantly increase alcohol consumption – particularly among boys and those from underprivileged backgrounds, with the effects persisting for years after.

    Using data from Austria, Alexander Ahammer, Stefan Bauernschuster, Martin Halla and Hannah Lachenmaier examine the relationship between minimum legal drinking ages and alcohol abuse. The results show a normative effect of the legislation, and not access to alcohol, might explain the increase in teenage binge drinking. 


    COMPUTER-ASSISTED LEARNING CAN SIGNIFICANTLY REDUCE THE RURAL-URBAN EDUCATION GAP: Evidence from China

    Nicola Bianchi, Yi Lu, Hong Song                 
    27 March 2021


     

    A study by Nicola Bianchi, Yi Lu and Hong Song show how a 2004 Chinese education reform that connected high-quality teachers in urban areas with more than 100 million children in rural primary and middle schools via satellite internet significantly boosted the students' academic achievement & labour market outcomes. The use of technology is shown to be able to connect students in rural schools to the best teachers in the country without teacher relocation, which could be relevant for other countries.


    THE COST OF VIOLENCE IS HIGHEST FOR BLUE-COLLAR WORKERS: Evidence from the Mexican Drug War

    Hâle Utar                
    28 March 2021

    Writing at Vox, Hâle Utar presents evidence that Mexican firms and workers are also suffering heavily from the endemic violence of the drug war. The findings show that the consequences of the conflict on the manufacturing sector are indeed dire, with firms experiencing a significant reduction in capacity utilisation, employment, output, and productivity. 
    The violence additionally creates a negative labour supply shock, particularly among firms with lower wages workers and lower-skilled female workers. Those affected are likely to live in poorer neighbourhoods, most afflicted by violence. By affecting firms that have the potential to become big and diversified, organised crime-related violence also acts as a substantial obstacle in the development of domestic industrial capability.


    ALZHEIMER’S DISEASE AND RELATED DEMENTIAS TO RISE SUBSTANTIALLY IN NEXT FEW DECADES 

    David Bloom, Simiao Chen, Nathaniel Counts, Rachael Han, Sabrina Malik, Arindam Nandi, Benjamin Seligman, Daniel Vigo                      
    26 March 2021

    Alzheimer’s disease and related dementias contributed to a loss of 33.1 million years of full health (measured in disability-adjusted life years) in 2019. Writing at Vox, David Bloom and colleagues show how over the next 30 years, the loss could more than triple, with the burden increasingly falling on low- and middle-income countries.

    To ensure the future health and functioning of an ageing global community, the authors call on the global community to invest effectively and efficiently in R&D and scale effective supportive interventions for Alzheimer’s and related dementias. 


    REGULATION AND ECONOMIC GROWTH: A ‘contingent’ relationship

    Massimo Morelli, Matia Vannoni                       
    29 March 2021

    The link between regulation and the economy has been central in political economy since the 1970s. Using data on US states from 1965 to 2012, a study by Massimo Morelli and Matia Vannoni argues that regulation may be good or bad for the economy depending on its type and the information and incentives of the regulators. 
    More regulation leads to higher economic growth when that regulation is more detailed, when the current level of regulation is lower, when uncertainty is higher, and in contexts with greater competition and/or opportunity of experimentation among regulation proposers and greater accountability. 


    NEW CENTRAL BANKING CALLS FOR A EUROPEAN CREDIT COUNCIL

    Eric Monnet             
    26 March 2021

    Since 2008, a new central banking model has emerged. Monetary authorities increasingly engage in targeted lending, hold large amounts of public debt, and focus on climate change. Writing at Vox, Eric Monnet argues that the new practices of central banks call for an updated institutional framework in order to maintain democratic legitimacy.

    He proposes the creation of a European Credit Council, which would provide impartial assessments of the ECB’s decisions, particularly those with large distributional consequences. In addition, it would develop proposals for coordinating monetary policy with other EU policies and reinforce the role of the European Parliament.


    THE ECONOMIC BENEFIT OF LIFTING LOCKDOWNS COULD DEPEND SIGNIFICANTLY ON THE LOCKDOWN STRATEGIES OF OTHER REGIONS AND COUNTRIES DUE TO SUPPLY CHAIN LINKS

    Hiroyasu Inoue, Yohsuke Murase, Yasuyuki Todo                
    25 March 2021

    A study by Hiroyasu Inoue, Yohsuke Murase and Yasuyuki Todo analyses the importance of supply chain links in this context by conducting a simulation analysis applying rich firm-level data from Japan to an agent-based model of production. It finds that the production of two regions can attain greater recovery by lifting their lockdowns together when they are closely linked through supply chains in either direction. These results point to the need for policy coordination among regions when regional governments impose or lift lockdowns. 



    ARE SCHOOL CLOSURES COUNTERPRODUCTIVE? Challenging the conventional wisdom

    Coen Teulings interviewed by Tim Phillips, 30 March 2021

    School closures have been a globally used strategy in the fight against the COVID-19 pandemic. Coen Teulings talks to Tim Phillips about a SIR (Susceptibles-Infected-Recovered) model for the Netherlands, where the recent closure of primary and secondary schools is shown to be counter-productive (as it increases future vulnerability to infection) and hard to reverse (since the increased vulnerability demands continuation). Behavioural economics explains why decision making and the public debate are so distorted, to the detriment of youngsters.