This week from CEPR: April 09
Thursday, April 9, 2020
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
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THE ROLE OF FAMILY, CULTURAL AND ECONOMIC BACKGROUND IN EDUCATIONAL ATTAINMENT
EDUCATIONAL INEQUALITY, ASSORTATIVE MATING AND WOMEN EMPOWERMENT
Ester Faia
CEPR DP No. 14547 | 31 March 2020
Family cultural and economic background has a bigger influence than school characteristics and quality on adolescents' mathematics, reading and science scores. Mothers’ education, a widely agreed proxy for their empowerment, has an additional impact relative to fathers’ education.
These are the central findings of a new CEPR paper by Ester Faia, which uses PISA data for 72 countries to examine the role of family, relative to schools, and of women’s empowerment, in affecting children's educational attainment. Among the findings:
- Family cultural and financial background counts more than school characteristics for children's educational attainments.
- An exception is teacher quality.
- Family cultural background appears to count more than economic background.
- Mothers seem to have a separate added value, even when controlling for assortative mating or educational homogamy.
- Their added value peaks at intermediate levels of education, but declines afterwards.
- These results highlight the obstacles to reversing intergenerational inequality.
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MACROECONOMIC LESSONS FROM THE 2015-18 REFUGEE WAVE TO GERMANY
SHOULD GERMANY HAVE BUILT A NEW WALL? Macroeconomic Lessons from the 2015-18 Refugee Wave
Christopher Busch, Zainab Iftikhar, Dirk Krueger, Alexander Ludwig, Irina Popova
CEPR DP No. 14562 | 05 April 2020
Net wages of unskilled German natives deteriorated after 2015 in the short run as an increased number of unskilled refugees competed in the labour market and as administrative expenses for (mainly) low skilled immigration increased. But the small welfare losses this group suffered can be compensated by welfare gains of other parts of the native population.
These are the findings of a new CEPR study by Alexander Ludwig and colleagues, which evaluates the macroeconomic and welfare implications of the large wave of low-skilled refugee inflows into the German economy in the short and long run. The study evaluates the macroeconomic and distributional effects using a quantitative overlapping generations model calibrated using German micro data to replicate education and productivity differentials between foreign-born and native workers. The results point to general lessons that apply beyond the German experience:
- For the wage and welfare consequences for different groups, it is crucial what skill segment the migrants belong to and compete with. The binary distinction between college and non-college educated workers might not be granular enough in many countries.
- Related, the relative magnitude of the substitution elasticities across worker skill types, and across regions of origin of workers are crucial determinants in the wage- and thus welfare consequences for natives of large migration flows.
- The welfare consequences of migration for natives are not only heterogeneous by education and wealth (highlighting the potential importance of endogenous interest movements in the presence of massive shifts in the supply of labour), but vary substantially over time and across cohorts.
- Even though the aggregate welfare consequences of these migration waves might be small, at least initially, they mask very sizeable redistribution across groups, with substantial transfers required to compensate the losers.
- Over time, welfare effects become more and more positive so that low-skilled native newborns benefit from the inflow of low skilled workers, because in an ageing society the favourable (relatively young) age distribution of the immigrants eventually dominate the relatively low productivity effects.
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THE WELFARE EFFECTS OF GREENBELT POLICY: Evidence from England
THE WELFARE EFFECTS OF GREENBELT POLICY: Evidence from England
Hans R. A. Koster
CEPR DP No. 14546 | 31 March 2020
A new CEPR study by Hans Koster measures the economic effects of greenbelt policies, which prohibit new construction beyond a predefined urban fringe and therefore act as urban growth boundaries. The study examines England, where 13% of the land is designated as greenbelt land, and estimates a model that includes amenities, a traffic congestion externality, agglomeration forces, productivity and household location choices. Among the findings:
- Greenbelt policy generates positive amenity effects, but also strongly reduces housing supply.
- Overall, the residents' income increase that would be necessary to compensate for the presence of greenbelts is about 3%; hence, residents are worse off.
- By contrast, greenbelt policy benefits landowners as total land revenues are about 7.5% higher due to greenbelts.
- Total net welfare effects appear to be small, but distributional effects are large.
THE COVID-19 ECONOMIC CRISIS: Europe needs more than one instrumentAgnès Bénassy-Quéré, Giancarlo Corsetti, Antonio Fatás, Gabriel Felbermayr, Marcel Fratzscher, Clemens Fuest, Francesco Giavazzi, Ramon Marimon, Philippe Martin, Jean Pisani-Ferry, Lucrezia Reichlin, Hélène Rey, Moritz Schularick, Jens Südekum, Pedro Teles, Nicolas Véron, Beatrice Weder di Mauro |
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Europe needs a multi-instrument approach that would jointly achieve three objectives: sharing the cost of the COVID crisis; helping member states to borrow at very long maturities and low interest rates; and relaunching the EU after the crisis. In addition to existing tools, the authors believe that a tryptych built around a COVID fund (with borrowing capacity), specific credit guarantees with the European Investment Bank and dedicated credit lines such as an ESM (European Stability Mechanism) COVID line or the recently proposed temporary Support to mitigate Unemployment Risks in an Emergency (SURE) would be appropriate, provided it is sized up and allows for very long-run borrowing. |
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TO GOVERNMENTS OF THE G20 NATIONS: Letter from leading economists and health expertsErik Berglöf, Gordon Brown, Jeremy Farrar |
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The gravity and urgency of the entwined COVID-19 public health and economic crises must be reflected in an unprecedented response. In this letter to world leaders, leading global health experts and economists outline what is needed. The two crises require urgent specific measures that can be agreed on with speed and at scale. Both require world leaders to commit to funding far beyond the current capacity of our existing international institutions. The economic emergency will not be resolved until the health emergency is effectively addressed: the health emergency will not end simply by conquering the disease in one country alone, but by ensuring recovery from COVID-19 in all countries. |
CEPR LAUNCHES COVID ECONOMICS: Vetted and real-time papersCharles Wyplosz |
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CEPR has launched a novel vehicle for getting COVID-relevant, vetted research into the hands of researchers and, eventually, decision-makers as quickly as possible. ‘Covid Economics: Vetted and Real-Time Papers’ provides 48-hour turnaround on peer reviewing. This is not a journal but rather should be thought of as a CEPR-linked discussion paper series that is not limited to CEPR researchers. As with the medical site MedRxiv, ‘Covid Economics’ is for papers that will eventually be published in traditional journals but whose findings are of immediate relevance to the world’s fight against COVID-19. |
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ECONOMICS OF CORONAVIRUS: Impact assessment and economic measuresChristian Gollier, Stephane Straub |
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Economists have long argued that there is a conflict between the need to make individuals and companies accountable on the one hand, and the need to share risks effectively on the other. In this column, the first in a three-part series, Christian Gollier and Stephane Straub argue that in the context of COVID-19, the reluctance to share risk based on ‘moral hazard’ has no reason to exist. They discuss how the socialisation of losses could be implemented. |
THE EU NEEDS AN INDEPENDENT PUBLIC HEALTH AUTHORITY TO FIGHT PANDEMICS SUCH AS COVID-19Joan Costa-i-Font |
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The response to the COVID-19 pandemic has varied widely across the EU, member states following their own self-interests and limited coordination. Writing at VoxEU, Joan Costa-i-Font argues that an independent public health agency could help overcome problems of collective action. The authority would confer additional value on EU membership in a time of rising populism, and would add to the technical guidance offered by WHO (the World Health Organization) to ensure that European countries build their capacity to respond to pandemics and other public health challenges. |
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TRADE TRANSPORT AND THE ENVIRONMENT: New evidence on emissionsRikard Forslid |
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The transport sector is a significant greenhouse-gas emitter. Because international trade in goods requires transport, it is regarded with some suspicion by the environmentally concerned. But trade and transport may actually decrease emissions if production is ‘dirtier’ than transportation. These are the findings of a study by Rikard Forslid, who uses a new ‘dirtiness index’ to capture how environmentally harmful a firm is and demonstrates how transport can reduce global emissions if the production of transport services is cleaner than the production it substitutes. The cleaner transport is relative to other production sectors, the higher the likelihood that transport could lower emissions. |
CORONAVIRUS AND FINANCIAL STABILITY 3.0: Try equity – risk-sharing for companies, large and smallArnoud Boot, Elena Carletti, Hans‐Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam |
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Writing at Vox, Arnoud Boot and colleagues propose a European-wide scheme that could bring funding to struggling firms quickly without increasing their leverage or default risk. The plan combines outright cash transfers with a temporary, elevated corporate profit tax at the firm level as a form of conditional payback. The implied equity-like payment structure has positive risk-sharing features for firms, without impinging on ownership structures. |
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ECONOMICS OF CORONAVIRUS. PART 2: Health policyChristian Gollier, Stephane Straub |
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In this column, the second in a three-part series, Christian Gollier and Stephane Straub ask how we can determine a policy of exemptions to containment beyond essential activities, as well as how we might eventually exit containment. It argues that the cost of going to work – that is, the risk of contracting the disease and becoming a vector of transmission – has to be compared to the social benefit of the activity generated. That the calculation often differs depending on whether one adopts an individual or a collective point of view. |
TO FIGHT THE COVID PANDEMIC, POLICY-MAKERS MUST MOVE FAST AND BREAK TABOOSSony Kapoor, Willem Buiter |
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COVID-19’s economic impact on GDP, tax revenues and fiscal deficits will be much larger than what has been reported thus far. To combat the damage, central banks, including the European Central Bank, must cross the Rubicon of monetary financing and immediately transfer the 20-30% of GDP this will cost into fiscal coffers. These are the conclusions of Sony Kapoor and Willem Buiter writing at Vox, who state that any hesitation supporting health, employment, state aid and financial rescue interventions that are needed will result in the death of citizens and significant damage to the economy. |
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THE EUROPEAN STABILITY MECHANISM CAN FINANCE THE COVID FIGHT NOWAitor Erce, Antonio Garcia Pascual, Ramon Marimon |
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Member states are currently debating how to finance the fight against COVID-19. As time is pressing, practical and readily implementable solutions are needed now. Using the ESM (European Stability Mechanism) to provide the funds needed is a reasonable and workable way forward. Italy, Spain and other states would benefit from using the ESM access to AAA funding to reinforce their debt dynamics: a combination of loan size, maturity and interest rates would strengthen debt sustainability. Writing at Vox, Ramon Marimon and colleagues demonstrate the stabilisation power of an ESM-ECB intervention, using existing instruments and the just announced ESM Rapid Financing Instrument, showing the case of Italy as an example. Combining ECB support with ESM funds would deliver a more resilient euro area, better placed to engage in a post-virus economic recovery. The announced EIB guarantees and the SURE unemployment re-insurance will also help countries. But these measures are not a supplement, but a complement, to the already feasible ESM financing discussed. |
THE EUROPEAN COMMISSION’S SURE INITIATIVE AND EURO AREA UNEMPLOYMENT REINSURANCEFrank Vandenbroucke, László Andor, Roel Beetsma, Brian Burgoon, Georg Fischer, Theresa Kuhn, Chris Luigjes, Francesco Nicoli |
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The European Commission proposes a pan-European support for short-time work arrangements (SURE). Writing at Vox, Roel Beetsma and colleagues discuss the relationship between this proposal and the idea of a European unemployment reinsurance scheme, to which the Commission also refers in its communication on SURE. The authors sketch the merits of SURE and signal some caveats. |
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EUROPEAN ECONOMIC POLICY FOR THE COVID-19 CRISIS: Views of leading economists on lockdowns, Coronabonds and the ECB’s roleRomesh Vaitilingam |
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The IGM Forum at Chicago Booth invited its panel of leading European economists to express their views on Europe’s economic policy response to the COVID-19 crisis. Three quarters of the experts agree that severe lockdowns are likely to be better for the economy in the medium term than less aggressive measures; over 90% call for pan-European fiscal policy measures; but opinions are more divided on the need for Coronabonds. |
ECONOMICS OF WAGE COMPENSATION AND CORONA LOANS: Why and how the state should bear most of the economic cost of the COVID lockdownJean-Philippe Bonardi, Marius Brülhart, Jean-Pierre Danthine, Eric Jondeau, Dominic Rohner |
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| Due to COVID-19, large parts of the world economy are being put on hold by government fiat. Writing at Vox, economists from HEC Lausanne argue that – on efficiency as well as equity grounds – the state should generously support not only labour but also capital costs, the latter through ex ante partially reimbursable, rapidly disbursed ‘corona loans’. The exact criteria for reimbursement can be determined ex post – depending primarily on the sector-level severity of lockdown-induced income shortfalls. |  |
PRECARIOUS LIVES: Syrian refugees in Turkey in corona timesAyça Tekin-Koru |
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Syrian refugees in Turkey are in a precarious position as COVID-19 rapidly spreads across the country. Writing at Vox, Ayça Tekin-Koru offers a discussion of the heterogenous risks associated with the precarious lives of the millions of refugees living in the country. These risks harbour the danger of vicious pandemic cycles with ripple effects. Turning a blind eye to the condition of those most vulnerable is not an option for Turkey, or the international community. |
SHARING THE FISCAL BURDEN OF THE CRISIS: A Pandemic Solidarity Instrument for the EUSebastian Grund, Lucas Guttenberg, Christian Odendahl |
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To ensure that all EU countries can do what is necessary to fight the economic fallout of the pandemic, the fiscal costs of this crisis must be shared. Writing at Vox, Sebastian Grund, Lucas Guttenberg and Christian Odendahl propose that the EU give member states €440 billion in grants to support healthcare, liquidity to the private sector, short-time work schemes and stimulus packages. The EU should raise the funds in bond markets backed by guarantees. |
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EU SOLIDARITY IN EXCEPTIONAL TIMES: Corona transfers instead of CoronabondsDaniel Gros |
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The countries hit hardest by the COVID-19 crisis already have too much debt. Lending from the European Stability Mechanism or via Coronabonds would add to that debt, potentially making it unsustainable. Writing at Vox, Daniel Gros argues that European solidarity should take the form of transfers, not credit. A substantial transfer could be organised via the EU budget simply by exempting the weakest countries from their contributions to the EU budget for the duration of the programming period 2012-2027. |
COVID-19: OMT is second-best, but still welcomeLorenzo Codogno, Paul van den Noord |
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| The emergency measures in place to absorb the COVID-19 shock need to be supplemented by Outright Monetary Transactions (OMT) unless leaders agree to create a euro area safe asset and fiscal capacity. Lorenzo Codogno and Paul van den Noord employ an empirically calibrated model to show that OMT is second-best to the creation of a safe asset and fiscal capacity at the centre, but would still be a powerful means to mitigate the economic impact of the crisis. |  |
EXPECTED US MACROECONOMIC PERFORMANCE DURING THE PANDEMIC ADJUSTMENT PERIODJames Bullard |
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‘Throttling down’ the US economy as a result of actions and policies taken to control the spread of COVID-19 radically changes the way we gauge its health. Writing at VoxEU, James Bullard explains that the goals of macroeconomic policy will need to be very different, in some ways the opposite of what we would normally try to accomplish. At this stage, macroeconomic policy could be better described as maintenance and support, more a matter of insurance than stimulus. |
WILL INFLATION MAKE A COMEBACK AFTER THE CRISIS ENDS? The evidence is inconclusiveDavid Miles, Andrew Scott |
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Might inflation rise as a result of policies undertaken during the current crisis and as demand comes back more strongly than supply when it ends? Writing at Vox, David Miles and Andrew Scott argue that it is possible, but far from clear. Indeed, there are reasons to doubt whether any rise in inflation will come. Looking back at past crises – and in particular wars – reveals some similarities but more differences with the current pandemic. There was more reason to see UK inflation rise after the three major wars of the past 220 years; and even then, the evidence that it did is not conclusive. |
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ACCURATE DATA IS CRITICAL FOR INFORMING SHUTDOWN POLICYJames Stock |
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Decisions about whether to clamp down or ease up on social distancing hinge on how deadly and widespread coronavirus is. But as James Stock explains in this column, neither is known because tests for the virus have focused on those showing severe symptoms and at high risk. If the virus is still not widespread, then it is deadly and there is still time to implement measures – more severe than those currently in place in the United States – to suppress it until a vaccine or treatment becomes available. If the virus is widespread, then the true death rate is low and cautiously opening up the economy becomes an option. Data from random testing of the population, which are still unavailable, are critical to informing this choice. |
THE NORMALITY OF EXTRAORDINARY MONETARY REACTIONS TO HUGE REAL SHOCKSStefano Ugolini |
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The bold reactions by central banks to the COVID-19 crisis have been called ‘unprecedented’. But the global economy has experienced real shocks before, with monetary authorities implementing similarly assertive policies. Writing at Vox, Stefano Ugolini reviews three relevant historical precedents. In each case, intervention targeted the private rather than public sector, and succeeded in preventing an economic collapse. The larger difficulty lay in finding the right ‘exit strategy’ once the shock had passed. |
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ESM LOANS OR CORONABONDS: A legal analysis from the German perspectiveJulian Pröbstl |
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From a practical legal standpoint, the use of the European Stability Mechanism (ESM) is preferable to issuing Coronabonds, because it offers more legal certainty and could be implemented more quickly. But jointly issuing Coronabonds would send the stronger political signal. Writing at Vox, Julian Pröbstl offers a pragmatic legal perspective on the financing options for European fiscal packages, focusing on their compatibility with EU Law, the ESM Treaty, and German Constitutional Law. |
PLUMBING IDEAS FOR CRISIS ABATEMENTErica Bosio, Simeon Djankov |
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Writing at Vox, Erica Bosio and Simeon Djankov propose four ideas for lessening the negative effects of the sudden economic shock caused by COVID-19 on private businesses:
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BABY BOOMERS AND THE HOUSING MARKET ON THE CUSP OF COVID-19Marijn Bolhuis, Judd N. L. Cramer |
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The effects of the COVID-19 pandemic on public health will have major repercussions for the global economy, affecting trends in many different sectors. Writing at Vox, Marijn Bolhuis and Judd Cramer use detailed neighbourhood-level data to evaluate the impact of demographic changes on different segments of the US housing market. As larger homes (and those in neighbourhoods with relatively more baby boomers) lag behind the broader market in terms of price growth, they also appear increasingly difficult to sell. In the wake of COVID-19, a large share of the US population is at risk of taking a substantial hit to their asset portfolio, just as they retire. |
BABY BOOMERS AND THE HOUSING MARKET ON THE CUSP OF COVID-19Marijn Bolhuis, Judd N. L. Cramer |
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| Historically male-biased sex ratios (where men far outnumbered women) forged a culture of male violence, help avoidance, and self-harm that persists in present-day Australia. When these behaviours become entrenched in local cultures, Ralph de Haas and colleagues argue, they continue to manifest themselves long after the country’s gender ratios have stabilised. |  |
MODELLING THE ECONOMIC CONSEQUENCES OF COVID-19
Warwick Mckibbin interviewed by Tim Phillips, 07 April 2020
When Covid-19 wasn't even on the radar of most policy-makers, Warwick McKibbin of the Australian National University used his experience from previous pandemics to create seven scenarios for its impact. All implied a major shock to the global economy. Tim Phillips asks him how his model was able to capture the nature of Covid-19, and which policy-makers listened to the warning.
Read about McKibbin's scenarios in Chapter 3 of Economics in the Time of Covid-19.
CORONAVIRUS CRISIS: Now is the hour of MMT
Peter Bofinger
Modern Monetary Theory has received a mixed response from macroeconomists, but could the coronavirus crisis and the policy responses to it provide the perfect natural experiment to test MMT's predictions? Tim Phillips talks to Peter Bofinger, former member of the German Council of Economic Experts.
Part of CEPR & VoxEU's Covid-19 webinar and videocast series