This week from CEPR: December 19th

Thursday, December 19, 2019

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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THE TRUE COST OF AUSTERITY FOR THE HOMELESS AND LOW-INCOME HOUSEHOLDS: UK evidence  

HOUSING INSECURITY, HOMELESSNESS AND POPULISM: Evidence from the UK 

Thiemo Fetzer, Srinjoy Sen, Pedro CL Souza      

CEPR DP No. 14184 | 09 December

UK public spending cuts that substantially lowered housing benefits aimed at helping low income households pay rent amounted to an annual reduction equivalent to a £470, rising to as much as nearly £2,400 in many parts of London. The implications of this policy had high social and human costs, as it substantially increased evictions, individual bankruptcies, property crimes, temporary accommodation, statutory homelessness and rough sleeping.

These are the findings of a new CEPR study by Thiemo Fetzer, Srinjoy Sen and Pedro Souza, which investigates the consequences of a UK austerity policy that attempted to reduce the fiscal cost of providing housing assistance to low income households. Before April 2011, local housing allowance covered up to the median level of market rents; from April 2011 onwards, only rents lower than the 30th percentile were covered. 

On top of this, the actual fiscal savings of the cut are much smaller than anticipated: for every pound saved by the central government, council spending to meet statutory obligations for homelessness prevention increases by 53 pence. 

The study also finds that the policy had significant effects on representative democratic participation in UK elections: in the most affected districts, electoral registration rates dropped markedly. This finding is reproduced during the 2016 EU referendum vote, where the authors find evidence that the turnout was substantially lower. The study also finds that the support for Leave was higher in those places, which is possibly driven by a composition effect on the electorate since the proclivity to vote Remain was substantially higher among those who did not turn out to vote on that occasion.

Figure 8: Impact of change in reference rent on measures of statutory homelessness  

 

Notes: Figure plots from the regression studying the impact of the cut to local housing allowance to cover the median rent to only cover the 30th percentile of rents from April 2011 onwards. All dependent variables are measured as rates relative to the number of resident households in a district. The dependent variable in Panel A measures the number of statutory homeless individuals. Panel B is the street count of rough sleepers. All regressions control for local authority district fixed effects and year fixed effects. 90% confidence bands obtained from clustering standard errors at the district level are indicated.


ALL YOU NEED IS CASH: Corporate cash holdings and investment after the financial crisis

DISABILITY INSURANCE: Error Rates and Gender Differences

Andreas Joseph, Christiane Kneer, Jumana Saleheen, Neeltje Van Horen        

CEPR DP No. 14199 | 13 December

A new CEPR study by Neeltje Van Horen and colleagues from the Bank of England sheds some light on the long-term consequences of the global financial crisis on corporate investment. It shows that cash is an important asset to have when the credit cycle turns, enabling firms to continue to invest when rivals cannot. This gives cash-rich firms a competitive edge that lasts far beyond the crisis years. Among the findings:   

  • Firms with high pre-crisis cash holdings invested significantly more than their cash-poor rivals during the global financial crisis and especially so during the recovery phase. 
  • This resulted in a persistent and growing investment gap between cash-rich and cash-poor firms. 
  • Cash especially benefitted young and small firms, and firms in industries where rivals became more financially constrained. 
  • The amplification effect of cash was absent in the period preceding the crisis. 
  • The ability to continue to invest allowed cash-rich firms to gain market share and accumulate more profits over the long run. 
  • Having a liquid balance sheet when the credit cycle turns thus gives firms a competitive edge that lasts far beyond the crisis years.  

SETTLEMENT LOCATION SHAPES REFUGEE INTEGRATION: Evidence from post-war Germany 

SETTLEMENT LOCATION SHAPES REFUGEE INTEGRATION: Evidence from Post-war Germany

Sebastian T. Braun, Nadja Dwenger       

CEPR DP No. 14194 | 12 December

A new CEPR study by Sebastian Braun and Nadja Dwenger shows how the settlement location of migrants affected their economic, social and political integration in West Germany after the Second World War. The migration was one of the largest displacements in human history, involving almost eight million people. Among the findings: 

  • Local socio-economic conditions strongly affected the economic, social and political integration of expellees in West Germany.
  • High inflows of expellees led to a deterioration in integration outcomes, underlining the potential importance of policies to disperse refugees across regions.
  • Integration outcomes were considerably worse in agrarian regions. This cautions against the belief that today's refugees should be mainly sent to rural areas, thereby fostering rural revival. 
  • Religious differences between expellees and natives had no effect on economic integration, but decreased intermarriage rates and strengthened anti-migrant parties.
  • Expellees moved away from agrarian regions with high expellee shares once they were allowed to do so in the 1950s. They thus closed the gap between the actual and the optimal distribution of expellees. This finding highlights the potentially high costs of restricting the movement of refugees, especially in the absence of efficient allocation policies. 

Figure 8: Germany’s Territorial Losses 1919-45 and its Division in 1945  



FIRMS LESS LIKELY TO ADOPT ARTIFICIAL INTELLIGENCE TECHNOLOGIES WHEN FACED WITH INCREASED REGULATION

Yong Suk Lee, Benjamin Cedric Larsen, Michael Webb, Mariano-Florentino Cuéllar         

14 December 2019

Exposure to information about artificial intelligence (AI) regulation decreases managers’ reported intent to adopt AI technologies in their firm’s business processes, according to a new study by Yong Suk Lee and colleagues. 

The authors suggest that regulators should adapt regulations to the needs and concerns arising in specific industries, as business managers are sensitive to the risks and costs associated with AI regulation. Cross-cutting AI regulation such as the proposed Algorithmic Accountability Act may have enormously complex effects and make it harder to take potentially significant sector characteristics into account. 


BANKS DO NOT CREATE MONEY OUT OF THIN AIR

Pontus Rendahl, Lukas B. Freund          

14 December 2019

In recent years, some have claimed that banks create money ‘ex nihilo’. Writing at Vox, Pontus Rendahl and Lukas Freund explain that banks do not create money out of thin air. From an economic viewpoint, commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise. In addition to bank solvency representing a constraint on private money creation, banks require access to liquid reserves in order to be able to engage in money creation.   


ECONOMICS OF EARLY COINAGE: Analysis of the emergence of Lydian electrum coins and the succeeding Greek silver coins in antiquity

Jacques Melitz         

15 December 2019

Why did the Lydians decide, in the 7th century BCE, to coin electrum? On the face of it, this alloy of gold and silver would seem a particularly poor choice for coinage since its natural gold content varies and is hard to gauge with precision. Jacques Melitz, writing at Vox, suggests that it is the very uncertainty of the value of electrum, and the close control that the Lydians had over its gold content in coin form, that were the keys to the benefit of its coinage.

His analysis also suggests that the subsequent decision by the Greeks to coin silver was driven by the government's plan to subsidise the lower denomination coins, perhaps in order to economise its own transaction costs in its budgetary affairs.


START-UPS AND THE LONG-RUN IMPORTANCE OF LUCK: Evidence from Norway

Hans Hvide, Tom G. Meling          

16 December 2019

Start-ups that win a government procurement auction are 20% larger than the runner-up, even years after the contract work has ended, according to a new study of Norway by Hans Hvide. What’s more, winning an auction seems to have much larger effects for start-ups than for mature firm 

The results of this research suggest the potential value in public policies that promote start-ups’ participation in government procurement auctions, such as those currently employed in the United States and UK.


BENCHMARKS NEEDED FOR NET INTERNATIONAL INVESTMENT POSITIONS

Alessandro Turrini, Stefan Zeugner           

13 December 2019

For net international investment position benchmarks to be effective measures of countries’ external positions, they must be developed beyond a one-size-for-all approach. European Commission economists Alessandro Turrini and Stefan Zeugner present two such country-specific benchmarks to identify investment levels that are (1) explained by a country’s demographics and key indicators, and (2) beyond the threshold of presenting significant external stability risk. The authors apply these benchmarks to 65 advanced and emerging economies.


MULTINATIONALS' LOCATION DECISIONS:  They don’t just depend on transport costs but also on ease of communication between HQ and foreign subsidiaries 

Dany Bahar           

13 December 2019


 

A key influence on the location decisions of multinationals is thought to be the ‘knowledge–distance trade-off’ – how far apart headquarters are from foreign subsidiaries, and the impact this has on ease of communication between them on issues related to management, monitoring, coordination, troubleshooting, and so on. 

Dany Bahar argues that it is differences in time zones as much as the transport costs related to physical distance that play an important role in this trade-off. Human interaction is vital for the transfer of tacit knowledge that underpins economic development. 


PUBLIC SUPPORT FOR THE EURO AND TRUST IN THE EUROPEAN CENTRAL BANK: The first two decades

Yi Huang, Ugo Panizza, Richard Varghese        

04 December 2019

The crisis of 2008-2013 led to a sharp fall in public trust in the European Central Bank – and while the economic recovery since 2013 has triggered an upturn in trust in the central bank, trust is still lower than it was before the crisis.

These are the key findings of research by Felix Roth and Lars Jonung, which traces public support for the single currency and public trust in the ECB on the 20th anniversary of its launch. Their results show that unemployment is the key factor driving public support for the euro as well as trust in the ECB. 


PROMOTING COMPETITION IN PLATFORM ECOSYSTEMS: Policy recommendations for the European Commission 

Thorsten Kaeseberg          

12 December 2019

The agendas and roadmaps for the future of digital policy in Europe have been debated extensively. Thorsten Kaeseberg, writing at Vox, proposes a menu of different policy instruments for the new European Commission in order to achieve this transformation. These include reforming the framework of the e-commerce Directive, regulating super-dominant digital platforms, facilitating data intermediaries as counter-balancing actors, facilitating the rise of European platforms, and pushing blockchain.  


WHY IS POPULISM THRIVING IN RICH COUNTRIES AND IN GOOD TIMES?

Lubos Pastor, Pietro Veronesi         

12 December 2019

Populism in the form of anti-globalisation may reduce everyone’s consumption, but it affects the rich disproportionately and thus appeals to many voters in richer countries. In poorer countries, voters are less willing to give up consumption for equality. These are the central conclusions of a study by Lubos Pastor and Pietro Veronesi.

Economic anxiety and insecurity are often cited as drivers of populism, so why has populism emerged over the past few years in rich countries and in good times? The researchers argue that income inequality plays a role. When the economy is strong, everyone fares well but the rich fare especially well, fuelling inequality and resentment.  


HOW YOUTUBE RESHAPED THE MUSIC INDUSTRY: Free music, free publicity 

Tobias Kretschmer, Christian Peukert 12          

12 December 2019

A new study by Tobias Kretschmer and Christian Peukert examines the ways that digital platforms, and YouTube in particular, have reshaped the music industry and finds that they fulfil an important promotional function. The study finds that YouTube works as an ‘anarchistic MTV’ for musicians: because everyone can upload content on YouTube (unlike MTV), the promotional effect of free music availability outweighs the substitution effect. This makes any exposure for artists good exposure. 


COMPARATIVE EUROPEAN INSTITUTIONS AND THE ‘LITTLE DIVERGENCE’, 1385–1800

António Henriques, Nuno Palma           

10 December 2019

The decline of countries such as Castile and Portugal, which first benefited from access to the New World, relative to their followers, especially England and the Netherlands, is often attributed to the quality of the Iberian countries’ institutions at the time Atlantic trade opened. 

A new study by António Henriques and Nuno Palma questions this narrative by comparing Iberian and English institutional quality over time, considering the frequency and nature of parliamentary meetings, the frequency and intensity of extraordinary taxation and coin debasement, and real interest spreads for public debt. It finds no evidence that the political institutions of Iberia were worse until at least 1650.


WINNERS AND LOSERS FROM STRUCTURAL ECONOMIC CHANGE: New analysis of the drivers of populism

Italo Colantone, Piero Stanig          

10 December 2019

Rising support for nationalist and radical-right parties might not be simply an ephemeral ‘protest vote’, according to a new study by Italo Colantone and Piero Stanig. Their research concludes that there is a new political cleavage of winners and losers from structural economic changes – globalisation and automation – that might last a long time.

The researchers note that populist parties tend to share an anti-establishment stance and they claim to represent ordinary people versus the elites. Despite these similarities, populist parties are fundamentally heterogeneous and the drivers of their support tend to be diverse. The economy and culture should be seen as tightly interrelated rather than mutually exclusive explanations for the populist surge. 


WHAT A EUROPEAN ‘CARBON BORDER TAX’ MIGHT LOOK LIKE

Michael Mehling, Harro van Asselt, Kasturi Das, Susanne Droege           

10 December 2019

The new European Commission is considering the introduction of a ‘carbon border tax’. Michael Mehling and colleagues, writing at Vox, argue that the current EU legal framework and earlier policy proposals for border carbon adjustments offer a good indication of what such a measure might look like. 

If certain substantive and procedural guidelines are observed, a carbon border tax along these lines can work and pass legal muster, but some important questions remain. Without a concrete mandate in the EU emissions trading system allowance directive to elaborate a border carbon adjustment, new legislation or an amendment will be necessary.


THE DRASTIC CONSEQUENCES OF CLIMATE CHANGE ON MIGRATION 

Michał Burzyński, Christoph Deuster, Frédéric Docquier, Jaime de Melo         

10 December 2019

Climate change will force between 210 and 320 million people to migrate over the 21st century, mostly within their own countries, leaving about 28 to 56 million international migrants over the century. In poor countries and regions, long-haul migration to OECD destinations is a costly adaptation strategy of last resort.

These are the conclusions of a new study by Jaime de Melo and colleagues, who predict that massive international flows of climate refugees are unlikely, except under generalised and persistent conflicts. The poorest economies will be hardest hit, thus increasing global inequality and extreme poverty. 

SMALLER FIRMS BENEFIT MOST FROM EXPORT CREDIT GUARANTEES: Evidence from Sweden

Natasha Agarwal, Magnus Lodefalk, Majken Stenberg, Aili Tang, Sofia Tano, Zheng Wang         

11 December 2019

A new study by Magnus Lodefalk and colleagues examines the causal effects of export credit guarantees on firm performance. The study finds that guarantees most strongly facilitate the entry of less well-endowed and internationalised firms into foreign destinations and substantially sustain existing exports there. It also finds effects on jobs, value added, and productivity for new users of insurance and for small transactions. 

Seeing that small and less-experienced firms benefit the most, the authors consider whether governments should rebalance the provision of guarantees in favour of such firms. Considering larger companies, for which the export effects are relatively minor, the question is to what extent and under what conditions they need guarantees. 


Vox Talks


HELPING PARENTS TO READ WITH THEIR CHILDREN

Denis Fougère, Carlo Barone interviewed by Tim Phillips, 13 December 2019

Denis Fougère and Carlo Barone tell Tim Phillips about a successful experiment in Paris to help less educated parents spend time reading with their children. They find that language skills for pre-schoolers help them to achieve more when they get to school, but some parents are better than others at helping their kids to develop these skills.


Vox Video


FOREIGN INVESTMENT AND ECONOMIC GROWTH

Sebnem Kalemli-Özcan 12 December 2019

Sebnem Kalemli-Özcan discusses foreign direct investment and how local conditions can limit a country's capacity to take advantage of spillovers from the investment.

It’s not only the company receiving foreign investment that benefits. Sebnem Kalemli-Özcan’s recent research reveals that FDI is beneficial for the aggregate growth of the domestic economy as well — as long as the country has strong institutions and well-developed financial markets. ‘If you’re an investor, you want to make sure you are in an environment where you can function. This is very important in the sense that countries that want to attract FDI should really think about strengthening their institutional environment. If you look at the worldwide allocation of FDI among emerging markets right now, it will be in markets that have done a lot of structural reforms.