This week from CEPR: February 11

Thursday, February 11, 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


    • ARTIFICIAL INTELLIGENCE AND AUTOMATION COULD REVERSE GAINS MADE BY DEVELOPING COUNTRIES: Strategies for Economic Development must be adequately revised     

    Artificial Intelligence, Globalization, and Strategies for Economic Development
    Anton Korinek, Joseph E Stiglitz
    CEPR DP No. 15772  | February 2021

    Progress in artificial intelligence and related forms of automation technologies threatens to reverse the gains that developing countries and emerging markets have experienced from integrating into the world economy over the past half century, aggravating poverty and inequality.

    These are among the main findings of a new CEPR study by Anton Korinek and Joseph E Stiglitz, which analyses the economic forces behind these developments and describes economic policies that could mitigate the adverse effects on developing and emerging economies, while leveraging the potential gains from technological advances. Among the findings: 

    • Increasing automation in manufacturing may lead to the demise of the manufacturing export-led developmental model, which has had such profound positive effects on many emerging market economies.
    • While earlier technological advances were associated with shared increases in prosperity, increasing equality between countries, the new advances may arrest the convergence in standards of living between rich countries and developing countries.
    • AI also tends to give rise to natural monopolies, creating a small set of so-called superstar firms that are located in a few powerful countries but serve the entire world economy.
    • New technologies have the tendency to be labour-saving, resource-saving, and to give rise to winner-takes-all dynamics that advantage developed countries. 

    The authors stress the need to adjust and update our economic frameworks to think about the models that will describe the next 50 years. 


    • EPIDEMICS HAVE SOCIAL SCARRING EFFECTS, INCREASING THE LIKELIHOOD OF SOCIAL UNREST     

    SOCIAL REPERCUSSIONS OF PANDEMICS
    Philip Barrett and Sophia Chen      
    Issue 68 Covid Economics  | 10 February 2021

    Outbreaks of epidemics cast long shadows of social repercussions: shaping politics, subverting the social order, and some ultimately causing social unrest. They also have mitigating effects in the short-run, by suppressing unrest by dissuading social activities. It is reasonable to expect that, as COVID-19 the pandemic fades, unrest may re-emerge in locations where it previously existed.

    These are among the findings of a new Paper in Issue 68 of CEPR’s Covid Economics Journal by IMF economists Philip Barrett and Sophia Chen, which uses data from 130 countries to examine whether epidemics may lead to higher likelihood of social unrest, using global evidence in recent decades. Among the findings:

    • Using a new monthly panel on social unrest in 130 countries, results show a positive cross-sectional relationship between social unrest and epidemics. 
    • But the relationship reverses in the short run, implying that the mitigating effect dominates in the short run. Recent trends in social unrest immediately before and after the COVID-19 outbreak are consistent with this historic evidence. 
    • From the Plague of Justinian and the Black Death to the 1918 Influenza Epidemic, history is replete with examples of disease outbreaks causing social repercussions. 
    • Mishandling of epidemics may reveal deeper problems such as insufficient social safety nets, incompetent government, or the public’s lack of trust in institutions.
    • Economic damage from epidemics, especially if disproportionately affecting the poor, could exacerbate inequality and sow the seeds of future social unrest.
    • They may also have mitigating effect, suppressing unrest by dissuading social activities, and may impede the communication and transportation needed to organise major protests. 
    • In some cases, incumbent regimes may also take advantage of an emergency to consolidate power and suppress dissent.

    • DISTANCE LEARNING SOLUTIONS AND CHILD DEVELOPMENT DURING THE COVID-19 LOCKDOWN: Evidence from Italy and France

    Learning at home: distance learning solutions and child development during the COVID-19 lockdown
    Hugues Champeaux, Lucia Mangiavacchi, Francesca Marchetta and Luca Piccoli
    Issue 68 Covid Economics  | 10 February 2021

    Most of the burden of children’s learning during COVID-19 has fallen on parents, with uneven outcomes depending on the socio-economic characteristics of the family. Using a real-time survey data collected in April and early May 2020 in France and Italy on a large sample of families, a new study by Hugues Champeaux, Lucia Mangiavacchi, Francesca Marchetta and Luca Piccoli in Issue 68 of CEPR’s Covid Economics Journal analyses how the Spring 2020 lockdown has affected children’s emotional well-being and home learning processes according to their parents. Among the findings: 

    • The Spring 2020 lockdown had a stronger negative effect on boys, on children attending kindergarten (in Italy) or secondary school (in France), and on children whose parents have a lower education level. 
    • Very young children (aged 3-6) found the online learning process particularly difficult, especially those who did not receive any distance learning support from their teachers, i.e. 40% of them in Italy vs only 2% in France. 
    • Children attending secondary schools also experienced important losses in learning when they could not attend online classes, and this is particularly evident in France, where it was the case for almost 30%. 
    • the increase in the time spent in front of screen is correlated to worse learning progresses and emotional status, while the opposite is true for the time spent reading. 
    • The use of interactive distance learning methodologies, which has been much more common in Italy than in France, appears to significantly attenuate the parents’ negative perception of the impact of lockdown on the learning progress of their children.


    AFTER BREXIT: Views of leading economists on future prospects for the UK and EU economies

    Romesh Vaitilingam            
    08 February 2021

    Summarising the views of leading European and US economists views on the likely long-term effects of Brexit on both the UK economy and the aggregate economy of the remaining 27 EU members, Romesh Vaitilingam finds that a strong majority (86% of the panellists) agree that the UK economy is likely to be at least several percentage points smaller in 2030 than it otherwise would have been.

    Views are more divided on the EU-27 economy: nearly a quarter of respondents agree that it will be at least several percentage points smaller in 2030 than it otherwise would have been; but more than a third are uncertain; while 41% do not expect the impact to be that strongly negative.

     

    MILLIONS OF EUROPEANS WOULD FALL INTO VULNERABILITY IF IT WERE NOT FOR COVID-19 UNEMPLOYMENT BENEFITS

    Catarina Midões, Mateo Seré                 
    06 February 2021

    18.2 million Europeans, 7% of the population of the countries analysed in this study, cannot cover one month of food and utilities by resorting to their deposits, pensions, and public transfers, according to new evidence on European households’ financial vulnerability.

    The study, by Catarina Midões and Mateo Seré, examines households’ financial vulnerability to an income shock in seven European countries and assesses the degree of protection awarded to employees by COVID-19 employment protection schemes.

    It finds that importantly, there is a significant drop in the number of vulnerable with COVID-19 unemployment benefits. Rent and mortgage suspensions are more effective in some countries than in others.


    MEMO TO THE NEW WTO DIRECTOR-GENERAL: Never waste a crisis

    Simon Evenett, Richard Baldwin               
    10 February 2021

    Following the appointment of its new Director-General, the World Trade Organization has the best opportunity in years to revive its fortunes. This column, by Simon Evenett and Richard Baldwin is written as an open letter to the incoming Director-General of the WTO, and argues why and offers ideas on how.


    CAN MONETARY POLICY FIX RACIAL INCOME AND WEALTH GAPS IN THE UNITED STATES? 

    Alina Kristin Bartscher, Moritz Kuhn, Moritz Schularick, Paul Wachtel              
    10 February 2021

    A study by Paul Wachtel and colleagues finds that while accommodative monetary policy tends to reduce racial unemployment and thus earnings differentials, it exacerbates racial wealth differentials, which implies an important trade-off for policymakers.

    The results show that white households gain more because they have more financial wealth and hold portfolios that are more concentrated in interest-rate-sensitive assets such as equities. At the same time, monetary policy shocks reduce the gap between black and white unemployment rates and bring larger earnings gains for black households. Bringing the two together, however, leads to one stark finding: the reduction in the earnings gap pales in comparison to the effects on the wealth gap.


    WHAT ARE THE POTENTIAL SCARRING EFFECTS OF COVID-19 ON THE GLOBAL ECONOMY? 

    Natalia Martín Fuentes, Isabella Moder                
    05 February 2021

    A study by ECB economists Natalia Martín Fuentes and Isabella Moder shows that past epidemics and other exogenous shocks did not cause scarring effects on the economy, while the negative impact of financial crises on the long-term level of potential growth tends to be persistent. However, unlike previous exogenous shocks, the COVID-19 pandemic could affect the supply side of the economy through several channels and thus lead to a permanently lower level of potential output.  


    GENEROUS UNEMPLOYMENT INSURANCE BENEFITS IMPROVE THE FUNCTIONING OF THE LABOUR MARKET BY IMPROVING JOB MATCHING: Evidence from the United States

    Ammar Farooq, Adriana Kugler, Umberto Muratori            
    07 February 2021


     

    Do extensions to unemployment insurance benefit durations help or hinder the labour market? A new study by Ammar Farooq, Adriana Kugler and Umberto Muratori shows that the generosity of unemployment insurance benefits (UI) has a positive effect on the labour market by improving job match quality, the connection of ideally suited workers and employers.

    Importantly, these benefits are greater for women as well as for minority and less educated workers. In light of the Covid-19 economic crisis, giving ideally suited workers and firms sufficient time to find each other can be part of the healing, and are crucial in helping workers sustain their basic consumption levels and stay out of poverty. These extensions may well be crucial in ensuring workers land good jobs when the economy recovers again.


    EXPERTS SPLIT ON RISK POST-COVID INFLATION POSES TO THE UK 

    Ethan Ilzetzki             
    09 February 2021

    Should we be concerned about inflation? Writing at Vox, Ethan Ilzetzki presents evidence on inflation expectations from the January 2021 survey by the Centre for Macroeconomics.

    The panel of experts is split between those predicting that UK inflation will be roughly at its current target and those believing that inflation will be above target in the upcoming decade. A smaller minority worry that the UK growth rate will be too low for the Bank of England to stimulate inflation. Beyond the growth rate of the economy, additional factors that panellists are monitoring to project inflation include the effects of Brexit, rising public debts, and global factors.


    INFLATION AND THE BIDEN STIMULUS

    Jean-Pierre Landau               
    08 February 2021

    The fiscal stimulus pushed by the new US administration – much larger that the remaining output gap – has recently triggered a new and fascinating debate on the risk of inflation. Writing at Vox Jean-Pierre Landau  argues, however, that the focus on short-term imbalances may obscure the long-term risk of fiscal dominance. This points to the need for a new, revitalised approach to central bank independence which would aim less at solving the time-inconsistency problem (eliminating the incentive to cheat) and more on preserving central banks’ unconstrained ability to act and avoid fiscal dominance in the future.


    URBAN RESIDENTS ARE FLEEING CITY CENTRES FOR THE SUBURBS: Impact on the US Real Estate Market

    Arpit Gupta, Jonas Peeters, Vrinda Mittal, Stijn Van Nieuwerburgh                
    11 February 2021

    A new study by Arpit Gupta, Jonas Peeters, Vrinda Mittal and Stijn Van Nieuwerburgh explores the impact of the pandemic on real estate markets in the United States. The study documents sizeable changes in rent and price gradients, which suggests that urban residents are fleeing city centres for the suburbs. Limits placed on city amenities combined with expanding opportunities to work from home have reduced the premium on urban living.


    MACROECONOMIC STABILISATION, THE LOWER BOUND, AND INFLATION: Why Expectations matter

    Ioana Duca-Radu, Geoff Kenny, Andreas Reuter         
    09 February 2021

    When interest rates cannot go any lower, the economy can be stabilised if consumers expect the rate of inflation to increase. Yet, the evidence for this stabilising effect has been very mixed. Writing at Vox, Ioana Duca-Radu, Geoff Kenny and Andreas Reuter present new evidence from a monthly survey of over 25,000 individual consumers across the euro area, showing that consumers are indeed more ready to spend if they expect inflation to be higher in the future. While generalised in the population, the stabilising effect is stronger when nominal interest rates are constrained at the lower bound.


    MONEY CREATION, BANK PROFITS, AND CENTRAL BANK DIGITAL CURRENCY

    Dirk Niepelt             
    05 February 2021

    Central bank digital currencies are currently hotly debated, both in terms of their utility in monetary policy as well as the controversy of bank-level profit from money creation.

    Writing at Vox, Dirk Niepelt presents a method for quantifying the funding cost reduction enjoyed by banks, highlighting that money creation substantially contributes to bank profits. This raises important questions for policymakers to address as they seek to optimise the deployment of digital currencies within financial institutions.


    INDUSTRIAL ROBOTS HAVE POSITIVE IMPACTS ON BOTH EMPLOYMENT AND WAGES: Evidence from Japan, 1978-2017

    Daisuke Adachi, Daiji Kawaguchi, Yukiko Saito                 
    09 February 2021

    The penetration of industrial robots has positive impacts on both employment and wages in Japan, a country which is unique due to early industry penetration and the fact that almost all the robots were domestically produced.

    The findings, from a new study by Daisuke Adachi, Daiji Kawaguchi and Yukiko Saito, highlights the potential for harmonisation of human work with future labour-replacement technology, such as artificial intelligence.


    REALISTICALLY MODELLING WAGES DYNAMICS AND HOUSEHOLD STRUCTURE IS CRUCIAL FOR INFORMED POLICY EVALUATION: Evidence from the UK

    Mariacristina De Nardi, Giulio Fella, Gonzalo Paz-Pardo                 
    07 February 2021

    In the UK, earning dynamics, such as income risk and shock persistence, differ substantially depending on age and position in the income distribution. Writing at Vox, Mariacristina De Nardi, Giulio Fella and Gonzalo Paz-Pardo show that taking these dynamics into account when evaluating benefit policies is of crucial importance, to the extent that traditional linear wage models miss important features of the data, their implications substantially alter the evaluation of a given policy reform and do so heterogeneously in the population, thus leaving some vulnerable groups much worse off.

    When the dynamics are incorporated, the 2016 reform of the UK’s benefit system is found to have been welfare-improving on average. Importantly however, the average welfare improvement under Universal Credit masks very heterogeneous effects: Because singles without children do not benefit from the earnings disregard, they lose welfare under this reform. 
     


    EXPENDITURE RULES ARE EFFECTIVE IN REDUCING THE PROCYCLICALITY BIAS OF FISCAL POLICY: Evidence from EU member states

    Cristiana Belu Manescu, Elva Bova                 
    07 February 2021

    Expenditure rules are recognised as one of the most effective tools to manage budgetary aggregates, and many EU members have recently chosen to add an expenditure rule to their national frameworks. Against this background, a study by Cristiana Belu Manescu and Elva Bova takes stock of the current design of national expenditure rules across EU member states and provides new evidence on their effectiveness in reducing the procyclicality bias of fiscal policy.

    The results show that expenditure rules are effective in reducing the procyclicality bias of fiscal policy. The more expenditure rules are endowed with essential features and the more they operate in conjunction with budget balance rules, the more effective they are in reducing the procyclicality bias. 


    FOSTERING THE DIFFUSION OF GENERAL PURPOSE TECHNOLOGIES: Evidence from the transistor

    Markus Nagler, Monika Schnitzer, Martin Watzinger                   
    08 February 2021

    The secular decline in productivity growth is blamed by some on the slow diffusion of new general purpose technologies, so it is important to understand what slows down this diffusion and how it can be speeded up.

    Writing at Vox, Markus Nagler, Monika Schnitzer, and Martin Watzinger  present evidence from the diffusion of the transistor, one of the most important general purpose technologies of our time. It shows that patents on general purpose technologies are likely to cause considerably more harm than patents on other technologies unless a standardised licensing regime is put in place. Not only do they block more follow-on innovation, but in particular they block valuable follow-on innovation arising from cross-technology spillovers. 



    DO WE GIVE MORE TO CHARITY AFTER WE'VE BEEN SICK?

    Sarah Smith interviewed by Tim Phillips, 05 February 2021

    Serious illness can be life-changing. Does it inspire us to be more charitable? Sarah Smith tells Tim Phillips whether we give more to charity after we suffer, to which charities - and what this means for their funding after Covid-19.


    IS EUROPE'S TRADE STRATEGY FIT FOR PURPOSE?

    Christian Bluth interviewed by Tim Phillips, 10 February 2021

    Christian Bluth, author of a new CEPR Press eBook on Europe's trade strategy, tells Tim Phillips that nations are increasingly using global trade as a means of political arm-twisting. Should the EU do the same?

    Download the free eBook here.