This week from CEPR: February 27

Thursday, February 27, 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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    Sergei Guriev, Elias Papaioannou     
    CEPR DP No. 14433  22 February 2020 

    A new CEPR study by Sergei Guriev and Elias Papaioannou reviews the latest research evidence on the recent rise of populism. The authors discuss the role of economic factors, such as trade and automation, non-economic determinants of populism, such as identity politics and cultural backlash, as well as online media, immigration and the refugee crisis. Among the findings: 

    • While there are many definitions of populism, there is a consensus on the lowest common denominator: ‘anti-elitism and anti-pluralism’.
    • Populism is a ‘thin-centred’ ideology or even non-ideology, a style of political discourse.
    • There is a major rise of populism in advanced economies, especially in Europe. In the last two decades, the vote share of populist parties has roughly doubled, and populist parties have taken power in many countries.
    • The rise was especially salient after the Global Crisis. Populists found fertile ground for their anti-elite narrative that now blended old politicians, bankers, technocrats and even academic economists who did not foresee the crisis.
    • The main beneficiaries of this increase have been mostly right-wing, nativist, xenophobic and authoritarian parties rather than pro-redistribution radical-left parties.
    • The specific types of elites that populists target include academics (experts), ‘old’ establishment politicians, unelected technocrats, judges and journalists.
    • Certain key global challenges, such as climate change or antimicrobial resistance, are missing from populist discourse as they are not compatible with anti-expert sentiment.
    • The rise of populism reflects economic factors, both secular (trade and automation) and crisis-related (the rise in unemployment and the crisis-related austerity).
    • Rising competition from imports from low-wage countries, such as China and Vietnam, and increased automation of low/middle-skilled jobs have contributed to stagnated wages among non-college graduates and rising inequality in the West. This in turn has caused an anti-globalisation backlash, a message on which populist leaders often campaign. 
    • There is growing evidence that the internet and online social media have also played a major role.
    • Populists tend to fit complex economic or security issues into simple messages, designed to elicit a ‘with us’ or ‘against the people’ separation of responses. 
    • Even though economics alone cannot account for the spectacular rise of populism, even small-to-moderate effects can be pivotal in bringing populists in power.
    • Economic shocks may have activated pre-existing cultural divides and exacerbated polarisation and identity politics. 
    • Populism has found fertile ground in formerly manufacturing-based communities that have experienced a decline in the recent decades. Small cities specialising in labour-intensive manufacturing have lost jobs, as multinationals moved operations offshore and upgraded technology, and many smaller producers were forced to shut down.
    • There is substantial evidence on the role of immigration. But the direction of the effect is mixed, depending on the magnitude of the influx of refugees and immigrants.
    • Authoritarian populists almost everywhere try to undermine political institutions and remove constitutional checks and balances.

    Figure 4: Left-wing and right-wing populists in Europe and Latin America. 

    Note: Grey bars indicate global recessions and slowdowns. 

    • BREXIT AND US TARIFFS: Trade and income losses likely to be substantially larger than anticipated    

    RISING PROTECTIONISM AND GLOBAL VALUE CHAINS: Quantifying the General Equilibrium Effects
    Rita Cappariello, Sebastian Franco-Bedoya, Vanessa Gunnella, Gianmarco Ottaviano    
    CEPR DP No. 14423 |  19 February 2020

    A new CEPR study by Gianmarco Ottaviano and colleagues finds that previous estimates of the trade and income losses from Brexit, US protectionism and the rise of global trade barriers are substantially under-estimated. Using a new framework, with a richer input-output structure across countries and sectors, the study investigates the relationship between the effects of changes in trade policies and global value chains (GVCs). Among the findings:    

    • For almost all countries, the income effects are considerably larger in a world characterised by the more developed GVCs existing in 2014 than by the less developed GVCs of 2000.
    • On average, income effects in 2014 are 36% larger (and as much as 219% larger for some countries) than in 2000.
    • Accounting for GVCs can make a sizable difference to quantification of the impacts of trade policies on economic activity, prices and income.
    • Impacts can vary substantially both across sectors due to their specific input-output linkages and across countries due their different degree of participation to global production networks.

    When the authors apply the model to assess the effects of Brexit under alternative trade policy scenarios, the model predicts a fall in bilateral trade between the UK and the EU that would be more severe in the case in which trade between the two parties fell back to ‘no deal’ terms. This is due to the close integration of UK-EU production networks and implies that denser GVCs amplify the adverse effects of protectionist trade policies. Among the findings:

    • In a free trade agreement (FTA) scenario, exports from the UK to the EU27 fall by -31.4% and -38.3% for intermediates and final goods respectively. Those from the EU27 to the UK fall by -27.3% and -28.2% respectively. While exports from the Rest of the World increase only towards the UK (by 6.9%) for final goods.
    • The trade effects of Brexit are more pronounced in the ‘No Deal’ scenario. Exports from the UK to the EU27 fall by -45.5% and -53.7% for intermediates and final goods respectively. Those from the EU27 to the UK fall by -40.6% and -43.9% respectively. Again, exports from the Rest of the World increase only towards the UK (by 13.9%) for final goods. 
    • For imports, the fall in real flows is more pronounced than for exports in all scenarios, especially for the UK whose imports decrease by more than 15% in the FTA scenario and by more than 20% in the ‘No Deal’ one. 
    • Less trade is associated with lower incomes: UK and EU27 real household income levels decrease respectively by -2.1% and -0.4% in the FTA scenario, and by -3.1% and -0.6% in the ‘No Deal’ scenario.
    • Country-level results show very heterogeneous income losses, with Malta, Luxembourg and Ireland hit the most by Brexit. 
    • The largest price increases are observed for Ireland and Cyprus, due to their heavy reliance on UK final products and intermediate inputs.

    Figure 1: The evolution of the GVC network 


    Source: WIOD (2016 release) and authors’ calculations. Note: Each dot (node) in the picture represents a sector in a country. Colours distinguish countries. Gray lines (edges) connecting the dots represent trade flows in intermediate inputs between sectors. To reduce complexity, only nodes with betweenness centrality above 3000 and edges representing flows above 1 billion USD are shown.   

    • THE CONSEQUENCES OF TREATING ELECTRICITY AS A RIGHT: Evidence from developing countries   

    Robin Burgess, Michael Greenstone, Nicholas Ryan, Anant Sudarshan     
    CEPR DP No. 14416 | 17 February 2020

    A new CEPR study by Robin Burgess and colleagues explains why billions of people in developing countries either have no access to electricity or lack reliable supply. The authors present evidence that these shortfalls are a consequence of electricity being treated as a right, which sets off a vicious four-step circle: 

    1. Because a social norm has developed that all deserve power independent of payment, subsidies, theft and non-payment are widely tolerated.
    2. Electricity distribution companies lose money with each unit of electricity sold and in total lose large sums of money.
    3. Government-owned distribution companies ration supply to limit losses by restricting access and hours of supply.
    4. Power supply is no longer governed by market forces and the link between payment and supply is severed, thus reducing customers' incentives to pay.

    The authors propose some solutions:  

    1. Reduce explicit government subsidies for electricity, both in size and in scope, while continuing to support the poor.
    2. Introduce reforms to reduce theft of electricity and non-payment of bills.
    3. Promote technology to make electricity excludable, therefore making it possible to link payments and supply explicitly at the individual level.
    4. Privatise distribution in the hope that this leads to a market for electricity.

    The authors note that 24/7/365 electricity remains out of reach for most people in developing countries. Macro solutions, like privatisation of the electricity industry or construction of ever more wires and plants are targeting the symptoms, not the cause. High losses and poor-quality supply will persist, despite ambitious reforms, so long as electricity is treated as a right. 

    BUSINESS UNCERTAINTY ABOUT BREXIT: A fall since the UK election

    Nicholas Bloom, Philip Bunn, Scarlet Chen, Paul Mizen, Pawel Smietanka    
    25 February 2020

    Brexit-related uncertainty has fallen since the UK general election in December 2019, but mainly among firms that don’t trade much with the European Union. Substantial uncertainty remains around the future trading relationship between the UK and the EU. 

    These are the latest findings from the Decision Maker Panel, a monthly survey of the chief financial officers in around 3,000 UK businesses, conducted by Nicholas Bloom and colleagues at the Bank of England. The research team notes that while there are some signs that this fall in uncertainty may lead to a modest pick-up in investment it is still early days.  



    Laurence Kotlikoff      
    19 February 2020

    The United States has spent the entire period since the Second World War running a massive and ever-growing Ponzi scheme that takes from the young and gives to the old, according to Laurence Kotlikoff writing at Vox.

    He discusses how the scheme has been and is being run by expanding take-as-you-go-financed Social Security, Medicare and Medicaid systems, by running huge official deficits, and by imposing a larger share of taxes on the young and a smaller share on the old. Take as you go, whether done on or off the books, has done precisely as theoretically predicted – reduced the national saving rate from 13% in the 1950s and 1960s to 3% in the last two decades. 

    The results underlie, in large part, a commensurate drop in the domestic investment rate, which was also 13% between 1950 and 1969 and is now running at 4%. The textbook predicted consequence? Lower median labour productivity and median real wage growth. 



    David Klenert, Enrique Fernández-Macías, José-Ignacio Antón     
    24 February 2020

    A new study by David Klenert and colleagues finds no evidence that industrial robots have destroyed jobs or reduced the employment share of low-skill workers in Europe in recent years. In fact, the study finds that robot adoption tends to be positively associated with aggregate employment, although the relationship is small compared with other factors affecting European employment in recent years. 


    UNFAIR AND UNSTABLE: EU bankruptcy reform requires more scrutiny

    Maryam Malakotipour, Enrico Perotti, Rolef de Weijs     
    24 February 2020

    The Relative Priority Rule in the EU directive on its preventive restructuring framework is unfair to unsecured creditors, may lead to a regulatory race to the bottom, and will ultimately reduce financial stability, argue Enrico Perotti and colleagues at Vox. The rule would aggravate risk-taking because returns would be captured by shareholders while losses would be borne by unsecured creditors.  


    GLOBALISATION: What’s at stake for central banks

    Simone Arrigoni, Roland Beck, Michele Ca' Zorzi, Livio Stracca     
    24 February 2020

    Central banks are far from immune from the forces of globalisation and should continue to evolve and reassess their role and instruments in a changing world. Writing at Vox, Roland Beck and colleagues from the European Central Bank highlight globalisation’s impact on inflation, evolving complications to central banks’ role in supporting financial stability, the challenge of navigating protectionist pressures, the changing the nature of global financial integration and more.  


    POPULISM, POLITICAL RISK AND THE ECONOMY: What we can learn from the Italian experience

    Pierluigi Balduzzi, Emanuele Brancati, Marco Brianti, Fabio Schiantarelli      
    20 February 2020


    Concerns about Italy's budgetary policies, government debt sustainability and euro membership are all reflected in the spread on sovereign credit default swaps, according to research by Pierluigi Balduzzi and colleagues. Their study shows how the rise of populist movements in Italy following the financial crisis and the sovereign debt crisis affects domestic and euro area financial markets, and also affects the Italian real economy.


    THE EFFECTS OF EDUCATION ON HEALTH: Evidence from the United States 

    Benjamin W. Cowan, Nathan Tefft      
    23 February 2020

    Expanding two-year college access in the United States improved self-reported general health and had a beneficial effect on health-related behaviours, including exercise and smoking, finds a study by Benjamin Cowan and Nathan Tefft, which provides some evidence that more years of schooling improved health outcomes. 



    Artjoms Ivlevs, Milena Nikolova, Olga Popova    
    21 February 2020

    Post-communist entrepreneurial activity in Central and Eastern Europe was driven by the connections, resources, and opportunities associated with former membership of the ruling party rather than by entrepreneurial skills or individual talent. These findings, from Artjoms Ivlevs and colleagues, underscore the fact that former Communist Party networks continue to affect business practices in Central and Eastern Europe.


    MONETARY POLICY AND BANK STABILITY: The analytical toolbox reviewed

    Ugo Albertazzi, Francesca Barbiero, David Marques-Ibanez, Alexander Popov, Costanza Rodriguez d'Acri, Thomas Vlassopoulos      
    25 February 2020

    A study by European Central Bank (ECB) economists reviews empirical evidence on how monetary policy affects bank stability, focusing on unconventional monetary policy measures deployed by the ECB during the Global Crisis. The authors argue that by stabilising the economy and averting a systemic crisis, these measures helped shore up stability, with the positive effects outweighing the adverse spillovers on banks’ intermediation capacity and risk-taking. But such measures may need to be complemented with counterbalancing actions that go beyond monetary policy.  



    Bruno Caprettini, Hans-Joachim Voth    
    22 February 2020

    How do governments of modern states convince citizens to fight and possibly to die for their country? Research by Bruno Caprettini and Hans-Joachim Voth examines whether welfare spending under Roosevelt’s New Deal boosted patriotism in the United States during the Second World War. They find that higher welfare spending prior to 1940 is positively correlated with greater patriotism, as measured by war bond purchases, volunteering for the US Army, and exceptionally brave acts in battle. The findings suggest that when the federal government looks out for its citizens’ needs, men and women who benefit repay the largesse by becoming more patriotic.


    Knut Aastveit, Bruno Albuquerque, André Kallåk Anundsen     
    25 February 2020

    The responsiveness of US housing supply to changes in prices has fallen since the Global Crisis, with bigger declines in places where land-use regulation has tightened most and in areas that had larger price declines during the crisis. This new lower elasticity of supply means that US house prices should be more sensitive to changes in demand than before the crisis. 

    These are the central findings of a study by Knut Aastveit and colleagues, who use a rich dataset and a novel identification method to show that supply elasticities vary across cities and across time.


    Leah Boustan interviewed by Tim Phillips, 21 February 2019

    A century ago, American nativists succeeded in establishing immigration quotas to drive up the wages of US workers. What happened next? Not what you might think, Leah Boustan tells Tim Phillips.


    John Van Reenen     

    Regulation is often blamed for inhibiting innovation. In this interview for Vox, John Van Reenen argues that the basis for this claim is weak. A study of firm-level innovation in France, where various labour regulations kick in once a firm reaches 50 employees, reveals that while innovation does fall among firms just below this threshold, the innovations that are discouraged tend be relatively low-value innovations that have little impact on economic growth.

    THE END OF MEN? Growing demand for women’s social skills in high-paying jobs

    Nir Jaimovich    

    Demand for high-skilled workers who perform cognitive tasks has increased dramatically in the United States over the past four decades, with the biggest change between 1980 and 2000. Nir Jaimovich discusses the findings of a UBS Center Policy Brief, which shows that the increase in demand was not experienced equally by both genders: despite rapid growth in employment in high-paying occupations, the probability that a college educated man was employed in such a job fell, while the prospects for college-educated women improved.

    The key driver seems to be growing demand for social skills, such as empathy, communication, emotion recognition and verbal expression, in which evidence from psychological research indicates that women have a comparative advantage.