This week from CEPR: July 03

Friday, July 3, 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


    • ENFRANCHISEMENT AND ELECTED POLICE CHIEFS PROMOTE BETTER TREATMENT OF MINORITY GROUPS: Evidence from the 1965 Voting Rights Act

    THE FRANCHISE, POLICING, AND RACE: Evidence from Arrests Data and the Voting Rights Act
    Giovanni Facchini, Brian Knight, Cecilia Testa      
    CEPR DP No. 14946 June 2020 

    Following the US Voting Rights Act (VRA) of 1965, which enfranchised black voters, black arrest rates fell in counties that were both covered by the legislation and had a large number of newly enfranchised black voters. There were no corresponding patterns for white arrest rates. These findings indicate that voting rights, when combined with elected, rather than appointed, chief law enforcement officers (CLEOs), can lead to improved treatment of minority groups by police. 

    These are the central findings of a new CEPR study by Giovanni Facchini, Brian Knight and Cecilia Testa, which investigates the effect of the enfranchisement of black voters on police practices, as captured by race-specific arrest rates. Among the findings: 

    The survey documents changes in income/work and leisure; self-reported negative and positive non-financial effects of the crisis; attitudes towards recommendations (wearing a mask in particular); and the approach taken by public authorities. Among the findings: 

    • Following the VRA, which enfranchised black voters, black arrest rates fell in areas both covered by the VRA and with a large number of newly enfranchised black voters. 
       
    • The study finds no corresponding patterns for white arrest rates.
    • The reduction in black arrest rates is driven by less serious offences, for which police might have more enforcement discretion. 
    • Importantly, these results are driven by arrests by county governments, which have elected sheriffs.
    • While there are no corresponding changes for municipal police chiefs in aggregate, the study finds similar patterns in covered counties with elected rather than appointed chiefs. 
    • These findings cannot be rationalised by alternative explanations, such as differences in collective bargaining, changes in the underlying propensity to commit crimes, responses to changes in policing practices or changes in the suppression of civil right protests.

    Taken together, these results suggest that enfranchisement of minority groups can lead to improved treatment by police, but only when CLEOs are elected rather than appointed.

    While historical in nature, these results have significant policy implications today, especially given the debates over race and policing, and also over voting. On the one hand, although blacks continue to be disproportionately targeted by law enforcement, the results indicate that the election of CLEOs affects accountability and improves the treatment of minority groups by police.

    On the other hand, since the franchise matters, should recently enacted changes in the costs of voting, such as voter ID laws, have disproportionate effects on black voters, this might lead to a further worsening of the treatment of minorities by police. These results emphasise the important link between the administration of justice and the democratic process.


    • THE COVID-19 THREAT TO FINANCIAL STABILITY IN EUROPE: New estimates indicate significant losses for euro area banks   

    IS COVID-19 A THREAT TO FINANCIAL STABILITY IN EUROPE?
    Henk Jan Reinders, Dirk Schoenmaker, Mathijs A Van Dijk 
    CEPR DP No. 14922 | June 2020

    The Covid-19 crisis has caused a sharp and unprecedented contraction of economic activity, leading to losses in business valuation across corporate industries. The market-implied losses for euro area banks from Covid-19 could reach over €1 trillion, or 4-25% of corporate book value (7-43% of available capital and reserves). This severe economic impact could realistically threaten financial stability in Europe. 

    These are the central findings of a new CEPR study by Henk Jan Reinders, Dirk Schoenmaker and Mathijs Van Dijk, who provide a real-time, market valuation-based assessment of the impact of Covid-19 on euro area banks' corporate loan portfolios. The findings show that the impact on business valuation is uneven across industries and affects the value of the instruments that finance those businesses (for example, equity and debt). The impact on the expected losses on debt instruments is largely driven by increased probabilities that firms will default. The analysis can be viewed as an early warning indicator of potential accounting losses to follow.

    These results are important for both financial sector authorities and financial institutions. Financial sector authorities can use these findings to compare market-based expected losses to currently announced loss provisions by euro area banks. In some jurisdictions, this may reveal gaps between the more accounting-based supervisory practices and market expectations and could be part of the rationale to implement additional measures to safeguard financial stability. 

    Findings that potential declines in bank capital of up to 43% support the European Central Bank’s ban on dividend payments and share buybacks during the Covid-19 pandemic (ECB, 2020). For financial institutions, and in particular banks, the results can provide a benchmark to their own loan portfolios to estimate a plausible range of expected losses in their loan portfolios. 


    • GENDER QUOTAS FOR CORPORATE BOARDS CREATE SHAREHOLDER VALUE: Evidence from across Europe 

    GENDER DIVERSITY IN CORPORATE BOARDS: Evidence from quota-implied discontinuities
    Olga Kuzmina, Valentina Melentyeva   
    CEPR DP No. 14942 | June 2020

    As many countries have pushed gender quotas for corporate boards, the effects of this policy are less well understood. Previous studies explored the setting of Norway to demonstrate that the effects of this gender-related quota are negative. 

    A new CEPR study by Olga Kuzmina and Valentina Melentyeva uses data from a much larger sample size across European corporate boards to investigate the effects of quota-induced representation of women, and show that gender quotas for corporate boards are, on average, value-enhancing for shareholders. Suggesting that arguments against such policy are largely unfounded. 

    The study, which explores the effects of increased presence of women on corporate boards on value, operating performance, leverage, and employment of firms, for a set of European countries that introduces soft or hard regulation with respect to the share of women, finds positive effects are largely due to a result of reductions in labour, scaling down operations, and therefore lower operating profits (as a share of assets). 
    The results show that having more women in board causally increases Tobin's Q (a measure of firm assets in relation to a firm's market value), despite some negative effects on operating performance and more likely employment downsizings. The authors suggest that this is evidence of firms scaling down inefficient operations, consistent with women being less prone to empire-building. Overall, these results highlight that gender quotas are not necessarily a costly way of promoting equality.



    THE WORLD’S POOR CANNOT PROTECT THEMSELVES WELL FROM CORONAVIRUS

    Caitlin Brown, Martin Ravallion, Dominique van de Walle       
    27 June 2020

    Recommendations to limit the spread of Covid-19 call for social distancing, washing and access to information and treatment, some of which must considered near fiction for the world’s poor – people need to be in household environments that allow them to follow those recommendations. 

    Dominique van de Walle, Lead Economist at the World Bank’s Research Department, and colleagues examine the relationship between poverty and the adequacy of the home environment. The findings indicate that there is a strong wealth effect both within and between countries, where the poor are less likely to have the kind of dwellings and infrastructure to follow WHO recommendations. 

    The housing stock cannot be changed rapidly. But some things can be done now. The current infrastructure for information (particularly mobile phone coverage) holds promise for getting out public health messages and information on how to access consumption support. Policies such as distributing or subsidising sturdy face masks, soap and improved water access could be feasible in the near term and justified by both external benefits and equity impact. Home-grown innovative adaptations to the realities of life in the developing world will be crucial.


    LONG-TERM CARE FACILITIES ARE A SIGNIFICANT RISK FACTOR IN DEATH FROM COVID-19: Evidence from Europe

    Neil Gandal, Matan Yonas, Michal Feldman, Ady Pauzner, Avraham Tabbach       
    25 June 2020

    Covid-19 deaths rates vary widely across European countries, from as low as five deaths per million in Slovakia to as high as 760 deaths per million in Belgium (as of 13 May). 

    Using data on 32 countries from the WHO European Health Information Gateway, economists from Tel Aviv University show that the Covid-19 death rate is higher in countries with more long-term care beds. This provides evidence that living in long-term care facilities is a significant risk factor for death from Covid-19, and suggests that countries should adopt policies to protect their older populations living in such facilities before the second wave (likely) arrives.


    SUPPLY VERSUS DEMAND: Unemployment and inflation in the Covid-19 recession 

    David Baqaee, Emmanuel Farhi       
    29 June 2020

    Covid-19 is an unusual combination of supply and demand shocks. These shocks propagate through supply chains, causing different sectors to become demand-constrained or supply-constrained. 

    Writing at Vox, CEPR researchers David Baqaee and Emmanuel Farhi identify the shocks, classify the sectors, and draw implications for policy. Their research indicates that negative sectoral supply shocks and shocks to the sectoral composition of demand generate more than 7% inflation, and this inflation is kept in check by a large negative aggregate demand shock. There is considerable slack in economy, with 6% Keynesian unemployment, but it is concentrated in certain sectors. As a result, untargeted aggregate demand stimulus, while desirable, is less effective than in a typical recession.


    CREDIBLE EMERGING MARKET CENTRAL BANKS COULD EMBRACE QUANTITATIVE EASING TO FIGHT COVID-19

    Gianluca Benigno, Jon Hartley, Alicia García-Herrero, Alessandro Rebucci, Elina Ribakova       
    29 June 2020

    Emerging economies are fighting Covid-19 and the economic sudden stop imposed by the containment and lockdown policies in the same way as advanced economies. But emerging markets also face large and rapid capital outflows as a result of the pandemic. 

    Writing at Vox, Elina Ribakova and colleagues argue that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimising the risks of large depreciations and spiralling inflation.  


    THE SUPPRESSION VERSUS MITIGATION DILEMMA 

    Facundo Piguillem, Liyan Shi       
    26 June 2020

    Given the wide range of strategies pursued by governments coping with Covid-19, the question of ‘who got it right’ is unavoidable. Economists from the Einaudi Institute for Economic and Finance argue that the combination of issues at stake – the chance to eliminate the virus, the statistical value of life and the behavioural reactions to social distancing – makes it possible to rationalise quite different government reactions. 

    Nevertheless, one tool could have substantially reduced the economic cost of quarantines and was vastly underused by most countries: testing. The output gains are so large that lockdowns can be completely avoided. Testing policies can be extremely costly, yet the cost is easily compensated by rendering the indiscriminate quarantine substantially milder


    CUTTING LABOUR TAXES BRINGS BACK THE JOBS LOST TO COVID-19

    Christian Bredemeier, Falko Juessen, Roland Winkler       
    28 June 2020


     

    The Covid-19 crisis has disproportionately affected different occupations in the labour market. Workers in contact-intensive and personal-service-oriented sectors bear the brunt of the Covid-19 recession, but blue-collar workers suffer heavy job losses as well. A cut in taxes on labour income outperforms other stimulus plans in promoting job creation for those who lost their jobs in the Covid-19 downturn. With this stimulus, the government would not only boost the recovery, but it would also create jobs for all those workers whom the Covid-19 crisis hurt the most.

    These are the central findings of a new study by Christian Bredemeier and colleagues, which uses a multi-sector, multi-occupation macroeconomic model to study how different fiscal stimulus measures can boost aggregate demand and help the economy recover faster.


    TARGETED GOVERNMENT POLCY HAS HELPED MANY FIRMS STAY AFLOAT AND CREATES INCENTIVES FOR JOB RETENTION: Evidence from Denmark 

    Morten Bennedsen, Birthe Larsen, Ian Schmutte, Daniela Scur        
    28 June 2020

    Much of the economic turmoil caused by the Covid-19 pandemic is channelled through firms and their managers’ decisions. Responding to the pandemic, governments have closed non-essential workplaces and imposed social distancing measures while offering firms various forms of aid. 

    A study by Morten Bennedsen and colleagues examines the impact of these measures on firms, and the uptake and effects of certain policy tools used in Denmark, which are similar to those used in many other countries. The results shows that while most firms suffered pronounced revenue declines, targeted government policy helped many stay afloat, and created incentives for job retention – thereby reducing the country’s aggregate level of unemployment. The authors estimate that the policies helped to avoid approximately 81,000 layoffs and instead, created an additional 285,000 furloughs.


    SAVED BY THE PHONE: Urban renewal or a new era of lawlessness?

    Lena Edlund, Cecilia Machado       
    27 June 2020

    The urban renewal that transformed many US inner cities may have hit its first major speed bump with the outbreak of Covid-19. The ‘space versus commute’ trade-off has been thrown into doubt and confusion by work-from-home orders. 

    Writing at Vox, Lena Edlund and Cecilia Machado draw on socio-economic history to argue that a mass exodus of skilled professionals to the suburbs could have major implications for inner city areas. Although this could spell the return to the homicidal days of the 1980s, the authors argue that this may not be the case – the reason being: cell phones and how they have affected illicit drug retailing.


    PAST LESSONS FROM INCREASING PROCTECTIONISM: From Smoot-Hawley to ‘America First’ and ‘strategic sovereignty’

    Koen Berden, Joseph Francois, Fredrik Erixon        
    26 June 2020

    Calls for more protectionism have been on the rise for some time now, and have surged again with the Covid-19 pandemic. Joseph Francois and colleagues point to similar policies and their negative consequences during the Great Depression. Discussing similarities and differences of the economic situation between then and now and drawing on lessons from the Great Depression, it highlights the very negative consequences of increasing protectionism. Trade restrictions during an economic crisis would make the situation worse rather than better.


    LOCKDOWNS IN DEVELOPING COUNTRIES SHOULD FOCUS ON SHIELDING THE ELDERLY

    Titan Alon, Minki Kim, David Lagakos , Mitchell VanVuren      
    26 June 2020

    Due to differences in labour market informality, fiscal capacity, healthcare infrastructure and demographics, blanket lockdowns appear less effective in developing countries. Age-targeted policies – where the young are allowed to work while the old are shielded from the virus – can potentially save both more lives and livelihoods, as they leverage their younger and less susceptible populations to focus limited resources on the most vulnerable parts of their populations.

    These are the central findings of a new study by UC Davis economists analysing the extent to which developing countries should try to replicate policies implemented in advanced economies.


    THE PANDEMIC HAS INCREASED AND BROADENED INEQUALITY IN PSYCHOLOGICAL DISTRESS IN THE UK

    Apostolos Davillas, Andrew M Jones       
    30 June 2020

    A new study by Apostolos Davillas and Andrew Jones finds that inequality in psychological distress has increased since the pandemic in the UK. But the proportion of inequality explained by observed individual circumstances has decreased. 

    Pre-pandemic, the largest contributors were financial, employment and housing conditions. By April 2020, age and gender accounted for a larger share, through the impact of the pandemic on mental wellbeing among young people. Working in Covid-19-affected industries, household composition and parental occupation have also increased their association with the inequality in psychological distress. 


    HOW NON-STANDARD WORKERS ARE AFFECTED AND PROTECTED DURING THE COVID-19 CRISIS: Stylised facts and policy considerations

    Orsetta Causa, Maria Chiara Cavalleri        
    30 June 2020

    Writing at Vox, OECD economists analyse the vulnerability of part-time workers, the self-employed and workers on fixed-term contracts during the Covid-19 labour market disruptions. The limited access to social protection and job retention schemes of these workers make them particularly vulnerable to labour market disruptions. 

    The Covid-19 pandemic risks exacerbating existing inequalities. Policy recommendations include: 

    • Prevent crisis-related adverse distributional effects from becoming long-lasting by preventing job losses due to Covid-19 from translating into long-term unemployment, scarring effects and labour market detachment.
       
    • Changes in the labour market may imply the need for workers to relocate from declining to expanding sectors and new ones.
    • Consideration should be given to introduce more permanent social protection schemes for such workers after the crisis, as well as to develop portable social benefits systems that move with workers.

    EIGHT PRIORITIES TO STRENGTHEN INTERNATIONAL COOPERATION AGAINST COVID-19: Analysis from OECD economists 

    Aida Caldera, Shashwat Koirala     
    30 June 2020

    Writing at Vox, OECD economists Aida Caldera and Shashwat Koirala discuss eight priorities to strengthen international cooperation against Covid-19, both in the short term for crisis response, and to facilitate an inclusive and sustainable recovery. 

    The authors conclude that in the short run, cooperation between governments is needed to curb the pandemic and expedite exit from the crisis. In the medium and long run, internationally coordinated policies can facilitate recovery and the rebuilding of socio-economic systems in inclusive and sustainable ways and help prepare for future risks and pandemics.

    Without international co-operation, both the exit from the crisis and the recovery is likely to be slow and weak. This is true for the healthcare sector, as effective disease surveillance, swift vaccine development (and deployment) and preparedness for future epidemics all benefit from multilateral action.


    ‘JUST-IN-TIME’ SUPPLY CHAINS AFTER COVID-19: Evidence from French manufacturing firms

    Frank Pisch        
    30 June 2020

    What can we learn about the long-term impact of Covid-19 on global supply chains? A new study by Frank Pisch predicts that ‘just-in-time’ supply chains are likely to become more prevalent, contribute to further regionalisation of international trade and generate an increase in multinational production.

    The study analyses the economic relevance, geographical properties and ownership structure of French manufacturing firms in international just-in-time supply chains – as well as potential implications for global value chains in a post-Covid-19 world. 


    USABLE BANK CAPITAL IN THE TIME OF COVID-19

    Alissa Kleinnijenhuis, Laura Kodres, Thom Wetzer        
    30 June 2020

    The Covid-19 induced ‘Great Lockdown’ has cast doubt on the efficacy of bank buffers in supporting the real economy in times of crisis. Despite accommodative regulatory and supervisory action, banks remain hesitant to draw on their buffers to maintain credit provision. 

    A new study Laura Kodres and colleagues focuses on the potential supply of credit and explores the obstacles to ‘usability’ of bank capital. It concludes that that the current capital framework falls short: there is not enough ‘usable capital’, and the disincentives to actually draw it down are too strong. The authors recommend improvements in the current capital framework to overcome these issues.


    THE MACROECONOMIC EFFECTS OF AUTOMATION AND THE ROLE OF COVID-19 IN REINFORCING THEIR DYNAMICS

    David Bloom, Klaus Prettner       
    25 June 2020

    Writing at Vox, David Bloom and Klaus Prettner describe the recent trends in automation and argue that its principal effects are to increase output per capita at the expense of rising inequality. Advancing technologies have mainly replaced the routine tasks of low-skilled workers, while the incomes that robots generate flow to wealthier capital owners. The Covid-19 pandemic is likely to reinforce these trends, raising the need for a policy response. The main challenge is to ensure that as many as possible will benefit from the positive economic and social effects of automation to prevent a situation in which a substantial part of society is disconnected from the gains brought by technological progress.


    COVID-19 AND THE NATURE OF CAPITALISM

    Philippe Aghion, Helene Maghin, André Sapir        
    25 June 2020

    The Covid-19 pandemic has shed light on the structural dichotomy between the models of capitalism operating in Europe and the United States; the former offers better protection for its citizens while the latter shows greater economic dynamism. 

    Writing at Vox, Philippe Aghion and colleagues argue that the crisis has provided an opening to rethink the versions of capitalism practised on both sides of the Atlantic. Some degree of convergence towards a better model is desirable, the authors suggest, and perhaps even possible.

    In Europe, the Covid-19 crisis may be an opportunity to move towards a new model of capitalism in which both innovation and the protection of citizens are promoted. The Next Generation EU package currently discussed by European leaders has the potential to stimulate such a transformative recovery.


    COVID-19 AND TELEWORKING IN JAPAN

    Toshihiro Okubo        
    25 June 2020

    A new study by Toshihiro Okubo examines the effect of Covid-19 on the uptake of teleworking in Japan, a country that has the lowest use among developed countries. Overall, teleworking increased about 4 percentage points from January to March 2020, driven by industries and occupations related to information and located in the Tokyo metropolitan area. Teleworking is not suited to face-to-face services and manual labour, which saw substantial declines in worker incomes.

    While economic activities need to be uniformly stopped as a countermeasure against infectious diseases, it is extremely difficult to promote telework in all industries and occupations. More generous economic assistance will be an urgent requirement to prevent bankruptcies and unemployment in industries and occupations unsuitable to telework.


    RECOVERIES FROM PAST US RECESSIONS INDICATE HOPE FOR A QUICK RECOVERY

    Robert Hall, Marianna Kudlyak        
    24 June 2020

    A new study by Robert Hall and Marianna Kudlyak looks at recoveries from recessions over past 70 years to assess how the US labour market might recover from the current job loss of unprecedented magnitude. 

    The findings show that remarkably consistent recoveries have occurred in the United States after every recessionary shock that caused a spike in unemployment, and there are reasons to believe that the recovery from the current shock will be more rapid, because unemployment contains a much larger fraction of workers on temporary layoff than in previous recoveries. But there is a great deal of uncertainty about the possible recovery rate.



    COPING WITH COVID-19 IN DEVELOPING ECONOMIES 

    Ugo Panizza interviewed by Tim Phillips, 26 June 2020

    A new ebook from the CEPR and the International Development Policy Journal discusses the threat to developing and emerging economies from the pandemic, and what we can do about it. Ugo Panizza is one of the editors, and he joins Tim Phillips to discuss capital flight, conflict, and what advanced economies and can do to help.

    Download Covid-19 in Developing Economies here, for free



    COVID-19 ECONOMICS: Back into work

    Monica Costa Dias and Rob Joyce      

    In the UK, non-essential shops are opening again and restaurants, bars and offices will follow. But are policy-makers making the right decisions? Monica Costa Dias and Rob Joyce tell TIm Phillips about who is, and is not, working at the moment, and what lockdown easing will mean for employment in the UK.


    LEADING THE FIGHT AGAINST THE PANDEMIC: Does gender really matter?

    Supriya Garikipati and Uma Kambhampati        

    There have been regular news stories about how women leaders have done a better job at responding to the Covid-19. Is this really true, or just a media narrative based on a tiny sample? Supriya Garikipati of Liverpool University and Uma Kambhampati at Reading tell Tim Phillips about how gender-based differences in leadership style may have saved lives and helped economies re-open earlier.