This week from CEPR: June 04

Thursday, June 4, 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

    • DIVIDED WE STAY HOME: Evidence from Russia and the United States of stricter voluntary social distancing where there is greater ethnic diversity 

    DIVIDED WE STAY HOME: Social Distancing and Ethnic Diversity
    Georgy Egorov, Ruben Enikolopov, Alexey Makarin, Maria Petrova     
    CEPR DP No. 14810  May 2020 

    Voluntary social distancing plays a vital role in containing the spread of the disease during a pandemic. Following the reports of the first local Covid-19 cases, people in more ethnically diverse places were more likely to restrict their mobility. Sick people self-isolated for altruistic reasons but did so less in more diverse societies due to out-group biases. At the same time, the decision of healthy individuals to self-isolate is determined by private benefits, so they were more likely to self-isolate in more diverse societies, where sick people are less likely to stay at home.

    These are among the conclusions of a new study by Maria Petrova and colleagues, which highlights the role of ethnic diversity in voluntary adherence to socially beneficial norms, such as self-isolation and social distancing during a pandemic. Analysing evidence from Russia and the United States, the study finds that: 

    • For healthy people, observing social distancing has private benefits, too. If sick individuals are more likely to stay home, healthy ones have fewer incentives to do so, especially if asymptomatic transmission is perceived to be unlikely. 
    • This interplay may lead to a stricter observance of social distancing in more diverse and less altruistic societies. 
    • The reduction in mobility following the first local case of Covid-19 was stronger in Russian cities with higher ethnic fractionalisation and cities with higher levels of xenophobia. 
    • Mobility reduction in the United States was also higher in counties with higher ethnic fractionalisation. 

    These findings highlight the importance of strategic incentives of different population groups for the effectiveness of public policy.

    • ASOCIAL CAPITAL: Greater civic capital promotes more voluntary social distancing in Italy during Covid-19   

    ASOCIAL CAPITAL: Civic Culture and Social Distancing during COVID-19
    Ruben Durante, Luigi Guiso, Giorgio Gulino   
    CEPR DP No. 14820 |  May 2020

    Social distancing can slow the spread of Covid-19 if citizens comply with it and internalise the cost of their mobility on others. Areas with higher levels of civic capital showed a much stronger voluntary response to restricting mobility, both before and after a mandatory national lockdown. These tendencies contributed to the containment of the pandemic and limited its death toll.

    These are the central findings of a new study by Ruben Durante, Luigi Guiso and Giorgio Gulino, which studies the relationship between civic capital, social distancing and disease containment in the context of the Covid-19 pandemic in Italy between January and May 2020.

    The results show that Italians decreased their mobility first as a voluntary response to information about the presence of the virus in the country, and, second, in reaction to the social distancing measures adopted by the government. Crucially, both reactions were stronger in communities with high levels of civic capital because more civic-minded individuals are both more likely to internalise the effect of their mobility on others, and to abide by the new rules. 

    The effect is not driven by differences in the risk of contagion, healthcare capacity, geographical, socio-economic and demographic factors, or by a general North-South divide. The study estimates that if all provinces had the same civic capital as those in top quartile, Covid-related deaths would have been ten times lower. The study finds consistent results for Germany where the incidence of the pandemic and restrictions to mobility were milder.

    The authors suggest that civic culture is likely to play an even greater role as economies re-open and communities unavoidably have to learn to co-exist with the pandemic, possibly for a sustained period of time. As restrictions ease, social distancing will have to be achieved through a decentralised process based on individual responsibility. In this phase, communities with high civic capital will arguably face a less grim trade-off between the speed of economic recovery and the risk of new outbreaks and other, costly lockdowns.

    • THE COVID-19 SHOCK AND EQUITY SHORTFALL: Firm-level evidence from Italy 

    THE COVID-19 SHOCK AND EQUITY SHORTFALL: Firm-level evidence from Italy
    Elena Carletti, Tommaso Oliviero, Marco Pagano, Loriana Pelizzon, Marti G. Subrahmanyam   
    CEPR DP No. 14831 | May 2020

    The economic losses inflicted by the Covid-19 shock on Italian firms are likely to produce a sizeable erosion of their equity, and absent of any recapitalisation or debt restructuring, widespread bankruptcies and layoffs and consequently, potential long-term damage to the economic fabric of the country.

    These are the findings of a new CEPR study by Elena Carletti and colleagues, which estimates the drop in profits and the equity shortfall triggered by the Covid-19 shock and the subsequent lockdown, using a representative sample of 80,972 Italian firms. Among the findings: 

    • A three-month lockdown entails an aggregate yearly drop in profits of €170 billion, with an implied equity erosion of €117 billion for the whole sample, and €31 billion for firms that became distressed – that is, ended up with negative book value after the shock.
    • As a consequence of these losses, about 17% of the sample firms, whose employees account for 8.8% of total employment in the sample (about 800,000 employees), become distressed and end up with negative 2020 year-end net worth after a three-month lockdown.
    • Small and medium-sized enterprises (SMEs) are affected disproportionately, with 18.1% of small firms, and 14.3% of medium-sized ones becoming distressed, against 6.4% of large firms. 
    • The equity shortfall and the extent of distress are concentrated in the manufacturing and wholesale trading sectors and in the north of Italy. 

    Since many firms predicted to become distressed due to the shock had fragile balance sheets even prior to the Covid-19 shock, restoring their equity to their pre-crisis levels may not suffice to ensure their long-term solvency.

    WHAT THE G20 SHOULD DO NOW: A letter from former world leaders and top health and economic experts

    Erik Berglöf, Gordon Brown, Helen Clark, Ngozi Okonjo-Iweala     
    02 June 2020

    Our world is at a critical moment. 30 May saw the highest daily figure recorded worldwide for new cases of Covid-19, with countries on every continent attempting to stop the transmission of the virus and save lives. 

    In this letter to world leaders, more than 230 former world leaders and leading global health experts and economists underline the urgency of addressing the medical emergency and providing debt relief to the poorest countries and more resources to the international financial institutions delivering immediate relief to countries facing the effects of an unprecedented, global crisis.

    They also call for the global health and financial architecture to be strengthened further, and in parts redesigned, to enhance our preparedness and capacity to act with speed and at scale to fight future crises.  

    THE LASTING SCARS OF THE COVID-19 CRISIS: Channels and impacts

    Jonathan Portes     
    01 June 2020

    There is a danger that the short-term measures taken to limit the spread of Covid-19 could lead to lasting economic damage. Writing at Vox, Jonathan Portes identifies and discusses five conceptually separate channels that could lead to such ‘scarring’ and attempts a very rough quantification of the potential impacts in both the short to medium term and longer term. Among the findings:

    • Economists’ concern about scarring is entirely justified. The magnitude of these potential impacts is huge – and dwarfs the short-term costs of the restrictions. 
    • The fact that there are numerous conceptually separate channels – and this is by no means an exhaustive list – is often obscured in the public debate, and makes policy-making much more complex.
    • Some of the impacts will fade out over time, but others will be persistent. While the natural resilience of market economies will significantly attenuate the damage, there is no theoretical or empirical reason to believe that it will ever repair it entirely. Aggressive policy actions are essential.
    • Policy will eventually need to ‘pivot’ from helping firms survive and preserving jobs to helping workers into new jobs


    Peter Dolton     
    31 May 2020

    The Covid-19 pandemic is causing serious financial problems for UK universities. Writing at Vox, Peter Dolton identifies the over-reliance on Chinese students for fee income as the main cause of the impact and considers what steps the government might take to support universities through this crisis.

    Faced with these large expected losses in income, many universities in the UK are already implementing, or planning to implement, hiring freezes, redundancies, termination of short-term contracts, dropping courses and even whole degree programmes, and closing departments.


    Patrick Bolton, Lee Buchheit , Pierre-Olivier Gourinchas, Mitu Gulati, Chang-Tai Hsieh, Ugo Panizza, Beatrice Weder di Mauro     
    28 May 2020

    The official sector has moved swiftly to assist the poorer countries most affected by the Covid-19 pandemic, under the banner of the Debt Service Suspension Initiative. Will private sector creditors follow suit? 

    The G20 ‘called upon’ commercial creditors to provide comparable forbearance but did not mandate it. In response, the private sector has offered an impressive list of the reasons why a temporary deferral of payments to commercial creditors will be time-consuming, expensive and possibly very damaging to the debtor countries requesting it. 

    Writing at Vox, CEPR President Beatrice Weder di Mauro, Vice President Ugo Panizza and colleagues, discuss the challenges in attempting to coordinate wholly voluntary private sector debt relief for sovereigns afflicted by the pandemic.

    REVENGE OF THE EXPERTS: Will Covid-19 renew or diminish trust in science?

    Cevat Giray Aksoy, Barry Eichengreen, Orkun Saka     
    31 May 2020

    It is argued that Covid-19 will reverse the trend of challenging the value of science and the integrity of scientists. Writing at Vox, Barry Eichengreen and colleagues find that exposure to epidemics in one’s country of residence during the ‘impressionable years’ of ages 18 to 25 has no impact on confidence in science as an enterprise, but negatively affects views of the honesty and public-spiritedness of scientists. 

    If past epidemics are a guide, the virus will not have an impact on the regard in which science as an undertaking is held. But it will reduce confidence in individual scientists, worsen perceptions of their honesty and weaken the belief that their activities benefit the public. The strongest impact is likely to be felt by individuals in their ‘impressionable years’, whose beliefs are in the process of being durably formed.


    Anna Stansbury, Lawrence H. Summers      
    02 June 2020


    Since the early 1980s, the United States has seen a falling labour share and slow wage growth for typical workers, while measures of corporate valuations and measured mark-ups have increased. A number of studies have argued that increasing monopoly or monopsony power can explain these trends. Writing at Vox, Anna Stansbury and Larry Summers argue instead that the decline in worker power in the US economy is a more compelling explanation for recent macro trends than a broad-based rise in monopoly power.

    PREGNANCY DURING THE PANDEMIC: Covid-19 seems to affect pregnant women less than influenza

    Hannes Schwandt      
    02 June 2020

    The Spanish Flu pandemic had devastating health impacts on pregnant mothers and in-utero exposure to influenza is known to have negative short- and long-term consequences for children. A study by Hannes Schwandt argues that the existing evidence from the Covid-19 pandemic allows for cautious optimism about the impacts of Covid-19 on pregnant women and their children. While immune system responses triggered by maternal influenza have been shown to impair foetal development, Covid-19 does not seem to cause such strong responses in mothers’ immune systems.

    This is not to say that pregnant mothers and young children are entirely unaffected by the current pandemic. Food insecurity is on the rise, and many young families face financial stress as unemployment is soaring to unprecedented levels. Nutritional, economic and psychological stress during pregnancy is detrimental for the foetus as it increases the risk of poor health at birth, which may in turn lead to negative long-term consequences. 

    THE WORK OF ECONOMISTS DURING THE CRISIS: The EEA Covid-19 research registry initiative

    Giovanni Peri, Imran Rasul     
    01 June 2020

    Economists can play a key role in helping policy-makers and the public understand the unfolding economic effects of the crisis. In March 2020, the European Economic Association established a registry of Covid-19-related projects, inviting research teams working with real-time data during this crisis to share their work. 

    Writing at Vox, Giovanni Peri and Imran Rasul give an overview of the registered projects, highlighting topics on which economists are working and methods being used. They also highlight areas and topics that are relatively understudied.


    Masayuki Morikawa      
    01 June 2020

    A new study by Masayuki Morikawa presents new survey-based evidence on the complementarity between automation technologies and human skills. The results show that the proportion of high-skilled workers is higher in firms using AI and big data technologies, but lower in those using robots. The Covid-19 shock may have long-lasting impacts on the structure of the labour market through the diffusion of new automation technologies.


    Jason Furman    
    31 May 2020

    The public health measures to ‘flatten the Covid-19 curve' will necessarily and appropriately impose large economic costs. A study by Jason Furman identifies the constraints that policy faces during a pandemic – uncertainty, time and capacity – and the implications of these constraints.

    The results show that too often in January, February and the first half of March, policy-makers were days or even weeks behind where they needed to be. For public health, the consequence of this delay has been enormous; when dealing with what is initially an exponential process, a delay of a few days in implementing social distancing can have a large impact on the trajectory of the virus.

    This column is taken from the VoxEU eBook Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes. Download the eBook here.


    Nicola Fuchs-Schündeln, Moritz Kuhn, Michèle Tertilt     
    30 May 2020

    The Covid-19 crisis has hit women’s employment particularly hard, partly because the worst-hit sectors have high female employment shares, but also because schools and daycare closures have forced more mothers to leave their jobs. 

    A study by Nicola Fuchs-Schündeln and colleagues looks at Germany, where 26% of the workforce has children aged 14 or younger and quantifies the macroeconomic importance of working parents. If schools and daycare centres remain closed as the economy slowly re-opens, 11% of workers and 8% of all working hours will be lost to the labour market. Policies to restart the economy must accommodate the concerns of these families.


    Lucie Gadenne, Maitreesh Ghatak      
    30 May 2020

    As debates about the future of the World Health Organization (WHO) rage on, the Covid-19 pandemic is a reminder of the vital importance of global public health institutions. Writing at Vox, Lucie Gadenne and Maitreesh Ghatak consider what principles should guide WHO’s missions and tools to deal with pandemics, which are distinguished from other health risks by their high contagion, extreme potential outcomes in terms of mortality risk, and the ‘weak-link’ aspect of global collective action.

    The authors argue that reforms should centre on having a narrower mission – Global Response to Infectious Diseases, or GRID – and creating better incentives to prevent contagions from spreading globally using stronger legal and financial tools. 

    COVID-19 AND NON-PERFORMING LOANS: Lessons from past crises

    Anil Ari, Sophia Chen, Lev Ratnovski      
    30 May 2020

    Non-performing loans are a crucial policy consideration, especially in times of wider economic crisis. A study by IMF and ECB economists uses a new database covering 88 banking crises since 1990 to draw lessons for post-Covid-19 resolution of non-performing loans. 

    Compared with the 2008 crisis, the pandemic poses some different challenges. Despite some respite from the credit crunch of 2008, policy-makers today are faced with substantially higher public debt, less profitable banks and often weaker corporate sector conditions, making resolution of non-performing loans even more challenging.


    Pauline Gandré, Mike Mariathasan, Ouarda Merrouche, Steven Ongena      
    30 May 2020

    Managing global financial risks requires coordinated policies and a firm commitment by national actors. In the absence of such commitment, risks are reallocated and concentrate where they are least effectively addressed.

    Using data on the staggered implementation of the G20’s global derivatives market reform, Steven Ongena and colleagues document US banks’ response to reform progress. They find that banks shift trading activities towards less regulated jurisdictions and adopt riskier portfolios overall. The effects are driven by agenda items – like the promotion of central clearing – that are costly and do not benefit banks directly.


    Richard Baldwin      
    29 May 2020

    Has Covid accelerated the future of work? Richard Baldwin argues that Covid has changed the future of work via four shocks: massive job losses, massive digital transformations, massive debt burdens and massive costs of socially distanced office space.

    These matter in two ways. First, due to ‘sunk cost hysteresis’, re-hiring workers is very different than retaining workers. Second, the digital transformations, office space costs, and debt burdens will push firms to replace domestic workers with ‘telemigrants’ or ‘white-collar robots’. The jobs that return will be those that require face-to-face interactions and involve tasks that artificial intelligence cannot handle. 


    Sara Markowitz, Erik Nesson, Joshua J. Robinson     
    28 May 2020

    Writing at Vox, Sara Markowitz and colleagues show how high levels of economic activity can foster the spread of communicable diseases through frequent person-to-person interactions, and high levels of employment affects the spread of influenza and other viruses transmitted via the spread of droplets, such as the novel coronavirus (SARS-CoV-2), the cause of Covid-19.

    The results show that high levels of employment in the United States encourage the spread of influenza, especially when employment in service sectors – particularly retail and healthcare - are high. The same average monthly increase in retail employment and healthcare employment would lead to much larger expected increases in flu prevalence of between 20% and 30%, respectively. Employment changes in the construction sector, one of the sectors with the lowest level of interpersonal contact, is not associated with statistically significant changes in flu prevalence.

    These results provide support for social distancing measures aimed to slow the growth of cases of Covid-19. 


    Jaime de Melo, Verena Tandrayen-Ragoobur, Boopen Seetanah      
    28 May 2020

    When they are strict and prolonged, the public health and social measures to contain Covid-19 have proven difficult to respect. Writing at Vox, Jaime de Melo and economists from the University of Mauritius provide evidence of the different outcomes, as of 23 May, across a sample of 20 tourist-dependent island states with populations of between 100,000 and 10 million. 

    The results show that if tourist-dependent islands have been hit hard by the shock, most have fared well, particularly those – like Mauritius – that acted early and imposed a strict lockdown. Among the more successful, Fiji, Mauritius and New Zealand followed a strict path of contact tracing.

    Mauritius also followed a strict 40-day long confinement strategy early on, accompanied by substantial income support. This combination kept the country in the ‘stringency corridor’. 

    New Zealand achieved the same. Fiji, Iceland, New Zealand and Trinidad and Tobago have also succeeded following a more progressive containment path. Others tended to follow less aggressive containment strategies. 

    FROM PATENTS TO PRODUCTS: Product innovation and firm dynamics

    David Argente, Salome Baslandze, Douglas Hanley, Sara Moreira      
    28 May 2020

    Patents are at the heart of policies designed to provide incentives innovation and productivity growth. In recent years however, while patent activity has skyrocketed, innovation and productivity growth have not. 

    Writing at Vox, Salome Baslandze and colleagues collect data on product innovations and link those to their respective patents. While patent filings are followed by product innovations overall, this relationship is much stronger for firms with lower market share.

    These results suggest that patents of market leaders play a key role in constraining the product innovation of their competitors and thereby in protecting the sales of their existing products. Larger firms are more likely to exploit the patent system to their benefit by using it to protect their market positions instead of introducing actual innovations. 

    ALBERTO ALESINA: A free-spirited economist

    Elias Papaioannou, Stefanie Stantcheva      
    27 May 2020

    To the world, Alberto Alesina was an engaged, prolific economist improving the policy debate. To the economics profession, he was a giant and driving force in the field of political economy. To the authors of this Vox column, he was a brilliant, warm and funny close co-author and friend. 


    Nathan Sussman interviewed by Tim Phillips, 29 May 2020

    The mortality statistics of the Covid-19 outbreak suggest that your country's medical infrastructure has a big influence on how likely you are to survive. Nathan Sussman has examined the data and tells Tim Phillips why all countries should be urgently investing in their health services.
    Read ‘Time for Beds’ in issue 11 of Covid Economics.


    Ricardo Reis    

    Ricardo Reis, London School of Economics, talks to Tim Phillips. Swap lines between advanced economy central banks are a relatively recent and important part of the global financial architecture. How has their role been affected by Covid-19?