This week from CEPR: June 11

UNCONVENTIONAL FISCAL POLICY TO EXIT THE COVID-19 CRISIS: Evidence from Germany

Francesco D'Acunto, Michael Weber                 
08 June 2020

The German administration has just released their €130 billion economic stimulus package, the most prominent measure of which is an unconventional fiscal policy in the form of a sudden drop in VAT. The aim is to create a future path of raising sales taxes by increasing prices and hence stimulating inflation expectations and aggregate demand today. 

Writing at Vox, Francesco D'Acunto and Michael Weber argue that earlier episodes have shown that unconventional policy is effective because it is easily understood by non-expert households and households react to it strongly, increasing consumer spending and hence growth. Alternative unconventional measures, such as forward guidance, are largely ineffective, in part because households do not understand what such policies imply for their consumption.

TO EASE THE HEALTH–WEALTH TRADE-OFF, REALLOCATE DIGITAL PROPERTY RIGHTS

Dennis Snower               
08 June 2020

Contact-tracing and risk-tracing technologies could help ease the ‘health–wealth trade-off’ confronting many countries in the wake of Covid-19. But privacy and security concerns are preventing such technologies from being widely adopted. 

Writing at Vox, Dennis Snower suggests a way to ease those concerns by endowing individuals with property rights in the digital information that concerns them. A ‘self-sovereign identity system’ could assure users that their data would be exploited only for specified purposes, such as containing a pandemic. The data would revert to being private property once the pandemic is over. 

SOCIO-ECONOMIC DETERMINANTS OF COVID-19 INFECTIONS AND MORTALITY: Evidence from England and Wales

Filipa Sá               
08 June 2020

Areas with larger households, worse levels of self-reported health and a larger fraction of people using public transport have higher Covid-19 infection rates. Areas with an older population, a larger black or Asian population and worse levels of self-reported health have higher Covid-19 mortality rates. 

These are among the findings of a new study by Filipa Sá, which uses data on Covid-19 infections and mortality for small local areas in England and Wales to study the link between Covid-19 and socio-economic factors. The findings suggest that particular attention should be paid to reducing the risk of infection on public transport when relaxing lockdown measures.

Businesses should also take the risk of infection in public transport into account when deciding how to get their employees back to the office. Working from home should continue to be encouraged when possible, especially for those who have to travel to work by public transport. This is particularly relevant in London, where more than half of employed workers travel to work by public transport, compared with a national average of 13%.

PRODUCTION NETWORKS AND EPIDEMIC SPREADING: Re-opening the UK economy

Anton Pichler, Marco Pangallo, R. Maria del Rio-Chanona, François Lafond, J. Doyne        
07 June 2020

A new study by Doyne Farmer and colleagues considers several re-opening scenarios for the UK economy, documenting their projected effects on both GDP and the spread of the Covid-19 virus. The results suggest that it is best to re-open upstream industries first, but leave many consumer-facing industries closed, as they provide a large direct and indirect economic boost at a relatively lower cost in terms of further epidemic spreading.

TARGETED ACTION FOR EXITING LOCKDOWNS: Limiting health risks and maximising economic impact

Giorgio Barba Navaretti, Giacomo Calzolari, Andrea Dossena, Alessandra Lanza, Alberto Pozzolo                  
07 June 2020

Although most activities were re-opened in May, Italian GDP is expected to drop by around 10% in 2020. A study by Giacomo Calzolari and colleagues argues that a targeted exit from the lockdown in Italy should have been implemented instead. The study identifies those activities with the greatest impact on the national economy, but with low risks for those returning to work and for the country at large. 

The results suggest that targeted action, opening or closing just the core sectors of economic activity, identified by the intricacies of production chains, could have an almost equivalent economic impact as a general re-opening, yet implicitly limiting health risks. The methodology could also be applied in other countries and in the unfortunate event of a new wave of contagion and a new lockdown.

THE BCG VACCINE DOES NOT PROTECT AGAINST COVID-19: Applying an economist’s toolkit to a medical question

Richard Bluhm, Maxim Pinkovskiy                 
06 June 2020

The prospect that BCG – a vaccine used primarily against tuberculosis – might offer protection from Covid-19 has become an understandably popular hypothesis. According to a study by Richard Bluhm and Maxim Pinkovskiy, that hope is misplaced.

The authors exploit a natural experiment, overlaying the large difference in BCG vaccination rates with the large differences in Covid-19 infection rates between the former East and West Germany, to show that the differences are attributable not to BCG, but to the West’s copious commuter flow patterns and the fact that the epidemic arrived there first.

VALUATING HEALTH VERSUS WEALTH: The effect of information and how this matters for Covid-19 policy-making

Shaun P. Hargreaves Heap, Christel Koop, Konstantinos Matakos, Asli Unan, Nina Weber            
06 June 2020

A survey experiment in the United States and the UK finds that people put high priority on saving lives, but this valuation will change as economic losses mount. Individual differences in valuation also predict individual compliance with Covid-19 policies, and information on COVID-19 deaths and income losses can affect valuations. These are the findings of a new study, which argues that caution in relaxing the lockdown will help to build public support and to mitigate polarising effects and, through increasing compliance, to improve its economic efficacy.

INDIVIDUAL COVID-19 FATALITY RISK – AND THE CONSEQUENCES FOR UNIVERSITIES

Andrew Oswald, Nattavudh                 
06 June 2020

Re-opening universities for the autumn term will be risky for individuals' health and safety. The biggest influence on individuals’ risk of severe illness is age. Individuals in their sixties face a 30 times higher fatality risk from Covid-19 than individuals in their thirties. Being obese, non-white, a man and having an underlying health condition also matter – each roughly doubles the fatality risk.

These are among the findings of a study by economists Andrew Oswald and Nattavudh Powdthavee, who show that chronological age still remains the biggest risk – a fact that universities should keep in mind when planning their autumn schedules. University staff older than 50 may need to consider their own relative risk, and might prefer to avoid front-line contact with students until a vaccine is found.

TRACTABLE EPIDEMIOLOGICAL MODELS FOR ECONOMIC ANALYSIS

Dirk Niepelt, Martín Gonzalez-Eiras               
05 June 2020

The Covid-19 shock has changed the discipline of economics in that it has brought an interest in epidemiology into the foreground of economic analysis. Writing at Vox, Dirk Niepelt and Martín Gonzalez-Eiras explore how traditional models of infectious diseases can be combined with an additional economic layer on top. This hybrid approach can help draw accurate predictions for the long-run impact of the crisis, without substantive loss in terms of ‘realism’ or flexibility.

FLATTENING THE COVID-19 CURVE: What works

Nikos Askitas, Konstantinos Tatsiramos, Bertrand Verheyden           
05 June 2020

Writing at Vox, economists from Institute of Labor Economics (IZA) and LISER present the findings of an evaluation study across 135 countries on the effects of lockdown policies on the daily incidence of Covid-19 and on various population mobility patterns. 

The results show that policies preventing close contacts in large groups, such as public events, private gatherings and schools are the most effective in reducing new infections. The study finds no effects for international travel controls, public transport closures and restrictions on movement across cities or regions. That travel controls had no impact, although imposed relatively early in many countries, is likely explained by their lack of stringency, allowing the virus to cross borders.

THE EFFECT OF CONTAINMENT MEASURES ON THE COVID-19 PANDEMIC: An analysis by IMF economists

Pragyan Deb, Davide Furceri, Jonathan D. Ostry, Nour Tawk    
05 June 2020

Containment measures have been very effective in flattening the ‘pandemic curve’ of Covid-19. The effects have been stronger in countries where containment measures have been implemented faster and in those with a larger share of an elderly population, stronger health systems, lower temperatures and lower population density.

These are the central findings of a new study by IMF economists, which uses daily data on coronavirus cases and deaths, as well as on real-time containment measures implemented by countries, to assess measures to halt the spread of COVID-19 and limit the number of fatalities.

EXPOSURE TO TRANSIT MIGRATION: Public attitudes and entrepreneurship

Nicolas Ajzenman, Cevat Giray Aksoy, Sergei Guriev                 
05 June 2020

The impact of the 2015 refugee crisis on sending and receiving societies has received significant scholarly attention. But there is little research on how the crisis affected ‘transit countries’ through which migrants travelled. 

A study by Sergei Guriev and colleagues examines 800 localities in 18 European countries to discover how local populations responded to the temporary presence of forced migrants. Data show that entrepreneurial activity of residents living closer to refugee routes fell considerably, and while anti-migrant sentiment increased in these areas, attitudes towards other minorities remained unchanged. Individuals exposed to the migration shock increased their perception of political instability, and reduced their belief that law and order existed in their countries. They also had less trust in all levels of government.

But the study finds no evidence that exposure to transit migration affects interpersonal trust or local labour market outcomes, such as unemployment or labour force participation, and produces a null effect on local economic activity.

COVID-19: Speeding up vaccine development

Pierre-Yves Geoffard               
04 June 2020

Writing at Vox, Pierre-Yves Geoffard calls for an innovative mechanism to foster the development of a vaccine against Covid-19: governments would commit now to buy back any patent obtained by a private firm that discovers an effective vaccine, at a price of €60 billion, and would grant the right to produce the vaccine to any firm able to do so. This mechanism would provide strong incentives to innovate, while protecting firms from the political risk of expropriation.

This could be financed by the Recovery Fund announced by the European Commission, which, according to the European Parliament, could be as large as €2 trillion. A commitment by the EU to buy a vaccine patent would be a clear and transparent mechanism that would reduce the political risk of expropriation, could foster investment in R&D and will speed up market access. 

FROM TRADE-OFFS TO SYNERGIES: COVID-19, populism and sustainable development

Christian Kroll             
09 June 2020

Writing at Vox, Christian Kroll presents a new framework that sheds light on the relationship between sustainable development and populism. He reports that progress on the Sustainable Development Goals (SDGs) may be associated with diminishing electoral support for populism, but humanity must still get better at turning the trade-offs between SDGs into synergies. 

Concerns are growing that the Covid-19 crisis could be exploited by populists claiming to be the voice of those who have been ‘left behind’. During the Covid-19 recovery, an effective way to prevent populists from exploiting the crisis may involve making the SDGs the policy blueprint. 

This column is a lead commentary in the VoxEU debate on ‘Populism'

NEXT GENERATION EU: A recovery plan for Europe

Maarten Verwey, Sven Langedijk, Robert Kuenzel              
09 June 2020

As EU member states start to ease restrictions linked to the Covid-19 pandemic on citizens and businesses, EU leaders and institutions have turned their attention towards the medium-term recovery of their economies. In late May, the Commission presented its proposals for a recovery plan. Writing at Vox, European Commission economists provide a brief overview of the economic rationale for collective action and an assessment of the expected impact of the recovery plan proposed by the Commission.

THE SCARRING EFFECTS OF EMPLOYMENT BANS FOR ASYLUM-SEEKERS

Francesco Fasani, Tommaso Frattini, Luigi Minale               
09 June 2020

Easing the socio-economic integration of migrants is beneficial to both migrants and host countries; yet, many European countries ban asylum-seekers from legal employment on arrival. 

A study by Francesco Fasani and colleagues examines the effect of such employment bans and find that they have large and lasting negative effects on refugees’ future labour-market integration and constitute an economic loss for the host country. 

Allowing early labour market access is an easily implementable and financially costless policy that effectively accelerates refugee integration. The results are even more pertinent during the current Covid-19 pandemic, which has brought to light how much societies rely on migrants for key labour while highlighting the vulnerabilities of already weaker groups.

DESIGNING REGULATION FOR DIGITAL PLATFORMS: Why economists need to work on business models

Cristina Caffarra, Federico Etro, Oliver Latham, Fiona Scott Morton                 
04 June 2020

There is a developed public discourse on the need for more enforcement, regulation and legislation of digital platforms. Regulating ‘gatekeeper platforms’ has emerged as a major plank of the new European Commission mandate, with a consultation process underway this week for a plan to introduce both ex-ante regulation and a new market investigation tool with quasi-regulatory powers. 

Writing at Vox, economists from Charles River Associates and Yale ask how economists can contribute to making rational progress in the debate, so that it is not based on subjective priors, but uses applied theory to make testable predictions, and data to discriminate between theories.

SO FAR, SO GOOD: And now don’t be afraid of moral hazard

Charles Wyplosz                 
04 June 2020

The only way to avoid a potential debt crisis is for the European Central Bank to offer the same potentially infinite guarantee that national central banks offer their respective governments. It already did so with its ‘whatever it takes’ announcement, but then it was subject to conditionality (pre-existing adjustment programmes focused on deficit reductions) that is incompatible with the current situation. Removing conditionality from the Outright Monetary Transactions (OMT) programme is the most needed form of coordination.

This solution involves substantial moral hazard. Writing at Vox, Charles Wyplosz argues that casting moral hazard aside will be the acid test of the ability of member countries to coordinate in a meaningful way when needed.

A NEW APPROACH TO QUANTIFYING, REDUCING AND INSURING CYBER RISK: Preliminary analysis for the UK 

Neil Gandal, Michael Riordan, Shalom Bublil                  
04 June 2020

The precautions taken to deal with cyber risks are often insufficient, posing significant threats to businesses and consumers. A study by Michael Riordan and colleagues examines the relationship between cyber vulnerabilities, (attempted) attacks and precautions using firm-level data from the UK. 

The results show that more than 80% of the sampled firms have at least one vulnerability, and these firms were more than twice as likely to experience an incident compared with firms without vulnerabilities. Reducing vulnerabilities is key to dealing with cyber attacks and reducing cyber risks in the future. 

DECARBONISING THE FUTURE UK ECONOMY

Jennifer Castle, David Hendry 
04 June 2020

The UK’s 2008 Climate Change Act has led to a 34% fall in carbon emissions by 2019, while real GDP per capita had risen by more than 10% following the crash into the Great Recession. Can the UK achieve its recent net-zero emissions target by 2050 while still growing? Writing at Vox, University of Oxford economists Jennifer Castle and David Hendry present strategies to achieve a decarbonised future.

CORONAVIRUS CREDIT SUPPORT: Don’t let liquidity lifelines become a golden noose

Çağatay Bircan, Ralph De Haas, Helena Schweiger, Alexander Stepanov                   
03 June 2020

As lockdown measures continue, or are relaxed only gradually, many small businesses continue to experience significantly reduced turnover. A study by EBRD economists reports on a firm-level analysis across 16 emerging markets, and three Western European comparator countries, in order to gauge the potential risks associated with debt-driven Covid-19 support. The overall goal is to prevent a wave of bankruptcies that could break valuable relationships between firms and their suppliers and employees. But liquidity support in the form of additional bank lending may create debt-overhang problems in the future and therefore requires careful targeting.

LEARNING FROM FRIENDS IN A PANDEMIC: Social networks and the macroeconomic response of consumption

Christos Makridis, Tao Wang                   
03 June 2020

Aggregate consumption has seen an unprecedented drop as a consequence of Covid-19 and the resulting lockdowns. A study by Christos Makridis and Tao Wang focuses on the role that social networks play in propagating these effects on consumption.

By combining card transaction data of 5.18 million debit card users, coupled with data on social connectivity across geographies from Facebook, the study shows that a 10% increase of infections in socially connected counties is associated with a 0.64% decline in local consumption expenditures. This suggests that social networks can sharply amplify the effects of an underlying shock and could be significantly larger than the direct effects of the virus on consumption.

WHO BENEFITS FROM TRADE LIBERALISATION? A case from Japan

Youngmin Baek, Kazunobu Hayakawa, Kenmei Tsubota, Shujiro Urata, Kenta Yamanouchi                   
03 June 2020

Anti-globalisation sentiment is spreading. Since trade liberalisation is one of the representative characteristics of globalisation, investigating who benefits from it, and to what extent, can be an important starting point in analysing the causes of anti-globalisation sentiment and promoting liberalisation. 

Writing at Vox, Shujiro Urata and colleagues explain how the rent from trade liberalisation, in the form of tariff reductions, is distributed among foreign producers, wholesalers and consumers by investigating the tariff pass-through for each player.