This week from CEPR: June 18

Thursday, June 18, 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

    • THE POLITICAL SCAR OF EPIDEMICS: What will be political legacy of the coronavirus pandemic?    

    Cevat Aksoy, Barry Eichengreen, Orkun Saka                   
    CEPR DP No. 14879  | June 2020 

    Trust and confidence in government are important for the capacity of a society to organise an effective collective response to an epidemic. Yet there is also the possibility that experiencing an epidemic can negatively affect an individual’s confidence in political institutions and trust in political leaders, with negative implications for this collective capacity.

    A new CEPR study by Cevat Aksoy, Barry Eichengreen and Orkun Saka finds that epidemic exposure in an individual's ‘impressionable years’ (ages 18 to 25) has a persistent negative effect on confidence in political institutions and leaders. The study finds similar negative effects on confidence in public health systems, suggesting that the loss of confidence in political leadership and institutions is associated with healthcare-related policies at the time of the epidemic. 

    These results are mostly driven by individuals who experienced epidemics under weak governments with less capacity to act against the epidemic, disappointing their citizens. Weak governments took longer to introduce policy interventions in response to the Covid-19 outbreak.

    The results are more pronounced in settings where there already exist doubts about the strength and effectiveness of government. By implication, countries where the strength of government is limited are the countries most at risk, not just from Covid-19 but also from future epidemics, insofar as the current epidemic can result in the further erosion of trust in political leaders and institutions. These results imply that the coronavirus may leave behind a long-lasting political scar on the current young generation (‘Generation Z’).

    • SOCIAL CAPITAL AND THE SPREAD OF COVID-19: Insights from European countries    

    SOCIAL CAPITAL AND THE SPREAD OF COVID-19: Insights from European countries
    Alina Bartscher, Sebastian Seitz, Sebastian Siegloch, Michaela Slotwinski, Nils Wehrhöfer   
    CEPR DP No. 14866 | June 2020

    Culture and social capital have a considerable impact on the containment of Covid-19 and the number of deaths. Areas across Europe with high social capital exhibit higher collective action and socially responsible behaviour, which contributes to positive health outcomes in the face of a pandemic – in some cases demonstrating between 12% and 32% fewer Covid-19 cases per capita accumulated from mid-March until mid-May.

    These are the central findings of a new CEPR study by Sebastian Siegloch and colleagues, which explores the role of social capital in the spread of the recent Covid-19 pandemic in independent analyses for Austria, Germany, Italy, the Netherlands, Sweden, Switzerland and the UK. Among the findings: 

    • Exploiting within-country variation, a one standard deviation increase in social capital leads to 12% and 32% fewer Covid-19 cases per capita accumulated from mid-March until mid-May. 
    • Using Italy as a case study, high-social capital areas exhibit lower excess mortality and a decline in mobility. 
    • The positive effects of social capital are likely to go beyond health outcomes. 
    • Success of virus containment directly relates to the size of the following economic downturn and its recovery speed. 
    • Low social capital areas might need to consider stricter formal policies to contain the virus. 

    These results have important implications for the design of local containment policies in future waves of the pandemic. The recent policy shift in Germany that delegated more responsibility to the county level might be a good way to allow for this regional flexibility, especially with the looming threat of a second outbreak in the autumn or winter.


    Jean-Victor Alipour, Harald Fadinger, Jan Schymik          
    CEPR DP No. 14871 | June 2020

    Working from home (WFH) is very effective in economic and public health terms. WFH effectively shields workers from short-term work, firms from Covid-19 distress, and substantially reduces infection risks, especially during the early stages of the pandemic.

    These are the central findings of a new CEPR study by Jean-Victor Alipour, Harald Fadinger and Jan Schymik, which examines the relationship between work and public health during the Covid-19 pandemic in Germany. Combining administrative data on SARS-CoV-2 infections and short-time work registrations, firm- and worker-level surveys and cell phone tracking data on mobility patterns. 

    Counties whose occupation structure allows for a larger fraction of work to be done from home experienced much fewer short-time work registrations and fewer SARS-CoV-2 cases. Health benefits of WFH appeared mostly in the early stage of the pandemic and became smaller once tight confinement rules were implemented. Before confinement, mobility levels were lower in counties with more WFH jobs and counties experienced a convergence in traffic levels once confinement was in place.

    Overall, the results imply that confinement and working from home are substitutable policies in reducing infections. Working from home should be encouraged in the post-confinement phase as long as significant infection risk remains present.


    Cevat Giray Aksoy, Barry Eichengreen, Orkun Saka                  
    15 June 2020

    What will be the political legacy of the Covid-19 pandemic? Writing at Vox, Cevat Giray Aksoy, Barry Eichengreen and Orkun Saka show that epidemic exposure during an individual’s ‘impressionable years’ of 18 to 25 has a persistent negative effect on trust in political institutions and leaders, especially in democracies. 

    Combined with other evidence that trust is important for limiting the spread of infection, this raises the spectre of a circular, self-reinforcing spiral in which poor public health policy leads to deeper distrust, further undermining the effectiveness of public health policy.


    Simon Burgess                
    16 June 2020

    The Covid-19 pandemic has the potential to have a significant negative impact on the life chances of the millions of children who missed weeks of school due to the lockdown. Focusing on the UK, Simon Burgess suggests a way to repair some of the educational damage using small group tutoring, (four months extra learning) at a modest cost (less than 1% of the schools budget) and on a rapid but feasible timescale (start in October, finish by Easter).

    CHILDCARE DURING A GLOBAL PANDEMIC: Many women left juggling work and childcare, but men do their share when they are not working

    Almudena Sevilla, Sarah Smith                
    16 June 2020

    The closure of schools and nurseries during the current pandemic has led to a huge burden of additional childcare for parents. Writing at Vox, Almudena Sevilla and Sarah Smith use survey data to show that women have borne the majority of this burden and many have been left juggling work and childcare. But fathers have also increased the time they spend on childcare and, when they are not working, there is an equal allocation. 

    THE LOCKDOWN IN EUROPE: Rising inequality and increased poverty 

    Juan C. Palomino, Juan Gabriel Rodríguez, Raquel Sebastian         
    16 June 2020

    A new study by Juan Gabriel Rodríguez and colleagues analyses the capacity of individuals in 29 European countries to work under lockdown and the potential impact of a two-month lockdown on wages and inequality levels. 

    The findings show that there is likely to be substantial and uneven wage losses across the board and poverty will rise. Inequality within countries will worsen, as it will between countries although to a lesser extent. Public policies are needed that alleviate the distributional consequences that the lockdown may otherwise have.


    Sylvain Leduc, Zheng Liu                   
    14 June 2020

    The Covid-19 pandemic has raised concerns about the future of work. The pandemic may become recurrent and necessitate repeated adoptions of social distancing measures, creating substantial uncertainty about worker productivity. 

    Writing at Vox, economists from the Federal Reserve Bank of San Francisco present a theoretical framework suggesting that such job uncertainty reduces aggregate demand and dampens business investment in general. But automation may provide one way for businesses to cope with the uncertainty about worker productivity. It appears that pandemic-induced job uncertainty could stimulate automation investment, despite declines in aggregate demand.


    Fernando Leibovici, Ana Maria Santacreu                  
    14 June 2020

    Writing at Vox, economists from the Federal Reserve Bank of St Louis examine the role of international trade in essential medical goods in exacerbating or mitigating the impact of a pandemic. The effects depend crucially on countries’ trade imbalances in essential medical goods. Net importers of these goods are relatively worse off during a pandemic than net exporters. Although the welfare losses of net importers are lower in a world with high trade barriers, they benefit from reducing barriers once the pandemic arrives.


    Martin Bodenstein, Giancarlo Corsetti, Luca Guerrieri             
    12 June 2020

    Drastic public health measures such as social distancing or lockdowns can reduce the loss of human life by keeping the number of infected individuals from exceeding the capacity of the healthcare system, but they are often criticised because of the social and the economic cost they entail. 

    A new study shows that the high peak of an infection not mitigated by social distancing may cause very large upfront economic costs in terms of output, consumption and investment that are amplified by supply disruptions as workers in essential industries become ill. Social distancing measures can reduce these costs, especially if skewed towards non-essential industries and occupations with tasks that can be performed from home, helping to smooth the surge in infections among workers in the essential sector.


    Graziella Bertocchi, Arcangelo Dimico                  
    12 June 2020

    The Covid-19 outbreak and the murder of George Floyd have dramatically exposed the racial inequalities in US society. Writing at Vox, Graziella Bertocchi and Arcangelo Dimico present research which studies the association between the historical experience of slavery and the African-American family structure.

    The results indicate that the extreme demographic conditions prevailing among slaves on sugar plantations in the US South may have persistently shaped African-American family formation. Over the period 1880-1940, higher sugar suitability is associated with a higher likelihood of single woman headship among black households. The results carry deep ramifications for other related facets of the ‘tangle of pathology’, and in particular for the workings of the US welfare, education and healthcare systems.

    THE COST OF STAYING OPEN: Voluntary social distancing and lockdowns in the United States

    Adam Brzezinski, Valentin Kecht, David Van Dijcke                 
    12 June 2020

    A new study by Valentin Kecht and colleagues argues that the lockdowns in the United States are efficient in minimising the costs of the epidemic, once both the economic and medical burden that would arise in the absence of such policies are considered. 

    Estimates from a controlled SIR model, which includes the possibility for changes in behaviour, suggest that lockdowns reduce the costs of the pandemic by at least 1.7% of annual GDP compared with a no-lockdown scenario.


    Luiz Brotherhood, Philipp Kircher, Cezar Santos, Michèle Tertilt            
    12 June 2020

    Writing at Vox, Michèle Tertilt and colleagues consider two lockdown policies – a stay-at-home order and a test-and-quarantine approach – and their projected effects on deaths and GDP. 

    The findings indicate that adjustments in individual behaviour, especially by the elderly, can save many lives, while lockdown policies targeted at the young prolong the time needed to reach herd immunity and could lead to more deaths in the long run. Testing and quarantining is an effective policy but requires about 10 million tests each week for the United States alone.


    Marco Pagano, Christian Wagner, Josef Zechner     
    11 June 2020

    Will Covid-19 trigger a massive reallocation of capital and labour? A study by Josef Zechner and colleagues shows that asset markets reveal large cross-sectional differences in the repricing of industries before, during, and after the onset of Covid-19. The results show that firms that are more resilient to social distancing significantly outperformed in the six years before and during the outbreak. 

    Looking ahead, stock options imply that investors require significantly lower returns from more pandemic-resilient firms. Governments would be unwise to ignore these signals, directing public financial resources mainly to prop up ailing low-resilience firms.

    COVID-19 AND UK PUBLIC FINANCES: Results from the Centre for Macroeconomics survey 

    Ethan Ilzetzki                  
    11 June 2020


    Reporting on survey analysis from the Centre for Macroeconomics, Ethan Ilzetzki shows that the panel was nearly unanimous that the UK Treasury should not take any action to decrease the deficit in the upcoming budget. The panel is split on when it would be wise to make public announcements about long-run plans to address the deficit and the debt. The majority of the panel supports a mix of financing options when action is taken, with tax increases receiving strong support and not a single panellist supporting public spending cuts.


    Thomas Plümper, Eric Neumayer                
    11 June 2020

    Is Covid-19 a ‘rich man’s disease’, as many citizens in poorer countries believe it to be? A study by Thomas Plümpera and Eric Neumayer reveals how in Germany, infections began with individuals returning from skiing holidays. In the first phase of the pandemic, infection rates were higher in richer areas and lower in more socially deprived districts.

    In the second phase, the ability to socially distance oneself mattered more – an ability that is itself socioeconomically stratified. Richer districts are now seeing fewer new infections, and the initial safety advantage of more socially deprived districts has disappeared. The results indicate that the longer the pandemic lasts, the more the disease becomes socio-economically stratified.

    EXECUTIVE ESCAPE: Executives flee when neighbouring firms pollute

    Ross Levine, Chen Lin, Zigan Wang              
    14 June 2020

    WWriting at Vox, Ross Levine and colleagues examine whether opening toxic pollution-emitting plants affect the career paths of executives at S&P 1500 firms in the United States. The findings show that the opening of such plants triggers substantial increases in executive migration from neighbouring firms. Corporations exposed to toxic emissions from other firms lose talented individuals and suffer stock-price declines. 

    There is ample evidence of the negative effects of pollution on health, with about one in six deaths worldwide attributed to air pollution. But the effect of one firm’s toxic emissions on neighbouring firms’ employees and profits are not known. 

    INFLATION AFTER THE PANDEMIC: Theory and practice

    Charles Goodhart               
    13 June 2020

    The correlation between monetary growth and inflation has an historic pedigree as long as your arm. Writing at Vox, Charles Goodhart argues that rejecting the likelihood of (eventually) rising velocity following the current massive monetary expansion requires an alternative theory of inflation that has successfully eluded all of us thus far. Ignoring the potential inflationary dangers is the equivalent to an ostrich putting its head in the sand, and while the path towards disinflation may be well known, it simply isn’t available today.

    COVID-19: Narrative economics, public policy and mental health

    Annie Tubadji, Don Webber, Frederic Boy                
    10 June 2020

    The general public’s mental health can be affected by different public policy responses to a pandemic threat. Italy, the UK and Sweden implemented distinct approaches to the Covid-19 pandemic: early lockdown, delayed lockdown and no lockdown. 

    Writing at Vox, Annie Tubadji and colleagues show that countries that had a pre-existing culturally relative dispositions towards death-related anxiety and their sensitivity to Covid-19 public policy was country-specific. Further, one country’s lockdown policy can affect another country’s mental health, suggesting that policy-makers should account for this spillover effect.


    Francesca Borgonovi, Elodie Andrieu                  
    10 June 2020

    Examining mobility patterns across US counties between mid-February and mid-May 2020, a study by Francesca Borgonovi and Elodie Andrieu finds that reductions in mobility differed across counties, and that community-level social capital can explain the geographic variations in mobility trends. 

    Individuals reduced mobility earlier and to a higher degree in counties with high levels of social capital. Many counties, particularly in the Southeast United States, may be especially vulnerable to Covid-19, matching low levels of social capital with high rates of chronic disease.


    Kritee Gujral                 
    10 June 2020

    A quarter of all rural hospitals in the United States, most of which are highly essential to their communities, are at high risk of closing. Hospital closures may increase transport time and delay treatment. 

    Drawing on date from hospital closures in California from 1995 to 2011, a study by Kritee Gujral assesses the effects of rural and urban hospital closures on inpatient mortality. The results show that mortality increases after a rural hospital closure not only in the local rural area but in the neighbouring urban areas as well. This adverse effect is larger for Medicaid patients and racial minorities.

    COVID-19 POLICY: A problem in decision-making under uncertainty 

    Charles Manski                  
    12 June 2020

    Formation of Covid-19 policy must cope with many substantial uncertainties about the nature of the disease, the dynamics of the pandemic and behavioural responses. 

    Writing at Vox, Charles Manski argues that instead of making policy that is optimal in hypothetical scenarios but potentially far from optimal in reality, it is more prudent to approach Covid-19 policy as a problem in decision-making under uncertainty. Under ‘adaptive diversification’, a range of policies would be implemented across locations and policy-makers would be able to revise the proportion of locations assigned to each policy as evidence accumulates.

    COVID-19: China's Recovery

    Huang Yiping interviewed by Tim Phillips | 17 June        

    Although coronavirus infection rates have dropped considerably in China and businesses are starting to return to something resembling normality, there is still a high state of alert and outbreaks are treated with an immediate and firm response.
    Huang Yiping, recorded 21 May 2020 at CEPR / LSE IGA / SPP webinar on:
    Recovering from COVID-19 – China and global value chains in the wake of the pandemic

    Covid-19: Who Could Replace China?

    Alicia Garcia-Herrero interviewed by Tim Phillips | 05 June          

    Even pre-Covid-19 there were signs of manufacturing FDI movement away from China.
    Alicia Garcia-Herrero, recorded 21 May 2020 at CEPR / LSE IGA / SPP webinar on:
    Recovering from COVID-19 – China and global value chains in the wake of the pandemic.


    Thomas Philippon interviewed by Tim Phillips, 12 June 2020

    Thomas Philippon's new book argues that in the last 20 years the United States has ‘given up’ on free markets. As a result, he tells Tim Phillips, American families are each $5,000 a year poorer.