This week from CEPR: March 18

Thursday, March 18, 2021

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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    BREAKING BAD: How Health Shocks Prompt Crime
    Steffen Andersen, Gianpaolo Parise, Kim Peijnenburg
    CEPR DP No. 15899  | March 2021

    Severe health shocks such as cancer diagnoses could have an impact on our criminal behaviour, new research shows. Data from Denmark shows that cancer shocks elicit an increase in the probability of committing crime by 13%. This is particularly the case for individuals who are financially more at risk before cancer, and the increase in criminal activity is driven by those individuals whose survival probabilities are impacted the most by the health shock and thus face lower expected cost of punishment.

    These are the main findings from a new CEPR study by Steffen Andersen, Gianpaolo Parise and Kim Peijnenburg, which uses data on cancer diagnoses in Denmark to explore whether (and why) affected individuals “break bad”. Among the Findings: 

    • The response is economically significant at both the extensive (first-time criminals) and intensive margin (reoffenders). 
    • Diagnosed individuals seek illegal revenues to compensate for the loss of earnings on the legal labor market. 
    • Cancer patients face lower expected cost of punishment through a lower survival probability. 
    • The documented pattern is stronger for individuals who lack insurance through preexisting wealth, home equity, or marriage. 
    • Welfare programs that alleviate the economic repercussions of health shocks are effective at mitigating the ensuing negative externality on society.

    • COUNTRIES AND PROVINCES MOST AFFECTED BY THE 2008 FINANCIAL CRISIS SUFFERED HIGHER COVID-19 DEATH RATES    

    Misfortunes Never Come Alone: From the Financial Crisis to the Covid-19 Pandemic
    Antonio Moreno Ibáñez, Steven Ongena, Alexia Ventula Veghazy, Alexander F Wagner     
    CEPR DP No. 15900 | March 2021

    The 2007-2009 Great Financial Crisis and 2020-2021 COVID-19 pandemic affected European countries particularly hard, in the process socially and economically challenging households, firms, financial institutions, and policymakers alike. New CEPR research shows that the impact of the financial crisis may have compounded the effects of the COVID-19 pandemic.

    A new CEPR study by Antonio Moreno Ibáñez, Steven Ongena, Alexia Ventula Veghazy and Alexander F Wagner examines the relation between both macroeconomic and financial losses derived from the financial crisis and the health outcomes associated with the first wave of the pandemic. Among the findings: 

    • The initial health response has proved key to fight the coronavirus pandemic. But this response crucially depended on the initial health capacity of the different provinces and countries.
    • Countries and provinces more economically and financially affected by the 2008 crisis experienced significantly more life losses relative to the number of cases.
    • After the 2008 Financial Crisis, costly bank bailouts, SME credit which became more constrained, and bank regulation that became stricter in the wake of the crisis all led to a slowing of economic growth, fiscal consolidation and an accumulation of sovereign debt relative to GDP. 
    • Cuts in public health spending followed. These cuts exacerbated the COVID-19 pandemic severity in terms of higher death rates at impact.
    • At the European level, countries more affected by the financial crisis had more deaths relative to coronavirus cases. 
    • Data from Spain reveals that provinces which lost significantly more output or which saw their debt levels increase more during the 2008 crisis experienced a more significant shortage of curative beds and, in turn, a higher ratio of deaths per cases during the initial COVID outbreak.

    These results show the importance of not diminishing the level public investment in health facilities and personnel during recessions in order to hedge against potentially negative future disease sprouts.


    • UNEQUAL JURY REPRESENTATION HAS SEVERE CONSEQUENCES FOR BLACK DEFENDANTS: Evidence from Texas   

    UNEQUAL JURY REPRESENTATION AND ITS CONSEQUENCES
    Shamena Anwar, Patrick Bayer, Randi Hjalmarsson
    CEPR DP No. 15909 | March 2021

    While the law requires juries to reflect their local communities, new analysis shows that juries, and indeed jury pools, in Harris County, Texas, are highly unrepresentative and that the geographic composition of jurors matters. Black defendants receive much harsher punishments when they face a jury pool with a higher fraction of potential jurors from the most over-represented neighbourhoods. Simulating outcomes under fair representation implies that the current unequal jury representation doubles the median sentence length for Black defendants and more than triples their likelihood of receiving a life sentence when eligible.

    A new CEPR study by Shamena Anwar, Patrick Bayer and Randi Hjalmarsson bring together in a single study, for the first time in the literature, analyses of both jury representation and its causal effect on trial outcomes to estimate the extent and consequences of unequal representation on juries in Harris County, Texas. Among the findings: 

    • Residents from predominantly white and high-income neighbourhoods are substantially over-represented on juries. The vast majority of the variation in representation on seated juries is already reflected in the pool of potential jurors. 
    • Black defendants are more likely to be convicted and receive longer sentences from juries with more residents from these over-represented neighbourhoods. 
    • Equal representation would reduce Black defendants' median sentence length by 50% and the probability of receiving a life sentence by 67%. 
    • A straightforward way to ensure a balanced distribution of jurors across neighbourhoods would be to oversample residents from under-represented neighbourhoods in calls for jury duty, so that jury panels properly reflect the community.

    Addressing the unrepresentativeness of jury pools can have important consequences for fairness far beyond what happens in jury trials.



    UNWINDING COVID SUPPORT MEASURES FOR BANKS: Clear and timely communication is crucial

    Thorsten Beck, Elena Carletti, Brunella Bruno           
    17 March 2021

    The combined effect of the measures implemented to maintain banks’ ability to provide funds during the Covid crisis created a virtuous circle between corporates, banks, and sovereigns, avoiding a funding crunch for either and keeping risk premiums at deflated levels. However, it also created the basis for possible increased systemic risk in the future. Writing at Vox, Thorsten Beck, Elena Carletti and Brunella Bruno argues that the exit strategy from the various support measures must be carefully designed and coordinated, as well as communicated in a clear and timely manner. This would provide banks with sufficient time and space to manoeuvre, and enable market participants (investors, market analysts, and rating agencies) to take action accordingly.

     

    WORKING FROM HOME IS REVOLUTIONISING THE UK LABOUR MARKET

    Shivani Taneja, Paul Mizen, Nicholas Bloom                     
    15 March 2021

    Results from a survey of 5,000 working adults in the UK in early 2021 shows that about half of the UK labour force are currently working from home. Two days a week at home is the most commonly expected working pattern post-COVID, with implications for many large and medium-sized businesses.

    Writing at Vox, Shivani Taneja, Paul Mizen and Nicholas Bloom suggest that even though in the UK some uncertainty remains over the timeline of the returning to workplaces, it seems certain that many workers will continue to work from home long after the end of the pandemic. 


    COVID CRISIS LIKELY TO HAVE LONG-TERM IMPACTS ON CONSUMER DEMAND 

    Ulrike Malmendier, Leslie Sheng Shen                 
    15 March 2021

    A study by Ulrike Malmendier and Leslie Sheng Shen argues that economic downturns ‘scar’ consumers in the long run. Consumers who have lived through times of high unemployment remain pessimistic about the future financial situation, spend less in future years, and accumulate more savings, controlling for income, wealth, and employment.  


    WORKING FROM HOME IS FAR LESS PRODUCTIVE FOR EMPLOYEES: Evidence from Japan

    Masayuki Morikawa                  
    12 March 2021

    Firm survey data shows that work from home (WFH) in Japan has varied widely across industries and has resulted in lower productivity during the pandemic. On average 10.9% of workplace hours have been replaced by WFH, and WFH is 68.3% as productive.

    A study by Masayuki Morikawa shows that the overall contribution of working from home to labour input is surprisingly small. Even where firms adopted the practice, many employees did not exploit it; and even those who did work from home did not necessarily do so throughout the week. 


    THE MARKET-IMPLIED EFFECTS OF THE BIDEN STIMULUS AND THE FED’S NEW POLICY FRAMEWORK

    Gavin Goy, Meilina Hoogland, Annelie Petersen                     
    15 March 2021

    On the back of fiscal accommodation, a rebounding economy, and the Federal Reserve’s newfound tolerance for inflation overshoots, market-based inflation measures have surged, triggering concerns of an overheating of the US economy.

    By decomposing recent yield curve movements, a study by Gavin Goy, Meilina Hoogland, Annelie Petersen shows that the steepening of the US Treasury curve corresponds with higher real term premia and a boost in both inflation expectations and the inflation risk premium. Lower real rate expectations suggest that markets do not yet expect the Fed to lean against the fiscal expansion. Simultaneously, the width of the distribution suggests that markets are relatively uncertain about the exact degree of overshooting the Fed will allow before stepping in. 


    THE CASE FOR CREATING EXCESS CAPACITY AT THE US FOOD AND DRUG ADMINISTRATION

    Lauren Cohen, Umit Gurun, Danielle Li               
    14 March 2021


     

    Covid-19 has revealed the importance of quick, efficient but safe medical innovation. Analysis by Lauren Cohen, Umit Gurun and Danielle Li on the impact of informal deadlines in the drugs market, finds that such regulatory pressures can end up distorting product safety and marketability. The findings highlight the need for well-designed regulatory systems which allow medical innovators to move swiftly but safely during the next health shock.


    WHY THE GOOGLE-FITBIT DECISION WAS CORRECT

    Pierre Régibeau               
    13 March 2021

    Writing at Vox, Pierre Régibeau argues that the European Commission’s approval of the acquisition of Fitbit by Alphabet was appropriate, addressing four main concerns; Wearables; Online Avertising; Digital Health; and Privacy. In the authors’ view, the suggested theories of harm have either been remedied or are not supported by evidence to the requisite legal standard.


    LAND IS BACK – IT SHOULD BE TAXED, IT CAN BE TAXED

    Odran Bonnet, Guillaume Chapelle, Alain Trannoy, Étienne Wasmer                    
    16 March 2021

    Housing wealth is now between two and four times as large as GDP in many Western economies. Writing at Vox, Odran Bonnet, Guillaume Chapelle, Alain Trannoy and Étienne Wasmer describe their study which reintroduces land and housing structures to the theory of optimal taxation, and finds that first-best taxation is achieved through a property tax on land and requires no tax on capital. Even absent land taxes, one can tax land indirectly and reach a Ramsey second best still with no tax on capital and positive housing rent taxes in the steady state. 


    TACKLING THE DANGEROUS NEXUS BETWEEN CLIMATE AND DEBT 

    Avinash Persaud                     
    17 March 2021

    For the countries on the frontline in the war against climate change, there is a nasty nexus between climate change and debt. The cost of environmental damage, the loss of revenues from a natural disaster, and the high price of building back better all contribute to higher debt. Writing at Vox, Avinash Persaud proposes three ways to break this climate–debt nexus: 

    1. Redistribute special drawing rights using a new classification of vulnerability. 
    2. Incorporate natural disaster clauses into multilateral development banks’ lending arrangements.
    3. Use the unused special drawing rights of the world’s strongest countries to recapitalise regional development banks to finance resilience in the vulnerable countries without adding to their debt.


    WORKING FROM HOME IN DEVELOPING COUNTRIES

    Charles Gottlieb, Jan Grobovšek, Markus Poschke, Fernando Saltiel            
    18 March 2021

    A study by Charles Gottlieb, Jan Grobovšek, Markus Poschke and Fernando Saltiel measures the ability to work from home in low- and middle-income countries. It finds that fewer than 10% of urban jobs in developing countries can be done remotely, and in particular workers in low-wage occupations and the self-employed have fewer opportunities to work from home. These results indicate that the low WFH ability in developing countries is driven not only by occupational composition, but also by the nature of tasks within occupations.


    PROHIBITION’S REPEAL AND ITS UNINTENDED IMPACT ON PUBLIC HEALTH: Lessons for future legalisation policies? 

    David Jacks, Krishna Pendakur, Hitoshi Shigeoka               
    16 March 2021

    The year 2020 marked the centenary of Prohibition. Writing at Vox, David Jacks, Krishna Pendakur and Hitoshi Shigeoka present new research suggesting that a substantial increase in infant mortality followed the repeal of Prohibition in the 1930s – an unanticipated, negative health outcome worth considering as debates resume over the legalisation of cannabis and other drugs.


    INCOME INEQUALITY WITHIN INDIA REMAINS LARGE, DESPITE GROWTH MIRACLE 

    Sriram Balasubramanian, Rishabh Kumar, Prakash Loungani                   
    12 March 2021

    India has seen a four-fold increase in average incomes since 1990, which has lowered the share of the population living in absolute poverty from 45% to 20% and improved the lot of 130 million people. But while most segments of society have shared in this remarkable performance, inequality in incomes within India remains large.

    Writing at Vox, IMF economists argue that increased attention to mitigating urban–rural and inter-state income and opportunity differentials – leveraging the digital technology in which the country excels – would be a prudent investment to help sustain growth.


    TECHNOLOGY, LABOUR MARKET INSTITUTIONS, AND EARLY RETIREMENT

    Naomitsu Yashiro, Tomi Kyyrä, Hyunjeong Hwang, Juha Tuomala                   
    12 March 2021

    A study by OECD economists uses data from Norway to examine how technological change and access to early retirement pathways reinforce each other in pushing older workers out of employment.

    It finds that the probability of leaving employment is higher for individuals in occupations with higher automation risks and increases faster for individuals closer to the eligible age for early retirement pathways. Reforms that tighten access to such pathways substantially extend the working lives of older workers exposed to high automation risks, but have little effect on old workers exposed to low automation risks.



    Cheaper cities and costly suburbs: how COVID-19 has changed the cost of real estate

    Stijn Van Nieuwerburgh, 16 March 2021

    Stijn Van Nieuwerburgh talks to Tim Phillips about research on the impact of the COVID-19 pandemic on real estate markets in the US, where sizable enough changes in rent and price gradients have been documented to suggest that urban residents are fleeing city centres for the suburbs. Limits placed on city amenities combined with expanding opportunities to work from home have reduced the premium on urban living.



    EXPORTING POLLUTION

    Itzhak Ben-David interviewed by Tim Phillips05 March 2021

    Anti-pollution laws penalise firms whose activities emit CO2. Itzhak Ben-David tells Tim Phillips that well-intentioned regulation may be causing multinationals to shunt polluting activities to poorer countries where regulation isn’t so strict.