This week from CEPR: November 21st

Thursday, November 21, 2019

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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    Gino Gancia, Giacomo AM Ponzetto, Jaume Ventura   
    CEPR DP No. 14121 | 15 November

    After decades of successful growth, economic unions have recently become the focus of heightened political controversy. This is due to differences in economic size and factor endowments that can trigger disagreement over the value of unions between and within countries, as well as the growth of trade between countries that are increasingly dissimilar. 

    These are the conclusions of a new CEPR study by Gino Gancia, Giacomo Ponzetto and Jaume Ventura, who have developed a theoretical framework to study the effects on trade, income distribution and welfare of economic unions that differ in size and scope. Among the findings:

    • Political support for international unions can grow with their breadth and depth, as long as member countries are sufficiently similar. 
    • But support for international unions can become weaker as member countries become more dissimilar in terms of economic size and factor endowments. 
    • An intra-union pattern of comparative advantage due to differences in endowments increases the value of the union but it also creates winners and losers. This redistribution may undermine support for the union even when the country as a whole would benefit from membership. 
    • Differences in economic size imply that in the presence of any cost of integration, larger economies would prefer a shallow union, while smaller ones prefer deeper integration.
    • If disagreement over the value of a union is between winners and losers within countries, domestic redistribution may suffice to solve it.
    • It is possible that some countries lose as a whole from further integration. If then the disagreement is between countries that differ in size and income, solving it requires some form of international redistribution. This may be more difficult to achieve, given that such policies tend to be politically costly and hard to implement.
    • Despite the prominence of migration in media and political narratives, in 2017 only 3.3% of EU citizens were living in a country other than their country of citizenship – very small numbers. In contrast, intra-EU trade in goods (19.6%) and services (7.4%) add up to 27% of the total GDP of the European Union – which are not small numbers. Clearly, we still live in a world in which trade in goods and services is quantitatively more important than migration.

    The expansion of the World Trade Organisation (WTO) from 23 to 164 countries, the enlargement of the European Union, especially after 2004, the rise of China and the emergence of global supply chains have all fostered trade between an increasingly diverse set of countries. While all these phenomena raise the potential gains from trade, this study shows that they may also undermine the political support for the process of economic integration.

    Figure 1: Perceived benefits from EU membership. 

     

    Notes: Shares of responses to the question: “Taking everything into consideration, would you say that (your country) has on balance benefited or not from being a member of the European Union?” Source: Eurobarometer. 


    • THE METHANE FOOTPRINT OF NATIONS: An 18% global increase between 1997 and 2014

    THE METHANE FOOTPRINT OF NATIONS: Stylized facts from a global panel dataset
    Octavio Fernández-Amador, Joseph Francois, Doris Oberdabernig, Patrick Tomberger     
    CEPR DP No. 14125 | 16 November

    A new CEPR study by Joseph Francois and colleagues analyses the methane footprint of nations derived from production, supply use (final production) and consumption activities for the period 1997-2014. The study finds that man-made methane emissions are quantitatively important for global warming and increased by about 18% between 1997 and 2014. Among the findings: 

    • The bulk of produced emissions is attributable to developing economies. 
    • Although a considerable amount is exported mainly via manufactured goods to high-income countries, which are net importers of methane. 
    • Trade-embodied emissions increased by 8% more than nationally produced emissions over the period 1997-2014, with the strongest increases in China, India and Indonesia. 
    • Decompositions of the growth rate of emissions over this period suggest that methane efficiency improved but that it was outweighed by the effect of economic and population growth in low- and middle-income countries. 
    • In high-income countries, methane efficiency gains outweighed the effect of economic and population growth.
    • In contrast to CO2, the bulk of methane emissions originates from a few economic sectors: livestock breeding; rice cultivation; extraction and transport of fossil fuels; and waste management.

    A growing world population will further raise the demand for food on a global scale. Provided that developing countries continue growing by expanding their primary sector activities to meet this demand, methane emissions will increase unless considerable gains in methane efficiency counteract the effect of increasing demand.

    Figure 3: Percentage change of GHG emissions (CO2 and CH4) using different GWPs (2014).  

    Source: Data on CO2 emissions are based on Fernandez-Amador et al. (2016).
    Notes: The figure shows the percentage change in GHG emissions from production (measured as CO2 equivalents of CO2 and CH4) when GWP20 is used instead of GWP100 to convert emissions to a common scale, as compared to the global average change in 2014. Red shades indicate an increase in emissions above the global average of 46.6%, blue shades indicate an increase in emissions below the global average of 46.6%. Some countries in the map form part of composite regions (see Table A.1 in Appendix A); the values for these countries are based on emissions data for the composite regions.


    • DO ANY ECONOMISTS HAVE SUPERIOR FORECASTING SKILLS?   

    SCHOOL TRACKING AND MENTAL HEALTH
    Ritong Qu, Allan Timmermann, Yinchu Zhu   
    CEPR DP No. 14112 | 12 November

    Analysis of a large set of Bloomberg survey forecasts of US economic data show that, overall, there is very little evidence of economists with superior forecasting skills.

    That is the conclusion of a new CEPR study by Ritong Qu, Allan Timmermann and Yinchu Zhu, who have developed new methods for identifying superior forecasting skills in settings with many forecasters, outcome variables, and time periods.

    The study examines whether any economists had superior forecasting skills for any variables or at any point in time while carefully controlling for the role of ‘luck’ which can give rise to false discoveries when large numbers of forecasts are evaluated. 

    The results reveal a paucity of evidence that any individual economic forecasters can beat a simple equal-weighted average of peer-group forecasts. The authors conclude that this does not suggest that economic forecasters are unskilled, as for many variables, economic forecasters are able to beat simple, robust statistical forecasts.



    THE UNEMPLOYMENT EFFECTS OF TRUMP’S PROTECTIONIST POLICIES

    Céline Carrère, Anja Grujovic, Frédéric Robert-Nicoud       
    13 November 2019

    Repealing The North American Free Trade Agreement (NAFTA) and the imposition of 20% bilateral tariffs between the United States and Mexico in all sectors would reduce living standards for US citizens by 0.31% and by 6.6% in Mexico. 

    These are among the findings of a new study by Céline Carrère, Anja Grujovic and Frédéric Robert-Nicoud. They show that an increase in US trade barriers to imports of motor vehicles from all countries bar Mexico and Canada would lead to a decrease in long-run welfare and employment in both Mexico and the United States, as well as in major car-producing countries. 


    RAISING R&D SPENDING IS NO LONGER SUFFICIENT TO FOSTER ECONOMIC GROWTH

    Tsutomu Miyagawa, Takayuki Ishikawa       
    13 November 2019

    Following the Global Crisis, some countries increased expenditures on research and development (R&D) to address secular stagnation. A new study by Tsutomu Miyagawa and Takayuki Ishikawa investigates how successful this rise in R&D scale was in supporting productivity growth in Japan and other advanced economies. 

    The research shows that R&D efficiency has declined in many of these countries in the past decade, compared with the preceding ten years. The findings suggest that increasing R&D spending is not enough to foster growth, and that countries need to do more to support innovation and collaboration in carefully chosen sectors.


    SUPPLIER NETWORKS WERE KEY TO WARTIME PRODUCTION OF AIRCRAFT IN JAPAN

    Tetsuji Okazaki       
    13 November 2019

    The key to Japan’s substantial increase in aircraft production during the Second World War was the efficient expansion of its supplier network, according to a new study by Tetsuji Okazaki. This ‘production miracle’ was achieved by centralising on an aircraft manufacturing plant of Mitsubishi Heavy Industries Co., one of the two largest aircraft producers in Japan. 

    Mitsubishi Heavy Industries organised many suppliers to provide aircraft parts to its plants. But in the final stages of the war, destruction of the supplier network by strategic bombing and an earthquake caused the collapse of the company’s aircraft production. 

    This column is part of the VoxEU debate on the Economics of WWII: Eighty years on


    ECONOMIC WARFARE: Insights from Mançur Olson

    Mark Harrison       
    14 November 2019

    Economic warfare was widely used in the Second World War. When one country blockaded another’s supply of essential goods or bombed the industries producing them, why did the adversary’s economy fail to collapse? 

    Mark Harrison reviews Mançur Olson’s insights, which arose from the elementary economic concept of substitution. Olson concluded that there are no essential goods; there are only essential uses, which can generally be supplied in many ways. Harrison argues that economic sanctions may not ultimately save soldiers’ lives. They may achieve their goals only when backed up by the credible threat or use of superior fighting power. 

    This column is part of the VoxEU debate on the Economics of WWII: Eighty years on


    THE REAL EFFECTS OF MONEY SUPPLY SHOCKS: Evidence from maritime disasters in the Spanish Empire

    Adam Brzezinski, Yao Chen, Nuno Palma, Felix Ward        
    14 November 2019

    The Spanish Empire’s money supply was directly affected by maritime disasters involving silver shipments from its American colonies during the 16th to 19th centuries. A 1 percentage point reduction in the money growth rate caused a 1.3% drop in real output that persisted for several years.

    These are the conclusions of a new study by Nuno Palma and colleagues, who analyse monetary transmission channels to show that price rigidities and credit frictions account for most of this non-neutrality result.


    THE POLITICS OF DISTRACTION: Four decades of US presidents have used big events to bury bad news

    Ruben Durante, Milena Djourelova        
    17 November 2019


     

    US presidents tend to issue executive orders, especially those that are more likely to generate negative publicity, in coincidence with other important events that distract the media and the public. 

    These are the findings of a new study by Ruben Durante and Milena Djourelova, who argue that even if the media is not politically biased, the strategic behaviour of politicians limits its role as a watchdog. Ultimately, this undermines political accountability.


    INSTITUTIONAL CHANGE AND DEVELOPMENT CAN HELP LAGGING REGIONS IN EUROPE

    Andrés Rodríguez-Pose, Tobias Ketterer      
    18 November 2019

    Government quality matters for regional growth, and relative improvements in the quality of government are a powerful driver of development. These are among the conclusions of a new study by Andrés Rodríguez-Pose and Tobias Ketterer, who analyse data from European regions for the period 1999-2013, to show that institutions are an important ingredient for economic growth.  

    According to the authors, ‘one-size-fits-all’ policies for lagging European regions are not the solution. Low-growth regions in Southern Europe stand to benefit the most from improvements in government quality. In low-income regions in Central and Eastern Europe, investments in the traditional drivers of growth – such as infrastructure – remain important.


    THE TWO-MARGIN PROBLEM IN INSURANCE MARKETS

    Michael Geruso, Timothy J. Layton, Grace McCormack, Mark Shepard       
    16 November 2019

    Sickly consumers tend to exhibit higher demand for health insurance, which drives up costs. Writing at Vox, Michael Geruso and colleagues argue that this adverse selection takes place along two margins: whether to buy insurance at all; and how much coverage to buy. 

    The authors develop a new framework that incorporates both selection margins and shows that policies aimed at addressing one margin can often exacerbate selection along the other. They conclude that it is therefore vital for optimal policy to consider both margins simultaneously. 


    HOW HOUSEHOLDS FORM EXPECTATIONS ABOUT INFLATION: Not, it seems, in the way that policy-makers assume they do

    Francesco D'Acunto, Ulrike Malmendier, Michael Weber      
    15 November 2019

    Households guess what inflation will be using the prices of things they buy frequently, which is not the way that central bank analysis typically assumes that they do it. The difference may be causing policy mistakes.

    These are among the conclusions of a new study by Francesco D'Acunto, Ulrike Malmendier, Michael Weber who test the conjecture of Nobel laureate Robert Lucas that the price changes that households observe, rather than all price changes, drive their expectations about inflation. A measure of individual household consumption weighted by the frequency of purchase is a statistically and economically significant driver of households' expectations. This challenges the modelling assumptions that central bank policy-makers currently make.


    THE DANGERS OF HAVING TOO MUCH DATA

    Daron Acemoğlu, Ali Makhdoumi, Azarakhsh Malekian, Asuman Ozdaglar       
    18 November 2019

    The Cambridge Analytica scandal has highlighted the sophisticated ways in which social media platforms can allow companies to infer information about users and non-users from shared data. 

    Writing at Vox, Daron Acemoğlu and colleagues show how correlations between platform users’ and non-users’ characteristics mean that companies can obtain data at below equilibrium prices, implying welfare inefficiencies for individuals. The authors make some suggestions for regulations that could improve on these data-sharing inefficiencies for users and non-users of the platforms.



    THE GREAT EXPECTATIONS OF THE MIDDLE CLASS 

    Jeffrey Chwieroth, Andrew Walter interviewed by Tim Phillips, 15 November 2019

    When there's a financial crisis, policy-makers and politicians increasingly kowtow to the demands of an influential group: the global middle class. Jeffrey Chwieroth and Andrew Walter tell Tim Phillips how their ‘Great Expectations’ are destabilising the world economy.



    WHAT HAPPENED TO THE RATIONALITY OF THE ANGLO-SAXON WORLD?

    Mario Monti, 22 September 2017

    The Anglo-Saxons have long been admired for their sense of rationality and pragmatism, says former Italian prime minister Mario Monti in this short film. But recent political events in the UK and the United States have completely changed the situation. This video was recorded at the ‘10 years after the crisis’ conference held in London, on 22 September 2017.