This week from CEPR: November 26

Wednesday, November 25, 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


    • DROPS IN CONSUMPTION OVER COVID-19 HAVE INRCEASED HOUSEHOLDS' NET FINANCIAL WEALTH - BUT NOT FOR THE POOREST: Evidence from France       

    CONSUMPTION DYNAMICS IN THE COVID CRISIS: Real Time Insights from French Transaction & Bank Data
    David Bounie, Youssouf Camara, Etienne Fize, John Galbraith, Camille Landais, Chloe Lavest, Tatiana Pazem, Baptiste Savatier      
    CEPR DP No. 15474 | November 2020

    Consumption dropped very severely during the nation-wide lockdown, strongly rebounded over summer and resulted in a significant increase in aggregate households' net financial wealth. However, households in the bottom decile of the income distribution experienced a severe decrease in consumption, a decrease in savings and an increase in debt. These trends are likely to lead to increased inequality. 

    These are the main findings of a new CEPR study by Camille Landais and colleagues, which uses transaction and bank data from France to document the evolution of consumption and savings dynamics since the onset of the Covid-19 pandemic. Among the findings: 

    • Consumption dropped very severely during the nation-wide lockdown but experienced a strong and steady rebound during the Summer, before faltering in late September. 
    • This drop in consumption was met with a significant increase in aggregate households' net financial wealth. 
    • This excess savings is extremely heterogenous across the income distribution: 50% of excess wealth accrued to the top decile. 
    • Households in the bottom decile of the income distribution experienced a severe decrease in consumption, a decrease in savings and an increase in debt. 
    • The study estimates marginal propensities to consume and show that their magnitude is large, especially at the bottom of the income and liquidity distributions.

    Figure 9:  Contribution to the “Excess” Growth in Net Financial Wealth by Deciles of Expenditures in 2019

    Notes: The figure reports the contribution of each decile of pre-crisis expenditures to the excess growth in net financial wealth over the period February to August 2020, computed from the CM data. Excess growth is computed in Figure 3 as the deviation in observed net financial wealth compared to the counterfactual of the 2019 linear trend. It amounts to about €47 billions.


    • DE-GLOBALISATION? Global Value Chains in the Post-COVID-19 Age

    DE-GLOBALISATION? Global Value Chains in the Post-COVID-19 Age
    Pol Antràs         
    CEPR DP No. 15462 | November 2020

    Although the growth of international trade flows relative to that of GDP has slowed down since the Great Recession, there is little evidence indicating that the world economy has already entered an era of de-globalisation. Instead, the observed slowdown in globalisation is a natural sequel to the unsustainable increase in globalisation experienced in the late 1980s, 1990s and early 2000s. 

    These are the main conclusions of a new CEPR paper by Pol Antràs, which evaluates the extent to which the world economy has entered a phase of de-globalisation, and offers thoughts on the future of global value chains in the post-Covid-19 age. The paper offers a description of the mechanisms leading to that earlier expansionary phase, together with a discussion of why these forces might have run out of steam, and of the extent to which they may be reversible. 

    The study highlights that the main challenge for the future of globalisation is institutional and political in nature rather than technological, although new technologies might aggravate the trends in inequality that have created the current political backlash against globalisation. The current health crisis may further darken the future of globalisation if it aggravates policy tensions across countries.

    Chart 1: World Trade over World GDP (1970‐2018)

    Source: World Bank’s World Development Indicators


    • DIFFERENCES IN FINANCIAL KNOWLEDGE MAY LEAD TO INCREASING INEQUALITY OVER A LIFE TIME: Evidence from the United States  

    THE STABILITY AND PREDICTIVE POWER OF FINANCIAL LITERACY: Evidence from Longitudinal Data
    Marco Angrisani, Jeremy Burke, Annamaria Lusardi, Gary Mottola       
    CEPR DP No. 15467 | November 2020

    In developed economies, individuals are being confronted with increasingly complex financial planning and decisions, while having to navigate a financial landscape of sophisticated products. The capability to deal with such complicated financial decisions differs substantially across individuals and groups in the population and subsequently affects financial outcomes, which could lead to increasing inequality over the life course.

    These are the main findings of a new CEPR study by Marco Angrisani, Jeremy Burke, Annamaria Lusardi and Gary Mottola, which investigates the evolution of financial literacy over time, and sheds light on the significant effects of financial knowledge on financial outcomes. Among the findings:  

    • Over a six-year observation period, financial literacy exhibits very limited within-individual variation to be rather stable (approximately half of the sample have the same financial literacy score in both waves), with a slight tendency to decline at older ages, a fact that may reflect cognitive ageing,
    • Importantly, financial literacy is seen to have significant predictive power for future financial outcomes, including household, satisfaction with finances, ability to meet unexpected financial needs, and planning for retirement.
    • Thus, financial literacy matters for financial decision making and financial security in both the short and medium term.
    • This estimated relationship is significantly stronger for older individuals, for women, and for those with lower income than for their counterparts in the study. 

    These findings suggest that differences in the stock of financial knowledge may lead to increasing inequality over the life course, particularly among more disadvantaged and vulnerable groups in the population. 



    REGULATING FINTECH IN EUROPE: Lessons from the collapse of Wirecard and the need for better coordination 

    Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Pozzolo         
    22 November 2020

    The default of Wirecard highlights several problems in the regulation and supervision of Fintech companies, with regulatory holes in investor protection, customer protection, and financial stability. 

    Writing at Vox, Giorgio Barba Navaretti, Giacomo Calzolari and Alberto Pozzolo argue that since Fintech companies can be very complex, their oversight requires understanding their business model and combining regulation and supervision based on both entities and activities. The global reach of Fintechs also calls for better coordination at the European level and beyond.

      

    CHOICE-BASED POLICIES PERPETUATE INEQUALITY: Evidence from health insurance choices in the Netherlands

    Ben Handel, Jonathan Kolstad, Thomas Minten, Johannes Spinnewijn        
    21 November 2020

    Public policies that offer choices to consumers are on the rise, yet not everyone benefits equally from these choices. A study by Ben Handel and colleagues examine health insurance choices in the Netherlands and find that markedly worse choices were made by individuals with lower education levels, in less analytical professions, and with little exposure to high-quality choices made by peers. If these findings apply to other settings, the role of choice-based policies in perpetuating inequality could be substantial.  


    WOMEN ARE EXPERIENCING GREATER JOB LOSS RATES AND TAKING ON MORE HOME RESPONSIBILITIES DURING LOCKDOWN 2.0 

    Claudia Hupkau, Barbara Petrongolo        
    23 November 2020

    The first UK lockdown may have led to positive changes in home organisation, with men and women sharing childcare after school closures, but women are disproportionately affected by the current, second lockdown, finds a study by Claudia Hupkau and Barbara Petrongolo, who show that women are experiencing greater job loss rates and taking on more home responsibilities. 

    HOW COVID-19 IS AFFECTING LONELINESS, HAPPINESS, AND LOVE

    Daniel Hamermesh       
    19 November 2020

    A study by Daniel Hamermesh investigates how the pandemic’s substantial effects on the way people work and live might have altered their feelings of general wellbeing. Time diaries from the US and the UK suggest that married couples compelled to spend more time together during Covid-19 may experience increased happiness, while the crisis could take an emotional toll on unmarried individuals forced to spend more time alone. 


    AS THE COVID-19 VACCINE APPROACHES, PEOPLE LOOK TO SAFEGUARD THEIR HEALTH

    Miltos Makris, Flavio Toxvaerd         
    24 November 2020

    The prospect of an effective Covid-19 vaccine materially alters people’s incentives to safeguard their health until the vaccine arrives, as the vaccine approaches, people may show increasing unwillingness to be socially active, share public spaces, eat out, or to show up at work. This will lead to a complicated transition period to a post-vaccine future that, while difficult, must be judiciously managed.

    These are the findings from a study by Miltos Makris and Flavio Toxvaerd, which examines how the prospect of a Covid-19 vaccine alters individuals’ incentives to self-protect between now and the arrival of the vaccine, and how a benevolent social planner would prefer individuals to self-protect. 


    THE UK HAS EXPERIENCED A SUBSTANTIAL DECLINE IN LABOUR DEMAND SINCE THE BREXIT REFERENDUM

    Beata Javorcik, Ben Kett, Katherine Stapleton, Leyla O'Kane         
    20 November 2020


     

    How has the Brexit vote affected UK labour demand? Writing at Vox, Beata Javorcik and colleagues show that UK regions exposed to the threat of future barriers on professional services exports experienced a substantial decline in the posting of online job adverts after the Brexit vote, relative to less exposed regions. A back-of-the-envelope calculation indicates that this resulted in approximately 1.5 million fewer job adverts posted after the vote than might have occurred otherwise. 

    The Brexit referendum created the threat of a trade policy reversal on an unprecedented scale, with the potential ‘unravelling’ of decades’ worth of deep integration between the UK and the world's most integrated trading bloc. For the UK, it was the threat of barriers on trade in services that mattered the most, rather than the threat of barriers on goods trade, despite the often greater focus on tariffs and goods supply chains during the discourse around the economic impacts of Brexit. 


    LOCKDOWNS AND UK ECONOMIC PERFORMANCE: Results from the latest CfM survey

    Ethan Ilzetzki, Benjamin Moll         
    25 November 2020

    Writing at Vox, Ethan Ilzetzki and Benjamin Moll report on the latest CfM survey. The majority of economists believe lockdowns have caused limited economic damage beyond what the Covid-19 pandemic itself would have caused unabated, and the economic costs of the current lockdown are limited relative to the milder measures employed this summer. 

    Nearly a fifth of the panel believes the UK economy is in fact better off due to lockdowns, beyond the public health benefits of these measures. About a third of respondents believes that no trade-off exists between lives and livelihoods and that health and economic outcomes in fact go hand in hand, especially when better policies are taken into account, a third believes there is a small trade-off, and the remaining third that the trade-off is larger.


    CAN THE EUROPEAN GREEN DEAL WORK? 

    Robert Schlögl, Christoph Schmidt         
    23 November 2020

    The conceptual deficiencies of the European climate policy are becoming ever more transparent – especially its neglect of the systemic nature of the energy system. Writing at Vox, Robert Schlögl and Christoph Schmidt highlight three key elements of a more promising approach to European climate policy: 

    1. establishing a uniform carbon price as its central policy element, 
    2. ending the confusion of objectives and instruments, and 
    3. dropping its naiveté about the repercussions of its own actions on global climate protection. 

    Addressing these issues will be crucial to making the European Green Deal work effectively.


    THE SWORD AND THE WORD: How Allied bombing and propaganda undermined German morale during the Second World War

    Maja Adena, Ruben Enikolopov, Maria Petrova, Hans-Joachim Voth         
    19 November 2020

    In conflicts, adversaries aim for victory by using both direct and indirect forces to break the enemy’s will to resist. During WWII, Allied forces used strategic bombing and radio propaganda to undermine German morale. Writing at Vox, Hans-Joachim Voth and colleagues compare German domestic resistance to the Nazi regime, based on treason trial records, with the monthly volume of bombing and the locations of BBC radio transmitters. 

    They find that where radio reception was better and Allied air forces bombed more heavily, German domestic resistance was markedly more likely, despite the draconian punishments for even the mildest transgressions.


    FINTECH AND BIG TECH CREDIT MARKETS AROUND THE WORLD: Analysis from a new database

    Giulio Cornelli, Jon Frost, Leonardo Gambacorta, Raghavendra Rau, Robert Wardrop, Tania Ziegler      
    20 November 2020

    Fintech and big tech firms are providing increasingly more lending to households and small businesses, as credit markets around the world are undergoing a transformation. Using newly available data, a study by Raghavendra Rau and colleagues estimates that fintech credit flows reached $223 billion in 2019, while big tech credit reached $572 billion. 

    Both forms of credit are larger where there is greater (unmet) demand for credit and where economic and institutional factors favour the supply of such lending. The Covid-19 pandemic undeniably represents an important test for these new business models. 


    DRIVERS OF PRODUCTIVITY EXPANSION AND STAGNATION IN SPAIN OVER THE LAST 170 YEARS SHED LIGHT ON THE CAUSES OF TODAY’S POOR PRODUCTIVITY PERFORMANCE

    Leandro de la Escosura, Joan R. Rosés          
    21 November 2020

    The current productivity slowdown in advanced economies has triggered a lively debate about its causes and remedies. Writing at Vox, Leandro de la Escosura and Joan Rosés take a long-run perspective to study drivers of productivity expansion and stagnation in Spain during the last 170 years. 
     

    The study finds that the productivity slowdown coincided with resource reallocation towards sectors attracting less innovation, with low investment in intangibles and low investment-specific technical change. Obstacles to competition in product and factor markets, subsidies, and cronyism further contributed to capital misallocation, negatively affecting productivity growth.


    STATE-BUILDING IN DEVELOPING COUNTRIES AND THE DEVELOPMENT OF FISCAL CAPACITY: New insights from African data

    Thilo Albers, Morten Jerven, Marvin Suesse           
    22 November 2020

    Why do large differences in tax revenues between states exist and persist? Writing at Vox, Thilo Albers, Morten Jerven and Marvin Suesse introduce a comprehensive new dataset of tax and revenue collection for all African polities from 1900 to 2015 to answer this central question. 

    The results confirm the importance of democratic institutions and political stability, while de-emphasising the role of resource revenues. Overall, states in Africa have been able to build institutions for the collection of ‘hard’ taxes when the preconditions were favourable, especially when access to external finance was limited. These insights add important nuance to established theories of state-building in developing countries.


    RESILIENCE AND FRAGILITY IN GLOBAL BANKING: Impacts on emerging economies

    Marina Conesa Martínez, Giulia Lotti, Andrew Powell         
    20 November 2020

    A study by economists at the Inter-American Development Bank analyses cross-border syndicated lending to emerging and developing countries from 1993 to 2020 and finds evidence of both resilience and fragility in the global financial system. 

    The results show that contagion through co-lenders affected bank lending more strongly before and during the 2008-09 financial crisis but significantly less in a period after the crisis, consistent with the idea that the reduction in network density as a result of the crisis may have increased resilience to ‘normal shocks’. But Covid-19 is clearly no normal shock, and its impacts are likely spreading through the network, affecting the supply of loans to emerging economies.


    MACROPRUDENTIAL RING-FENCING

    Tomáš Konečný, Lukáš Pfeifer        
    19 November 2020

    The financial sector has an essential role to play in addressing the economic fallout from the Covid-19 pandemic. Writing at Vox, Tomáš Konečný and Lukáš Pfeifer discuss the link between financial stability and restrictions on the mobility of capital along national borders of cross-border banking groups in the context of macroprudential capital buffers.

    The authors argue that apart from the direct absorption of systemic shocks, such macroprudential policies also enhance the performance of existing risk-sharing mechanisms, in particular in the case of synchronous shocks in the EU. The ESRB recommendation for restrictions of distributions during the pandemic contributes to the stabilising role of macroprudential capital buffers in the EU.


    A HIGHER PROPORTION OF OLDER TEACHERS IN A SCHOOL HAS A NEGATIVE EFFECT ON PUPIL PERFORMANCE: Evidence from Italy

    Alex Bryson, Lorenzo Corsini, Irene Martelli          
    24 November 2020

    Public spending on education in Italy has been falling for many years, limiting the hiring of new permanent teachers and thus raising the average age of teachers in the country. A study by Alex Bryson, Lorenzo Corsini and Irene Martelli finds that this increased, higher proportion of older teachers in a school has a negative effect on student performance in upper-secondary schools in Tuscany. The government may need to do more to recruit younger cohorts of teachers into permanent posts, preferably through periodic intakes.


    PUBLIC PREFERENCES FOR PRIORITISING A COVID-19 VACCINE: Evidence from Belgium 

    Jeroen Luyten, Roselinde Kessels, Sandy Tubeuf       
    25 November 2020

    Prioritising essential workers, the chronically ill, and older people are the most favourable strategies to distribute the supply of Covid-19 vaccines when they become available, according to survey data investigating people’s preferences regarding the distribution of a Covid-19 vaccine in Belgium. 

    With Covid-19 vaccines on the horizon, the initial supply will not be sufficient to vaccinate everyone and choices will need to made over distribution. Libertarian-inspired approaches (such as highest willingness-to-pay or ‘first-come, first served’) and a strict egalitarian approach (such as a lottery) were clearly the least preferred options according to a study by Jeroen Luyten, Roselinde Kessels and Sandy Tubeuf


    COVID-19, PUBLIC PROCUREMENT REGIMES, AND TRADE POLICY

    Bernard Hoekman, Anirudh Shingal, Varun Eknath, Viktoriya Ereshchenko        
    25 November 2020

    A prominent feature of the public policy response to Covid-19 has been the active use of trade policy instruments to enable access to essential supplies. A study by Bernard Hoekman and colleagues finds the use of export restrictions targeting medical products to be strongly positively correlated with characteristics of prevailing public procurement regimes. 

    Membership of trade agreements encompassing public procurement disciplines is associated with actions to facilitate trade in medical products. These findings suggest that future empirical assessments of trade policy drivers during the pandemic should consider the role of national public procurement systems and deep trade agreements.



    THE SECRET WAR IN LAOS

    Felipe Valencia Caicedo interviewed by Tim Phillips, 20 November 2020

    Laotians are still suffering collateral damage from a covert war that the US waged in the country half a century ago. Felipe Valencia Caicedo tells Tim Phillips about the devastating impact of the bombing of Laos, and how we can help victims of conflict in future.