This week from CEPR: October 28
Wednesday, October 28, 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
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MACROECONOMIC OUTCOMES AND COVID-19: A Global Progress Report
MACROECONOMIC OUTCOMES AND COVID-19: A progress report
Jesús Fernández-Villaverde, Charles I Jones
CEPR DP No. 15393 | October 2020
A new CEPR paper by Jesús Fernández-Villaverde and Charles Jones uses data on GDP, unemployment, and Google's Covid-19 Community Mobility Reports with data on deaths from Covid-19 to study the macroeconomic outcomes of the pandemic. The study draws on global data at the country level as well as results for individual US states and key cities throughout the world.
The results show that most countries/regions/cities fall in either of two groups: large GDP losses and high fatality rates (New York City, Lombardy, United Kingdom,..) or low GDP losses and low fatality rates (Germany, Norway, Kentucky, ...). Only a few exceptions, mainly California and Sweden, depart from this pattern.
Through a combination of government mandates and voluntary changes in behaviour, those areas that suffered high mortality reduced economic activity dramatically to lower social contacts and slow down the pandemic’s spread. In comparison, those locations that were able to control the virus from the beginning could maintain economic activity and suffer fewer deaths. This suggests that controlling the epidemic is vital to mitigating GDP losses.
New York City, Lombardy, the United Kingdom, and Madrid have many deaths and large macroeconomic losses. Some combination of bad luck and policy mistakes is likely responsible for the poor performance on both dimensions. These locations were unlucky to be hit relatively early in the pandemic, which also meant that communities often did not take appropriate measures in nursing homes and care facilities to ensure that the most susceptible were adequately protected and that the medical protocols at hospitals were less well developed.
Covid-19 additionally has policy spillovers, both in terms of health and economic outcomes. Had Italy controlled its epidemic earlier, France and Germany might have suffered a milder crisis. And if China had not undertaken draconian measures in Wuhan, South Korea might look very different today.
These findings suggest where to look for more in-depth lessons. For example, China, Taiwan, and South Korea focused early on non-pharmaceutical interventions (NPIs) such as widespread use of masks, protection of the elderly, better indoor ventilation, limited indoor contact, and widespread testing and quarantine.
Figure 1: Summary of the Trade-off Evidence
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THE LARGE ECONOMIC COSTS OF POPULISM: Lessons from the past
POPULIST LEADERS AND THE ECONOMY
Manuel Funke, Moritz Schularick, Christoph Trebesch
CEPR DP No. 15405 | October 2020
What economic consequences can we expect from the global surge of populist politics in recent years? How do economies fare under populist rule in the short and medium run? A new CEPR study by Manuel Funke, Moritz Schularick and Christoph Trebesch introduces a new cross-country database identifying 50 populist presidents and prime ministers between 1900-2018 to study their economic performance and find that the economic cost of populism is high. Among the findings:
- Populism at the level of central governments reached an all-time high in 2018, following a 30-year secular trend increase. Many populists are successful at surviving in office and shape their country’s political fate for a decade or more.
- After 15 years, GDP per capita is more than 10% lower compared to a plausible non-populist counterfactual.
- Rising economic nationalism and protectionism, unsustainable macroeconomic policies, and institutional decay under populist rule do lasting damage to the economy.
- Import tariffs rise on average ten percentage points compared to the non-populist counterfactual.
- Populists typically deliver on their promises of fostering economic nationalism and protectionism, but with high costs.
- The results show significant medium- and long-term economic costs of populism, and find no decline in income inequality.
- The decline in GDP growth in history (pre-1990) is driven by left-wing populists that emphasise distributional and social issues, while in recent decades it is increasingly driven by right-wing populists whose rhetoric typically focuses on cultural and religious topics. A clear result is that both variants of populism are equally bad for the economy.
- Declining economic fortunes under populists hold regardless of region, era, or ideology.
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NATIONWIDE STAY-HOME POLICIES SAVED A SUBSTANTIAL NUMBER OF LIVES DURING THE FIRST WAVE OF THE PANDEMIC: New evidence from Spain
EVALUATING THE EFFECTIVENESS OF POLICIES AGAINST A PANDEMIC
Christian Alemán, Christopher Busch, Alexander Ludwig, Raül Santaeulàlia-Llopis
CEPR DP No. 15390 | October 2020
Nationwide lockdowns have constrained the ability to identify the effects of nonpharmaceutical Covid-19 public health policies, as there is limited cross-regional variation at the time of policy implementation.
A new CEPR study by Christian Alemán, Christopher Busch, Alexander Ludwig and Raül Santaeulàlia-Llopis overcomes this challenge by developing a new approach of evaluating the success of policies, which normalises the time, speed and magnitude of the epidemic paths across regions. The essence of this approach is the insight that epidemic dynamics are best tracked over stages, rather than over time. The authors then apply this model to Spain. Among the findings:
- Stay-home policy saved 15.9% of lives relative to the number of deaths that would have occurred had it not been for the stay-home policy intervention.
- Its effectiveness evolves with the epidemic and is larger when implemented at earlier stages. The drop in policy effectiveness occurs rapidly - dropping by three fourths in a matter of a week.
- Regions for which the stay-home policy was implemented at earlier stages show larger policy effectiveness than regions for which the policy was implemented at later stages.
EUROPEANS KNOW AND ACT ON WHO RECOMMENDATIONS DURING COVID-19Nirosha Elsem Varghese, Iryna Sabat, Sebastian Neumann-Böhme, Jonas Schreyögg, Tom Stargardt, Aleksandra Torbica, Job van Exel, Pedro Barros, Werner Brouwer |
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How familiar and compliant were Europeans with recommendations from the WHO to protect the public from Covid-19? Using data from 7,000 respondents across seven European countries conducted in April 2020, a study by Werner Brouwer and colleagues finds that information from WHO in the context of Covid-19 was well trusted and largely followed, with heterogeneities by recommendation type, country, and individual level characteristics such as region, age, gender, and education. |
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POST-COVID-19 EXIT STRATEGIES AND ECONOMIC CHALLENGES FOR EMERGING MARKETSJoshua Aizenman, Hiro Ito |
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A study by Joshua Aizenman and Hiro Ito outlines two different exit strategies for the United States from the Covid-related debt-overhang and analyses their implications for emerging markets and global stability:
The post-WWII success story illustrates the feasibility of, and gains from, a two-pronged fiscal strategy. |
A (VERY) SHORT HISTORY OF THE IDEA OF ENDING POVERTYMartin Ravallion |
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At times, ‘ending poverty’ may seem to be nothing more than a ‘symbolic’ goal, with little done to achieve the aim. Writing at Vox, Martin Ravallion provides a short history of the idea of ending poverty as a ‘motivational’ goal, from the intellectual germ of the modern idea of distributive justice in the late 18th century to the UN’s first Sustainable Development Goal of ending “extreme poverty” globally by 2030. He argues that the path to attaining the United Nation’s Sustainable Development Goal (SDG1) calls for some combination of economic growth, especially when fuelled by pro-poor technical progress, and pro-poor redistribution, but huge challenges lie ahead in how to manage the likely tradeoffs between the ‘social’ and ‘environmental’ SDGs. |
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SHIPWRECKED BY RENTS: The curse of the Manila GalleonsFernando Arteaga, Desiree Desierto, Mark Koyama |
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The Spanish Crown had a monopoly on the trade route between Manila and Mexico for more than 250 years. The ships that sailed this route were “the richest ships in all the oceans”, but much of the wealth sank at sea and remain undiscovered. A study by Fernando Arteaga, Desiree Desierto and Mark Koyama use a newly constructed dataset of all of the ships that travelled the route to show how monopoly rents that allowed widespread bribe-taking would have led to overloading and late ship departure, thereby increasing the probability of shipwreck. Not only were late and overloaded ships more likely to experience shipwrecks or to return to port, but the effect is stronger for galleons carrying more valuable, higher-rent cargo. This sheds new light on the costs of rent-seeking in European colonial empires. |
FIRM-LEVEL STOCK PRICE REACTIONS TO PANDEMIC NEWSSteven Davis, Stephen Hansen, Cristhian Seminario-Amez |
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A new study by Steven Davis, Stephen Hansen and Cristhian Seminario-Amez examines the behaviour of the stock market in the early stages of the pandemic to illustrate the vast differences in firm-level outcomes, in both positive and negative directions, associated with the arrival of Covid-19. The results show that on days with large pandemic-related market moves, there is enormous dispersion in firm-level returns. Using firms’ pre-pandemic regulatory filings, which describe sources of future earnings risk, the findings uncover dozens of relevant risks associated with lower or higher returns, including direct exposure to social distancing and indirect effects arising from substitution effects and supply-chain linkages. What is clear from this analysis is that that the economic impact of Covid-19 will stretch far beyond the most obviously exposed sectors and firms. |
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WHY WE SHOULD INVEST IN SOFT SKILLS: Evidence from ColombiaFelipe Barrera-Osorio, Adriana Kugler, Mikko Silliman |
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Can vocational training programmes succeed in improving the labour market outcomes? A study by Felipe Barrera-Osorio, Adriana Kugler and Mikko Silliman uses data from Colombia to test whether technical and/or soft skills can sustain the returns from vocational programmes. The results show large and persistent positive effects of training on employment and wages. In addition, an emphasis on technical skills increases short-term outcomes, while soft skills training improves labour market dynamics in the long run. Finally, resource constraints may be an important obstacle for obtaining such training, particularly for lower-income households. |
HOW LAWS AFFECT THE PERCEPTION OF SOCIAL NORMS: Lessons from the Covid lockdownRoberto Galbiati, Emeric Henry, Nicolas Jacquemet, Max Lobeck |
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The UK's March lockdown announcement significantly raised the likelihood that people believed their compatriots took a positive view of staying at home, closing shops and not going to social gatherings, according to new research by Roberto Galbiati, Emeric Henry, Nicolas Jacquemet and Max Lobeck, who show that the introduction of the new laws affected the perception of social norms regarding the various containment measures – that is, what people thought the prevalent norms were. These results imply that the design of laws should take into account their effect on the perceived norm: people will not only react to the newly implemented material incentives, but will also internalise the norm expressed by the law. |
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SELF-PREFERENCING BY GATEKEEPER PLATFORMS: Implications for digital regulationJorge Padilla, Joe Perkins, Salvatore Piccolo |
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Alleged market abuse by technology firms with large bases of loyal customers has become a pressing policy concern. Writing at Vox, Jorge Padilla, Joe Perkins and Salvatore Piccolo argue that significant consumer harm can result from the attempts of these ‘gatekeeper platforms’ to gain revenue from their installed bases of platform users at the expense of third-party firms offering complementary services. The authors suggest possible ways forward for competition authorities currently considering new regulation of digital markets. |
WHAT IS IMPORTANT TO ACHEIVING INCLUSIVE GROWTH?João Tovar Jalles, Luiz de Mello |
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What is important to achieving inclusive growth (increases in GDP per capita without a concomitant deterioration in the interpersonal distribution of income)? A study by João Tovar Jalles and Luiz de Mello show that These episodes are more likely to occur where human capital is high, tax-benefit systems are more redistributive, productivity grows more rapidly, and labour force participation is high. Trade openness and a range of institutional factors, including political system durability and electoral regimes, also matter. In the context of Covid-19, government policies would be effective in increasing economic resilience and mitigating distributional consequences since, as recent research has shown, major epidemics in this century have raised income inequality. |
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GREEN ZONES: A safe path towards free movement and a lasting recoveryBary Pradelski, Miquel Oliu-Barton |
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On 13 October 2020, EU member states agreed to common criteria for mapping epidemiological risk and to implement non-discriminatory travel restrictions. The strategy agrees in its key aspects with the concept of green-zoning introduced in the original version of this column, which was published in April and circulated to European decision makers. It is based on four principles:
This approach is aimed at curbing the spread of the virus while ensuring lasting economic recovery. |
INACTIVE WORKERS AND MORTALITY DUE TO COVID-19: Evidence from the Italian lockdownNicola Borri, Francesco Drago, Chiara Santantonio, Francesco Sobbrio |
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A study by Nicola Borri, Francesco Drago, Chiara Santantonio and Francesco Sobbrio evaluates the Italian economic lockdown and its effect on mortality due to Covid-19. It finds that the intensity of the lockdown is associated with a significant reduction in mortality among people aged 40 and over, with larger and more significant effects for individuals over 50. Back-of-the-envelope calculations indicate that in the 26 days between 5 April and 30 April 4,793 deaths were avoided in the 3,518 municipalities which experienced a more intense lockdown. |
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TRUST IN POLITICIANS LEADS TO GREATER TRUST AND COMPLIANCE WITH COVID-19 PUBLIC HEALTH POLICIES: Evidence from EuropeOlivier Bargain, Ulugbek Aminjonov |
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As a second wave of Covid-19 approaches, governments are considering another round of lockdowns. But the success of those policies will depend largely on the levels of compliance, which will in turn depend on the confidence that citizens have in their leaders. Writing at Vox, Olivier Bargain and Ulugbek Aminjonov summarise the results of recent studies across Europe examining the effect of civic trust across Europe during the first wave of the pandemic. The evidence points to a higher rate of compliance with stay-at-home policies in regions with a higher level of long-term trust in politicians. |
SAFELY INCREASING THE SUPPLY OF SAFE ASSETS: Internationalising the euro in the age of Covid-19Angela Capolongo, Barry Eichengreen, Daniel Gros |
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Seeking to internationalise the euro is now an official policy of EU institutions. But a constraint on wider use of the euro, by central bank reserve managers in particular, is the shortage of safe euro assets – a problem that is being made worse by the European Central Bank’s asset purchase programme. Writing at Vox Angela Capolongo, Barry Eichengreen and Daniel Gros propose a solution to this problem: issuance by the ECB of its own certificates of deposit. |
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PRICE AND SALES EFFECTS OF STANDARD VAT RATE CHANGES: Evidence and implications for unconventional fiscal policyThiess Buettner, Boryana Madzharova |
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Facing the economic consequences of the Covid-19 pandemic, governments all over the world are considering providing a fiscal stimulus. A potentially powerful instrument to do so is a broad-based consumption tax such as VAT. Writing at Vox, Thiess Buettner and Boryana Madzharova argue that changes in VAT may have some effect in stimulating spending on certain consumer durable goods such as household appliances. However, these effects may be heterogenous across different product types and the timing and perceived credibility of the announcements are also important factors for policymakers to consider. |
NEPOTISM IN ACADEMIA
David de la Croix interviewed by Tim Phillips, 23 October 2020
How much did nepotism in Europe's ancient universities hold back progress? David De La Croix tells Tim Phillips about his fascinating research into the emergence of modern science.
THE PRICE OF A VOTE: Evidence from Britain and France
Julia Cagé interviewed by Tim Phillips, 26 October 2020
How well does campaign finance work, and which political parties benefit most? Julia Cagé tells Tim Phillips how the price of a vote has varied in recent British and French elections.