The world economy at the start of 2016 is a genuinely confusing place, with stock markets plummeting. This column discusses the mainstream narratives behind this – China and the oil price dip – and finds them wanting. The economic linkages seem too weak to justify the gyrations. Instead, they may be the result of herding or a delayed reaction to the global economy’s lower-for-long growth prospects.
Most Read: This Month
Adverse early childhood environments can have persistent effects. This column suggests that early childhood programmes have many beneficial effects, and their success should be evaluated on a multitude of outcomes. The returns to investing in the early lives of disadvantaged children in terms of social mobility and economic productivity are high – comparable to returns on equity investment.
The current inflow of refugees into Europe has left policymakers in disagreement over how to react. A major concern is the perceived financial burden that can result from large intakes. This column discusses the fiscal impact of refugees on the Swedish economy. The current net redistribution from the non-refugee population to refugees (excluding arrivals in 2015) is estimated to be 1.35% of GDP. The economic burden of a generous refugee policy is therefore not particularly heavy, especially if the host country incorporates them as quickly as possible into the labour market.
Many candidate explanations for the low level of real interest rates have been put forward. Less progress has been made on bringing together the different hypotheses into a unifying framework, on quantifying their relative importance and on predicting the future path for real interest rates. This column attempts to fill that gap, and suggests that persistent shifts to global desired savings and investment are behind the bulk of the fall in real interest rates. Those trends are unlikely to unwind anytime soon, so that the global equilibrium rate is likely to remain low, perhaps settling at or below 1% in the medium to long-run.
There is ongoing debate about the impact of technological progress on the geography of trade and production. One view is that cheap technology has attenuated the effect of distance, while others argue that location still matters. This column explores the issue in the context of foreign exchange markets. It examines how submarine fibre optic cables that link locations to financial hubs have affected the location of transactions. The findings suggest, on balance, that technological progress has made proximity to a trading centre more important.
China’s diminished growth prospects are in the news and seem to spell bad news for just about everybody. This column assesses the evidence, arguing that China’s economic growth will be much slower from now on, reducing international trade. Perhaps the biggest challenge for China will be future political tensions in reconciling economic dreams with economic realities.
Reorganisation doesn’t always create a more efficient and effective firm. This column assesses the extent to which a firm’s physical productivity varies as a result of reorganisation. The results suggest significant variation. For policymakers, studying and understanding the internal organisational responses of firms to firm-specific and economy-wide shocks is essential to understanding the level and distribution of productivity in an economy.
The internet is lauded for increasing access to information, but it is unclear whether this translates into a better-informed and more engaged voting populace. This column uses UK data to determine how the internet has changed voting patterns and aggregate policy choices. Internet penetration is found to be associated with a decrease in voter turnout, mainly among the lower socioeconomic demographic. Internet diffusion is also found to reduce local government expenditure, in particular on policies targeting less-educated voters. These findings point to a trade-off between the ‘digital divide’ and the ‘political divide’.
The World Bank has identified 37 countries as being in a ‘middle-income trap’, but few formal tests of the middle-income trap hypothesis exist. This column presents a new test based on a more nuanced observation that incorporates information on a country’s long-run growth path. Only seven out of 46 middle-income countries are found to be potentially ‘trapped’. Some countries that are usually considered to be trapped may just be growing very slowly.
Parallels are often drawn between the Great Recession of the past decade and the economic turmoil of the interwar period. In terms of global trade, these comparisons are based on obsolete and incomplete data. This column re-estimates world trade since the beginning of the 19th century using a new database. The effect of the Great Recession on trade growth is sizeable but fairly small compared with the joint effect of the two world wars and the Great Depression. However, the effects will become more and more comparable if the current trade stagnation continues.
The migrant crisis will continue to top headlines in 2016. This column takes a detailed look at the EU’s response to dealing with migration, concluding that everything points towards failure as the likely outcome. Unlike the most critical aspects of the Eurozone Crisis, the main drivers of the current migration emergency are external factors such as war. These circumstances are highly unlikely to change in the medium term. The hardball politics and threats that proved extraordinarily effective in coercing member states into accepting domestic political conditionality in return for financial aid during the Eurozone Crisis are doomed to fail when it comes to migration.
Although the Great Recession was viewed as a US problem, the Eurozone was affected by it from the start. This column compares the monetary policy responses to the Crisis by the Fed and the ECB. It argues that the US approach has been much more aggressive and proactive. The ECB failed to provide stimulus when needed, and as a result the Eurozone might slip into a low-inflation trap.
The price of oil rose to unprecedented highs in the 2000s, and its recent plunge took many by surprise. Although there are many consequences of such price fluctuations on the world economy, they are notoriously difficult to pin down. This column examines the trade consequences of varying shipping costs caused by oil price fluctuations. High oil prices are found to increase the distance elasticity of trade, making trade less global. The recent drop in oil prices could thus be a boon for globalisation.
Digital technologies are having dramatic impacts on consumers, businesses, and markets. These developments have reignited the debate over the definition and measurement of common economic statistics such as GDP. This column examines the measurement challenges posed by digital innovation on the economic landscape. It shows how existing approaches are unable to capture certain elements of the consumer surplus created by digital innovation. It further demonstrates how they can misrepresent market-level shifts, leading to false assessments of production and growth.
The Shanghai Stock Exchange Composite Index has dropped substantially in the past few months. China’s growth rate has also slowed. This column argues that the slowdown of the Chinese economy has little to do with the stock exchange, and is mostly due to economic forces. The author recommends a package of policies that need to be implemented to smooth the transition to a sustainable growth rate.
Cash welfare programmes are widely thought to discourage work because unearned income reduces the labour supply even when it does not alter work incentives. This column discusses recent evidence from Swedish lottery players suggesting that this ‘income effect’ is economically significant, but modest in magnitude and surprisingly similar across various demographic groups. Introducing ‘unconditional basic income’ programmes in developed countries may reduce the labour supply across a broad cross-section of the population.
The Great Depression is considered one of the darkest times for the US economy, but some argue that the US economy experienced strong productivity growth over the period. This column reassesses this performance using improved measures of total factor productivity that allow for comparisons of productivity growth in the Depression era and in later decades. Contrary to Alvin Hansen’s gloomy prognosis of secular stagnation, the US economy was in a very strong position during the 1930s by today’s standards.
Economists frequently discuss the ‘scarring effects’ the Great Recession has had on young people in Europe. This column tentatively challenges the received wisdom of permanent scarring. Young graduates mitigate some of the negative welfare effects of graduating during bad times by living with their parents for longer.
How shocks reverberate throughout the economy has been a central question in macroeconomics. This column suggests that input-output linkages can play an important role in this issue. Supply-side (productivity) shocks impact the industry itself and those consuming its goods, while a demand-side shock affects the industry and its suppliers. The authors also find that the initial impact of an industry shock can be substantially amplified due to input-output linkages.
Expectations play a key role in assessing how oil price fluctuations affect the economy. This column explores how consumers, policymakers, financial market participants, and economists form expectations about the price of crude oil, the differences in these expectations, and why future realisations of the price of oil so often differ substantially from these expectations. Differences in oil price expectations are shown to matter for quantifying oil price shocks and their transmission.
Previous research has shown that the corporate governance practices of firms are constrained by the legal standards of their country of incorporation. This column explores how an active international market for corporate control can substitute for weak institutions in a host country. Using firm-level data from 22 countries, it shows how cross-border M&A activity improves the governance of non-target firms in the same industry, via peer pressure. These findings provide evidence for corporate governance improvements as a novel positive spillover from FDI.
Informal collaboration is an integral part of academia. Studies of academic collaboration have mostly focused on formal collaboration, as measured by co-authorships. This column instead constructs a network of informal collaboration in financial economics, exploiting acknowledgements of assistance appearing in published papers. Three rankings of financial economists are constructed based on acknowledgement occurrence and centrality. Being helpful is not found to predict centrality in the informal collaboration network.
Why is growth in Europe so low? Among the contributing factors, this column highlights the role of financial structure. Intermediation in Europe is heavily bank-based, and the authors' novel empirical findings indicate that such a structure exerts a negative effect on long-run economic growth and exacerbates its response to sharp drops in real estate prices. The findings support policymakers’ efforts to rebalance financial structure towards securities markets.
Nudges are modifications of people’s choice architecture that impact their behaviour but don’t change their incentives or coerce them. As a policy instrument, nudges have been shown to be effective in changing certain kinds of behaviours. This column explores the ethical issues that arise in employing such potentially manipulative policies. An evaluation programme is outlined that explores a potential policy’s impact on people’s wellbeing, autonomy, and integrity, along with its practical implications.
Policymakers have employed various new tools in response to the Global Crisis to revitalise economic performance. This column introduces a new eBook that brings together key Vox columns to reveal the evolution of the economic profession’s thinking about one such tool – quantitative easing.
Since the beginning of the Global Crisis, illicit capital flows out of China have been in decline. This column argues that a key factor behind this is the relative money supply between China and the US. China’s rapidly increasing money supply, combined with the Fed’s expansionary monetary policy, prompted investors to reallocate their portfolios between the two countries. Another contributing factor is China’s gradual process of capital account liberalisation. The Fed’s interest rate hike in December may see a resurgence in China’s capital flight.
Wage differences across countries offer individuals the possibility of huge wage gains through moving abroad. This column uses data on lottery-selected migrants from Tonga to New Zealand to assess the effect on productivity and wages for workers moving from a poor country to a rich country. These randomly selected workers appear to be immediately more productive, and their wage gains are stable over time. It seems that cross-country wage differences are due to better institutions, higher quality capital, and other factors in rich countries that serve to raise the productivity of all workers, whether natives or migrants.
While some of the costs of climate change won’t be incurred for centuries, the actions to mitigate them need to be taken today. Over such a long timespan, small changes in discount rates can drastically change the attractiveness of such investments. This column presents estimates of appropriate discount rates for very long time horizons. The long-run discount rate for one important risky asset class – real estate – is estimated at 2.6%. This provides an upper bound on long-run discount rates for climate change abatement, one that is substantially lower than some of the rates currently being employed.
It is widely agreed that the Global Crisis qualifies as a period of ‘systemic’ financial stress. However, identifying and classifying other similar periods is challenging. This column presents a new framework for a transparent and objective identification of systemic financial stress episodes, beyond the expert-selected stress events available so far. The approach is applied to 27 EU countries to successfully identify episodes of financial stress.
The monetary policy of ‘leaning against the wind’ involves a higher policy interest rate. It is usually justified as reducing the probability and severity of a future crisis. This column argues that the costs of the policy exceed the benefits by a substantial margin, especially when taking into account that the cost of a crisis is higher if the economy is initially weaker due to the leaning itself. Furthermore, contrary to the common argument that the policy may be justified when macroprudential policy is less effective or even non-existent, less effective macroprudential policy actually makes the case against leaning against the wind policy stronger, not weaker.
The dual labour markets of Southern Europe and France create a ‘revolving door’ through which many workers – especially youths – rotate between dead-end jobs and unemployment. The problem lies in the difference between the costs of firing workers on permanent versus temporary contracts. This column proposes a framework for evaluating what the optimal single contract should look like taking account of transitional issues and political economy constraints.
Not everyone responds to pressure in the same way. This column suggests that girls and boys respond differently to the pressure of exams, depending on the significance of the exams. Girls perform relatively better when the stakes are low, but boys outperform them when the stakes are very high. This has a number of implications for the choices that young men and women make over degree subjects and careers.
Inequality, both in firm revenues and wages, varies greatly across sectors, has increased over time and is positively correlated to export opportunities. To explain these observations, this column propose a new theory in which firms’ investment at the entry stage affects the variance of the possible realisations of their productivity. It suggests that export opportunities and competition, besides reallocating resources across existing firms, increase the value of technological heterogeneity. This hints to a new powerful channel through which globalisation is making firms and wages more unequal.
Global value chains have increased the complexity of good economic analysis no end. This column assess the extent to which global value chains change how we think about the world, and argues that the evolution of global market shares is no longer an adequate indicator of a country’s competitiveness in most cases. ‘Made in China’ has changed almost everything.
Assimilation of migrants can be measured in various ways, one such measure being their access to the homeownership market. This column argues that the evolution of homeownership rates of immigrants is a complex process, with important selection effects. In France, the homeownership rate among northern African immigrants lags behind not only that of natives, but also southern European immigrants. A possible reason is discrimination against northern African immigrants not only on the labour market, but also on the credit and housing markets.
Many observers believe that pharmaceutical firms prefer to invest in drugs to treat diseases rather than vaccines. This column presents an economic rationale for why such a pattern may emerge for diseases like HIV/AIDS. The population risk of such diseases resembles a Zipf distribution, which makes the shape of the demand curve for a drug more conducive to revenue extraction than for a vaccine. Based on revenue calibrations using US data on HIV risk, the revenue from a drug is about four times greater.
In addition to setting interest rates, central banks also communicate with the public about economic conditions and future actions. While it has been established that communication can drive expectations, less is known about how it does so. This column attempts to shed light on this question. Applying novel measures to the content of Federal Reserve statements, it shows that forward guidance is a more important driver of market variables than disclosure of information about economic conditions.
Helmut Schmidt, one of the great post-war architects of Europe, passed away in November 2015. This column, by a former governor of the Central Bank of Cyprus, reminds us of Schmidt’s analysis of the political and economic dimensions of the Eurozone Crisis delivered in speeches in late 2011. As Schmidt said: “What we have, in fact, is a crisis of the ability of the EU’s political bodies to act. This glaring weakness of action is a much greater threat to the future of Europe than the excessive debt levels of individual Eurozone countries.”
During the past couple of months alone, floods have displaced 100,000 people or more in Kenya, in Paraguay and Uruguay, and in India, as well as more than 50,000 people in the UK. And rising sea levels due to climate change loom. This column assesses the risk and the challenges for policymakers. It details the effects of flooding in cities around the world, showing that economic activity is concentrated in low-elevation urban areas, despite their much greater exposure to flooding. And worryingly, economic activity tends to return to flood-prone low-lying areas rather than relocating.
Studies of the effects of economic fluctuations on health have come to wildly different conclusions. This may be because the effects are different for different groups. Using US data, this column looks at the health consequences of the Great Recession on mothers, a sub-population that has thus far been largely neglected in the literature. Increases in unemployment are found to have large negative health effects and to increase incidences of smoking and substance abuse among mothers. These effects appear to be concentrated on disadvantaged groups such as minorities, and point to short- and long-term consequences for their children.
Labour market liberalisation is both one of the most important structural reforms and one of the least well understood. This is partly due to a lack of data. This column introduces a new index of labour market regulations rigidity covering over 140 countries from 1950 onwards. Trade liberalisation and per capita income are shown to be more powerful explanations of the dynamics of labour market reform than ‘legal origins’.
Now that the worst of the Eurozone Crisis has passed, one question that emerges is whether improving current account balances should be an objective for policymakers. And if so, what tools are available? This column argues that because of the emergence of global value chains, trade imbalances within the Eurozone are to a large extent an endogenous result of the international organisation of production at the firm level. It is therefore better to disregard intra-EZ imbalances and focus on the total.
The 2015 Nairobi WTO Ministerial unshackled governments from the deadlocked Doha Development Agenda and opened the door for new issues and new approaches. The Ministerial Declaration calls on new initiatives to be agreed by consensus. This column argues that WTO procedures permit ‘clubs’ of countries to agree on additional policy disciplines if the benefits extend on a non-discriminatory basis to all WTO members. Consensus is not needed for such clubs.
A city’s metropolitan governance structure has a critical influence on the quality of life and economic outcomes of its inhabitants. This column quantifies the impact of governance on productivity using data from five OECD countries. Administrative fragmentation, which complicates policy coordination across a city, has a negative effect on individual productivity. This finding, combined with benefits from good governance such as improved transport and lower pollution levels, highlights the importance of well-designed metropolitan authorities.
Intel dominates the market for microchips, an essential component of innumerable electronic devices. This column proposes a structured antitrust test that could tackle the issue of how antitrust authorities make decisions on whether a dominant firm’s rivals can compete for exclusive contracts effectively. This decision depends on the size of the dominant firm’s competitive advantage, which isn’t something that we can easily measure but is something that is correlated with other variables, such as the firms’ market shares.
Vocational training programmes offer a second chance to those who drop out of the formal education system. Most studies of the success of such programmes, however, typically only analyse outcomes directly after participation. This column examines the medium- and long-term outcomes of a vocational training programme in Colombia. Results suggest that vocational training and formal education are complementary investments and that there are educational spillover effects for family members, in particular among applicants with high baseline educational attainment.
Immigration is an important election issue that often benefits right-wing political parties. Contemporary European politics is an example par excellence. Immigration in the US has been intermittently at the fringes and centre-stage in recent years, and this column looks at the extent to which US voters care about immigration. The political effect of immigration turns out to crucially depend on the extent to which immigrants participate in the political process. One thing from the research is clear: Republicans are generally opposed to immigration reforms, especially if they include a path to citizenship for currently undocumented immigrants. Naturalised immigrants are a liability for conservative politicians, as they tend to vote for progressive parties.
Prices of cable TV services are rising, leading to calls for the introduction of cable TV à la carte. This column argues against the proposal. Some would win while others would lose, but on average households would be no better off. Given the tremendous uncertainty associated with such a regulatory intervention, more convincing evidence of the consumer benefits is needed.
The goal of universal health coverage has been pursued by countries in a number of ways, most notably through demand-side policies. In 2005, Turkey extended basic healthcare services to its entire population under a free-of-charge, centrally administered system. This column examines the impact of this supply-side programme on mortality and birth rates. Results show that the program was successful in lowering both mortality and birth rates across provinces, particularly for the most vulnerable populations. These findings provide compelling evidence in favour of providing accessible healthcare services to all citizens.
Offshoring and global value chains have reshaped global trade patterns. This column describes how the German economy has been exposed to significant offshoring for at least three decades. The authors find an increasing importance of high-end tasks in the country. Organising and consulting activities under deadlines, changing business conditions, and tougher performance standards are an increasingly common reality in German workplaces. Labour market institutions in German trade partners are largely unrelated to the changing content of German imports.