Tax evasion and noncompliance reduce government revenue and exacerbate the problem of increasing debt. Standard economic theory predicts that the identity of the tax remitter shouldn’t affect outcomes – but this ignores the possibility of evasion. This column provides evidence that in the presence of evasion, both the amount of revenue collected and the incidence of burden are sensitive to the identity of the remitter. These results should inform future tax reform.
Curbing corporate misbehaviour is a key policy goal but fixing the problem requires an understanding of what causes it. This column develops an innovative empirical approach that identifies unethical CEOs as an important cause of unethical corporation behaviour.
Childhood obesity is a major health concern whose effects persist into adulthood. Targeted taxation of unhealthy foods has been shown to reduce body mass index (BMI), but this is an imperfect measure of obesity. This column provides evidence that taxation affects percentage body fat (PBF), a more direct measure. This evidence strengthens the argument in favour of tax-based incentives as a policy tool.
Horizontal acquisitions affect prices through two channels: by eliminating competition between the firms involved, and by changing the incentives for collusion in the affected industry. This column summarises recent research that quantifies these two effects using a new methodology – one that accounts for the difference between financial interests and corporate control. A study of the disposable-razor industry shows that small firms have the greatest incentive to undercut pricing agreements. After acquisitions, acquiring firms have greater incentives to collude, whereas other firms in the industry are more likely to defect.
The ‘financial trilemma’ – that open capital markets and pegged exchange rates mean a loss of monetary autonomy – has recently been challenged. Some argue that even flexible exchange rates cannot assure monetary autonomy without capital controls, while others argue even countries with fixed exchange rates can gain autonomy through temporary capital controls. This column argues that free floating exchange rates do in fact allow autonomy, and partially floating ones allow partial autonomy. For countries with fixed exchange rates, capital controls provide monetary autonomy when they are widely applied and longstanding, but not when they are temporary and narrowly targeted.
According to many measures, inequality has been increasing in the developed world and is now approaching prewar levels. Income inequality does not tell the whole story. This column documents the increase in the ratio of private wealth to national income. This macroeconomic change, precipitated by slowing GDP growth, exacerbates the problem of wealth inequality and makes the economy more susceptible to bubbles.
The recent reversal of capital flows to emerging markets raises the question of whether and how to intervene in currency markets. Brazil’s central bank has intervened heavily, spending more than $50 billion and promising to double that by the end of the year. However, almost all of that intervention has taken place in onshore derivative markets that settle in real. This column argues that such interventions can be effective, but that central banks must stand ready to use their foreign-exchange reserves if necessary.
Recent work on forecasting oil prices raises the question of whether oil industry analysts know something about forecasting the price of oil that academic economists have missed. This column presents evidence that they do, but economists know how to improve further on these practitioners’ insights.
Greece is in dire straits; it will need more debt relief. This column argues that Greece is suffering because northern EZ countries kicked the can down the road by forcing crisis countries to borrow rather than restructure their debts early on. It is time for the ‘generous’ lenders to face the consequences of their short-sightedness. The bad news that Chancellor Merkel ought to break now to her people is that official debt restructuring is inevitable.
Outsourcing is a controversial practice. This column looks at its effects on firm-level innovation in emerging markets. The authors find robust evidence that outsourcing is positively related to various innovation measures. However, outsourcing only leads to increased R&D spending in countries where intellectual-property rights are well-protected.
Cartel fines imposed by the European Commission routinely reach hundreds of millions of euro, having increased since the new 2006 fining policy. This column argues that they are still below their optimal level and come too slowly. Fines were often lower than the additional cartel profits and imposed 10 to 20 years after making the law-breaking decision was made – sometimes after the responsible managers had retired. To speed investigations, the Commission should Increase resources dedicated to inquiries; fines should also be raised.
The perceived tone of a product or political advertisement affects public response – even holding constant the content of the message. This column provides evidence that men and women react differently to positive and negative tones in electoral advertisements. Negative advertising increases voter turnout among men but not women; positive advertising tends to win women’s sympathy but alienates men. This should inform gender-specific tailoring of targeted advertisements.
'Special and differential treatment' was justified on the basis that developing countries lacked the fiscal resources to smooth the transition to free trade. However, despite improved fiscal circumstances, exceptions to WTO rules remain in place. Establishing an independent watchdog for the WTO could help it to address these issues.
Renting capital goods makes up 20% of total capital expenses by US companies and this type of capital spending increases in downturns. This column discusses research showing that the systematic pattern of corporate leasing can be linked to credit constraints. This means that a robust rental sector has the potential to mitigate the negative effects of financial disruptions when obtaining credit becomes difficult.
Faced with stubbornly high and persistent unemployment in 2003-05 the German government implemented far-reaching labour-market reforms, the so-called Hartz reforms. This column shows that these reforms were highly successful in bringing down the non-cyclical component of unemployment in Germany but also argues that the Hartz reforms created winners and losers. This explains why these reforms have been hugely unpopular among the German public.
QE is still on, but central banks are pondering exit pathways. Exit requires vacuuming up excess reserves, winding down massive securities holdings, and restoring normal interest rates – all without killing the recovery. This column points to the importance of a seemingly technical issue – the impact of the exit on the supply of high-quality collateral. This matters since collateral plays a critical role in today’s credit and money creation processes. When reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’.
To end moral hazard, investors, not taxpayers, should bear the loss associated with bank failures. Recently, the EU took a major step in this direction with the Banking Recovery and Resolution Directive. This column argues that this is a game changer. It assures through the introduction of the bail-in tool that investors, not taxpayers, will primarily bear the cost of bank failures, and it opens the door to resolving banks in a manner that will not significantly disrupt financial markets.
What are the competitive effects of bundling? This columns presents the results of an empirical study of the market for office productivity software in the 1990s. Counterfactual simulations suggest that the introduction of a bundled office suite increases consumer welfare – provided that preferences for word processors and spreadsheet programs are positively correlated, and that competitors do not exit the market.
Ronald Coase’s contributions to economics were much broader than most economists recognise. His work was characterised by a rejection of ‘blackboard economics’ in favour of detailed case studies and a comparative analysis of real-world institutions. This column argues that the ‘Coase theorem’ as commonly understood is in fact antithetical to Coase’s approach to economics.
The American football season is here. Bud, Miller, or Coors, the classic American lagers, are the beverage of choice to accompany the big game throughout the US. Despite the recent surge of microbrews and imports, the big three brands still capture more than 60% of the market. With the recent merger of Miller and Coors, only two large national brewers remain. No doubt many beer drinkers have wondered whether this merger has raised the price of their brand.
This year the free movement of eastern European workers within the EU has been questioned. Fearing excessive use of their own welfare systems, governments have argued for continued access restrictions. This column presents research showing that eastern European migrants have been net contributors to public finances of the richer EU15 nations that received them.
How responsive is international migration by high-skilled workers to tax differentials across countries? This column provides evidence from Denmark suggesting that a preferential scheme was highly successful in attracting rich foreigners. It warns that, absent international tax coordination, preferential tax schemes to high-income foreigners could substantially weaken tax progressivity at the top of the distribution.
The Bank of England is searching for an alternative activist monetary policy. This column argues that inflation targeting is better than previous frameworks but there is room for improvement. Faced with exchange rate and housing prices problems, the Bank was unable to modify the framework to suit. To avoid such problems, the Bank should be given more goal-independence as well as instrument-independence.
Service exports and innovation may be a source of dynamic growth for countries in the middle-income trap. This column presents new research showing some support for this optimistic view. That said, it’s clear that researchers need to improve their understanding of how firms in the services sector innovate and increase productivity, and whether better-tailored policies can promote trade and innovation in services.
From 2001 to 2008, half of Europe received capital inflows from the other half and beyond. In 2009, that stopped, capital accounts switched signs and a crisis occurred. This column draws parallels from a similar episode in Europe just before the Great Depression. It highlights that in both episodes global factors – largely exogenous to conditions in the borrowing countries – shaped the capital flows and reversals.
Are children who are non-native speakers making education worse for native speakers? Presenting new research on England, this column uses two different research strategies showing that there are, in fact, no spillover effects. These results support other recent studies on the subject. The growing proportion of non-native English speakers in primary schools should not be a cause for concern.
International trade declined dramatically during the Global Crisis. This column focuses on UK firms that exited from exporting during the Global Crisis. The evidence clearly points to the importance of financial factors. Firms that exited were more heavily indebted, less liquid, and faced higher firm-specific interest rates.
The Bank of England’s Monetary Policy Committee has recently provided some explicit forward guidance regarding the future conduct of monetary policy in the UK. This column by the Bank's Chief economist explains how the MPC designed its forward guidance to respond to the unprecedented challenges facing the UK economy and argues that forward guidance allows the MPC to explore the scope for economic expansion without putting price and financial stability at risk.
The Eurozone is recovering but the revival is fragile – ringed by downside risks. This column argues that three steps – reducing policy uncertainty, repairing the financial system, and creating new investment opportunities – are essential. They could switch the negative confidence-growth feedback loop into a positive one, thus paving the way to robust medium-term growth. There is no room for complacency or procrastination.
Policymakers in the developed world are fretting over how to care (and pay) for their ageing populations. This column unpacks the thinking behind Japan’s extensive Long-term Care Insurance Program, arguing that there are too many sweeping assumptions about the elderly and how they behave. So how can we best design policy for long-term care? As ever, it is only from well-funded and comprehensive datasets – such as the Japanese Study on Aging and Retirement, now in its fourth year – that effective policy will come.
Abenomics comprises three ‘arrows’. The monetary and fiscal arrows have been launched; the pro-growth arrow has not. This column suggests that arguments over the consumption tax burn up precious political capital that would be better spent on growth reforms. A consumption-tax hike won’t stall the expansion, but debates over it threaten to stop reform momentum. The time to release the third arrow is now.
Firm-level data has told us much about exporters, but little about export buyers. This column discusses new research that shows how buyer margins can be a critical channel through which trade policies influence aggregate exports. Reaching a larger number of buyers is an important vehicle of export expansion, both at the country level and at the firm level. As buyer margins are important, they should be incorporated into the assessment of policies such as export promotion and customs facilitation.
Are citations the best way to assess a scientific researcher’s worth? This column argues that although citation counts are easy to quantify and broadly indicative, they ultimately provide limited information and should only be used with a healthy dose of caution and common sense. At stake is the distribution of enormously important scientific resources, both public and private.
Should we expect more global financial crises? This column argues that we should. Global financial crises are far from being a thing of the past because they are often caused by buildups of excessive domestic and foreign debt. To successfully address them and to limit negative spillovers, we need coordinated actions that prevent a contraction in global liquidity. Unless we establish this more robust, coordinated global financial safety net centred on central banks (which is where the money is), we may end up being incapable of addressing inevitable future crises.
The recent proposal by President Obama to raise the federal minimum wage has brought this issue back into the limelight. This column presents new research suggesting minimum-wage policies may not cause an immediate shock to employment, as is often feared, but do cause a reduction in the rate of net job growth. The long-run prospects for individuals are damaged, as they are delayed the opportunity to develop skills and work experience – that crucial first rung on the career ladder.
Ronald Coase, an economics Nobel Prize winner, passed away on 2 September 2013. He is best known for stating that transaction costs explain many puzzles in the organisation of society, and that pricing for durable goods presents a particular worry since even a monopolist selling a durable good needs to compete with its future self. This column reviews how these ideas, though often misinterpreted, deeply influenced the thinking of economists.
Sweden’s average inflation has consistently undershot its inflation target. This column argues that this has led to higher average unemployment and a higher household-debt ratio. The author, a former Deputy Governor of the Riksbank, argues that Sweden’s central bank is not fulfilling its mandate.
Credit rating agencies didn’t anticipate the Eurozone Crisis and their ratings have been procyclical ever since. This column discusses research on the agencies' recent performance. Since 2009, credit ratings have persistently lagged behind market spreads, suggesting that ratings have been more lenient with respect to Eurozone countries than generally believed. Bond spreads may be too volatile for regulatory purposes.
Deregulating firm entry is usually good for firms. But what about their workers? This column presents new research on the deregulation of firm entry and how it affects different types of workers. Using a natural experiment from Portugal, the evidence suggests that deregulating firm entry appears to boost competition and employment (and possibly aggregate income) but its gains seem largely to be reaped by better-off, better-educated workers.
Elderly people assisted by immigrant carers, rather than by their sons and daughters, has become a common feature of many European countries. This column presents evidence from Italy suggesting that the immigrant presence in the home-care sector has allowed women, especially those with elderly parents, to retire from their jobs later. Increasing the retirement age has to happen over the coming decades to ensure the sustainability of developed countries’ pension systems.
The realisation that multinational enterprises like Starbucks, Google and Amazon pay few taxes has sparked heated public debate, especially in the UK. This column questions whether widespread low tax payments are a sign of tax avoidance. Perhaps an alternative explanation is that multinational enterprises are able to shift profits abroad even if they fully comply with the law due to features inherent in the fundamentals of generic tax codes and the nature of large international firms.
Has technological progress slowed down? Have we really picked all the low-hanging fruit? This column argues that technological progress is in fact not a thing of the past. Far from it. There are myriad reasons why the future should bring more technological progress than ever before – perhaps the most important being that technological innovation itself creates questions and problems that need to be fixed through further technological progress. If we rethink how innovation happens, we have every reason to suspect that we ain’t seen nothing yet.
Fiscal stimulus can either be a boon for an economy or its bane. This column discusses new empirical research on how the effects of fiscal stimuli interact with public debt-to-GDP ratios. Using data on real GDP, private investment and the trade balance, evidence suggests that the cumulative effect on real GDP is positive at moderate debt-to-GDP ratios but turns negative as the ratio increases. The evidence also suggests that the cumulative trade-balance effect is negative at first but switches sign at higher degrees of indebtedness.
Recent development of heterogeneous firm models in international trade were built on the observation that extensive margin effects are important in explaining the trade and productivity effects of trade liberalisation. This columns adds that if we want to use the current generation of heterogeneous firm models for the purpose of forecasting the effects of trade agreements, we need to allow not only for sources of within-industry but also within-firm productivity increases.
European offshoring mostly concerns factory jobs, but some worry that innovation will soon follow. This column shows that offshoring firms employ more people in R&D and design, introduce more frequently new products, and invest more frequently in advanced process technologies compared to non-offshoring firms. Concerns that offshoring may hurt innovation because of the lost links between production and product development are not supported by the evidence.
Central banks frequently lead the macroprudential policy implementation. The hope is that their credibility in conquering inflation might rub off on macroprudential policy. This column argues the opposite. The fuzziness of the macroprudential agenda and the interplay of political pressures may undermine monetary policy.
WTO membership does not come cheap in a political sense. So what is the point? This column addresses the idea that institutional reforms in the joining nations are an important element of the gains. It focuses on one reform – changes in customs procedures that limit discretion. This shuts down one channel for tariff evasion, but the column shows that greater evasion occurs through alternative channels.
EZ banks are more exposed to their own nation’s government bonds than ever. This column argues that Eurozone members can now afford to tell their banks to diversify, but pressure from Germany, Austria, France and the ECB might be necessary. Defusing the pernicious entanglement between the Eurozone’s weak banks and weak sovereigns would reduce the cost of any new crisis and reduce the likelihood of such a crisis occurring.
The ECB has promised to keep interest rates low for an “extended period of time”. In a broad hint to the profession, President Draghi stressed a reasonable forecast of this period could be extracted from a monetary policy reaction function. This column presents one such forecast based on published macro forecasts and a reaction function that fits the ECB’s past behaviour. The result is that ECB interest rates will rise by May 2014 at the latest.
The Riksbank maintains high policy rates since it fears that a lower rate would increase the household-debt ratio. This column argues that a higher rate in fact leads to a higher debt ratio, not a lower one. The higher rate reduces nominal housing prices and new mortgages, but since the new mortgages are such a small share of total mortgages, the total nominal debt falls very slowly. Yet nominal GDP falls much faster, so the debt-to-GDP ratio rises.
Emerging markets are under pressure. This column argues that this is not a mere headwind but that the BRICs’ party is over. Their ability to get going again rests on their ability to carry through reforms in grim times for which they lacked the courage in a boom.
Debt seems to be a lightning rod for crises. This column presents new research showing that the ratio of net foreign liabilities to GDP, and in particular its net external debt component, is indeed a significant crisis predictor for both advanced economies and emerging markets. Large current-account deficits and real exchange rate appreciation – the standard predictors – still matter, but we should be thinking more about net external debt.
G20 leaders are currently meeting in St Petersburg to discuss protectionism. This column, which summarises the key findings of the new 14th Global Trade Alert report, argues that the current G20 approach to promoting open trade and investment is not working. In recent years G20 members resorted to protectionism more frequently than at the beginning of the economic crisis and, indeed, the stock of crisis-era protectionist measures imposed by the G20 members keeps on growing. The G20’s ‘softly softly’ approach isn’t working.
Financial prices display ‘fractal’ properties. This column conjectures that this is caused by interactions among agents with different horizons and interpretations of information. This structure appears to be associated with a special sort of stability that can be disrupted – leading to price crashes – if these interaction breaks down. While embryonic, this thinking may have important implications for the regulation of financial markets.
Why some countries are richer than others is among the most difficult and important questions in economics. Yet, the Penn World Table, widely used to compare living standards across countries, has faced criticism in recent years. This column discusses how the new version of the tables both addresses these criticisms and provides a wider range of tools that will help researchers gain insight into why income differs across countries.
India, like other emerging markets, is having a tough summer. This column argues that India needs to step up reforms and critical infrastructure investment to reboot growth. Its economic health – and that of other emerging markets – is not as dire as headlines suggest. The alarm and pessimism surrounding emerging markets appears to have run well ahead of any deterioration in fundamentals.