Large banks have grown and become more involved in market-based activities since the late 1990s. This column presents evidence that large banks receive too-big-to-fail subsidies and create systemic risk, whereas economies of scale in banking are modest. Hence, some large banks may be ‘too large’ from a social perspective. Since the optimal bank size is unknown, the best policies are capital surcharges and better bank resolution and governance.
‘Capital in the 21st century’ has had an extraordinary – and extraordinarily rapid – impact on the global economic dialogue. It has drawn an extraordinary – and extraordinarily rapid – response, including a front-page critique by an FT journalist. In this column, the book’s author responds point-by-point to the critiques. He rejects the notion that he made outright mistakes. Scholars working with old data make judgments and compromises to expand the dataset; disagreements are inevitable – a point that applies equally to the journalist’s ‘corrections’. In any case, the book’s overall analysis is robust to such critiques.
Expansionary monetary policy in advanced economies have created capital inflow booms in emerging markets. This column analyses the effect of exchange rate flexibility on credit markets during capital inflow booms. In economies with less flexible exchange rate regimes, credit grows faster and more towards foreign currency. These countries may benefit the most from regulatory policies.
No comprehensive database of directly measured fossil-fuel subsidies exists at the international or the sub-national level, yet subsidies may be crucial drivers of global carbon emissions. This column describes a novel method for inferring carbon subsidies by examining country-specific patterns in carbon emission-to-output ratios, known as emission intensities. Calculations for 170 nations from 1980-2010 reveal that fossil-fuel price distortions are enormous, increasing, and often hidden. These subsidies contributed importantly to increasing emissions and lower growth.
Non-compliance with tax costs governments billions, in part because people really don't like paying taxes. This column reports two experiments designed to see if it's possible to make people hate taxes a little less and raise tax compliance. The results indicate that if people are given the opportunity to express a preference (though not actually make the final decisions) on how their taxes are spent, they are much less likely to cheat. Simply by making the tax form more interactive, governments could increase tax compliance, while empowering citizens and improving their attitudes towards taxation.
Mega-regional negotiations will underwrite global governance on 21st-century trade issues and facilitate the proliferation of global and regional value chains. This column writes that Latin American countries would gain from a strengthened and effective WTO to help mitigate the friction and fragmentation that may result from the mega-regionals.
Schooling changes are associated with ideological ones but it is difficult to claim a causal relationship. This column attempts to analyse the causal effect of curriculum changes in China on shaping preferences of students. The new curriculum moves one’s belief about democracy by about 25% of a standard deviation in the direction desired by the government. The findings suggest the state can use education to promote socially-useful beliefs and cultivate good citizenship.
Immigrants to the US are drawn from both ends of the education spectrum. This column looks at the effect of highly educated immigrants – in particular, those with degrees in Science, Technology, Engineering, or Mathematics – on total factor productivity growth. The authors find that foreign STEM workers can explain 30% to 60% of US TFP growth between 1990 and 2010.
Eurosceptic parties have been popular in the recent European elections, many complaining that the euro has only served Germany's interests. This column points out that although data on aggregate trade flows show that Germany's trade surplus with the rest of the Eurozone is not excessive, the success of a Eurosceptic party is larger in countries where the bilateral trade deficit with Germany has increased in recent years. A gradual rebalancing of Germany's external accounts of Germany would bring with it not only a greater economic stability in the Eurozone but also greater political stability.
Political leaders sometimes favour their preferred regions. This column looks at regional favouritism in a large sample of countries, using information on the birthplaces of political leaders and nighttime light intensity. Being the current leader's birth region increases nighttime light intensity by around 4%, and GDP by around 1%. Such favouritism is most prevalent in countries with weak political institutions and poorly educated citizens.
The negotiations for the Transatlantic Trade and Investment Partnership are about a year old and making only slow progress. This column argues that TTIP is a long-run project that will probably take several years to complete. Despite its significance to global trade, without support from the top echelons of government it might falter.
Much ink has been spilled over Scotland’s currency options in the event of independence. This column argues that a breakup of the sterling area would be truly unprecedented. The sterling union is unique because it services a unitary state with a highly integrated and complex financial sector, an indivisible payments system, and an overlapping legal system. Politics aside, neither a unilateral nor a mutual break-up would be credible, leaving a negotiated currency union as the only option. However, as the Eurozone crisis demonstrates, a badly designed currency union could be exceptionally costly.
Since 1988, rapid growth in Asia has lifted billions out of poverty. Incomes at the very top of the world income distribution have also grown rapidly, whereas median incomes in rich countries have grown much more slowly. This column asks whether these developments, while reducing global income inequality overall, might undermine democracy in rich countries.
Resource-rich countries face a peculiar set of challenges; natural wealth can be both a blessing and a curse. This column looks at links between natural-resource revenues and other taxes. Results suggest that these countries tend to substitute domestic taxes with natural-resource-based revenue; 30 cents in non-resource tax revenue are lost with each dollar of resource revenue. Worryingly, the substitution occurs disproportionately for growth-friendly taxes.
Young firms are known to play a central role in job creation. This column presents the results of a new OECD project on the dynamics of employment (DynEmp) based on an innovative methodology using firm-level data. It confirms that young firms play a central role in creating jobs, and in enhancing growth and innovation. Public policies can help by enabling firms to experiment, and by fostering the reallocation of resources towards the most productive firms. Structural reforms to product, labour, and capital markets, as well as bankruptcy laws that do not overly penalise failure, are particularly relevant.
Diet-related chronic diseases are a major public health concern. Addressing this concern is a key government policy objective. This Vox Talk argues that the impact of these policies on diet and health outcomes depends on how consumers adapt their consumption behaviour and on how firms respond in terms of the prices they set and the foods they offer.
Public debt and economic growth are historically negatively correlated. This column discusses new evidence that rejects the debt-to-growth causality. After estimating the effects between debt and growth in both directions, there is no evidence that high indebtedness suppresses economic growth. The effect of growth on debt is the main driver of the negative correlation.
To date, much uncertainty exists about how large the spillovers would be from the default of a systemically important bank. This column shows evidence that the market values of US and EU banks hardly respond to changes in the default risk of banks that the Financial Stability Board considers globally systemically important (G-SIBs). However, changes in all G-SIBs’ default risk explain a substantial part of changes in bank market values. These findings have implications for financial-crisis management and prevention policies.
There is concern that worker screening may aggravate discrimination against disadvantaged groups, but its effects may be counterintuitive. This column presents recent evidence on the effect of drug testing on hiring practices by race in the US. Removing this channel of information asymmetry allows employers to distinguish workers by this relevant characteristic rather than relying on their priors; the result is that hiring of non-drug-using African-Americans increases, at the expense of white women.
The euro’s impact on southern EZ members is a key topic in national and European debates. This column argues that the economic evidence is twisted to fit preconceptions. It presents evidence based on the ‘synthetic control’ approach, finding that the euro raised trade, lowered interest rates and inflation, but had a small negative impact on per capita incomes.
The diffusion of the internet has had varying effects on the location of economic activity, leading to both increases and decreases in geographic concentration. This column presents evidence that the internet worked against increasing concentration in invention. This relationship is particularly strong for inventions with more than one inventor, and when inventors live in different cities.
Immigrants potentially foster international trade by reducing trade costs. This column uses the exodus of the Vietnamese boat people to the US as a natural experiment to provide evidence of such a pro-trade effect. An exogenous allocation of Vietnamese migrants across the US in 1975 was followed by a 20-year trade embargo. Following the lifting of sanctions in 1994, the share of US exports going to Vietnam was higher and more diversified in the states with larger Vietnamese populations.
As Europe heads towards Parliamentary elections, this Vox Views interview looks at the economic benefits of EU membership. On average, European countries are 12% richer a decade after they join the EU. The UK is 24% better off since joining in 1973. The interview was recorded at the Royal Economic Society annual conference at Manchester University in April 2014.
Most economists cheer the Trans-Atlantic Trade and Investment Partnership that the EU is currently negotiating with the US. This column argues it is a pity that TTIP and other mega-regional agreements have emerged. It sees the exclusion of China in particular as an existential threat to the world trading system. It urges policymakers in the EU to focus instead on the world trading system or even consider an agreement with China.
The Hitler government built the world’s first nationwide motorway network. We examine the impact of road-building on the popularity of the Nazi regime. Using shifts in electoral support between 1933 and 1934, we conclude that ‘pork-barrel’ spending worked in reducing opposition to the regime – wherever the new roads ran, fewer Germans voted against the government in elections and plebiscites. At least part of the regime’s popularity after 1934 can be explained by the popularity of the Autobahn.
Many economic statistics move markets when first released, and move them again when they are revised. This column suggests ways of measuring the transitory statistical uncertainty in estimates of official statistics based on incomplete data and the permanent statistical uncertainty stemming from survey non-response. Government agencies would be doing the public and policymakers a service by being clear about these uncertainties.
Household savings in China are high by international standards, and the young save as much or more than the middle-aged – a fact at odds with the standard life-cycle savings model. This column argues that neither old-age support by the middle-aged nor the one-child policy can satisfactorily explain this phenomenon. Rather, currently high housing costs and the prevalence of inter-generational shared housing are key reasons for the higher savings rates of the urban young in China.
The European Parliamentary elections are conducted under rules that give voters power that varies with their nationality. This inequality is higher than in European and US national elections, as well as in large emerging-market democracies like Brazil, India, and Indonesia. Making the distribution more equal would be simple, but would require a change in the EU Treaties.
The world’s population is ageing, due to both increasing longevity and decreasing fertility. This column shows that the net effect of ageing on capital accumulation (and therefore growth) depends on which of these two factors dominates, and also on the structure of the pension system. Under a pension system with defined contributions, a reduction in fertility induces adjustments in savings and working life that unambiguously increase capital per worker.
Can a tightening in the bank resolution regime introduce more prudent bank behaviour? This column reviews some arguments for why this could be the case. It presents evidence linking changes in bank resolution regimes with bank behaviour. Tightening of US bank resolution significantly decreased the overall risk-taking of the most affected banks. This effect, however, does not hold for the largest and most systemically important banks. Too-big-to-fail seems to be unresolved.
Wendy Carlin talks to Viv Davies about the 'Curriculum Open-access Resources in Economics' (CORE) project, which was established by the Institute for New Economic Thinking (INET) at Oxford and proposes a new approach to economics teaching for undergraduates. The aim is to update the existing economics curriculum so that it reflects recent developments in economics, the economy and in teaching methods. They discuss the 'three gaps' in economics teaching that the project seeks to close. The interview was recorded in April 2014 at the annual conference of the Royal Economic Society.
Many analysts view democracy as a neutral or negative factor for growth. This column discusses new evidence showing that democracy has a robust and sizable pro-growth effect. The central estimates suggest that a country that switches from non-democracy to democracy achieves about 20% higher GDP per capita over the subsequent three decades.
The World Trade Organisation is one of the most successful instances of multilateral cooperation post-WWII. Yet WTO negotiators have yet found a way to break the recent deadlock on key elements such as the market access and rule-making dimensions on the agenda since 2001. This column introduces a new CEPR book that suggests the adoption of a ‘supply chain framework’ that could help to mobilise greater support for concluding the Doha Round and provide a basis to use the WTO as a forum for learning from regional initiatives.
Stars have direct impact on local economies. They can also indirectly affect growth in a positive way. This column examines the effect of academic star arrivals on the departmental knowledge productivity. Department-level output increases by 54% after the arrival of the star. The post-arrival quality of the joiners is also positively affected, displaying an increase of 68%. These star effects are largest at mid-ranked institutions.
Less than a year after its launch, the Trans-Atlantic Trade and Investment Partnership (TTIP) has caused a lot of controversy. This column discusses the challenges the TTIP is likely to face after the election of a new European Parliament. Key political leaders should engage in the TTIP discussions and not leave them to the unelected officials in Brussels. Otherwise, the TTIP may not deliver sizeable economic benefits, or there might not be a negotiation result at all.
Turnout in the 2014 European Parliament elections is seen as a critical test for EU democracy. This column presents some predictions. Trust in the ECB – rather than in the European Parliament itself – has been associated with higher turnout in previous elections. Macroeconomic conditions are also important – where a country’s fiscal problems are greater, voters are more inclined to vote.
The quasi-experiment of arbitrary border design allows for causal interpretation of institutional effects across territories. This column presents evidence on the impact of British and French colonial education policies in West Africa. British flexibility and French centralisation resulted in educational attainment differences that persist – across one border – even among some cohorts of the current workforce.
As banks repay their loans from the Long-Term Refinancing Operation, the ECB’s balance sheet is shrinking. This column argues that, given the slow recovery and sustained low inflation, the ECB should replace its bank lending programme with quantitative easing. Buying short-term government debt would be consistent with the ECB’s inflation target, would keep the ECB’s monetary policy separate from its role in bank supervision, and would create a built-in exit strategy from unconventional policy.
Minimum wages are set to increase in China under the country’s latest five-year plan. This column documents that past increases led to lower employment. However, the impact is heterogeneous. Firms with high average wages or large profit margins actually increase employment, while those with low average wages or small profit margins downsize.
The effects of interest-rate changes on output and inflation could be much larger than previously thought. Such evidence was suggested by Romer and Romer in their analysis of the US. This column provides similar estimates for the UK based on a novel real-time dataset. In response to a 1% increase in the interest rate, output declines by 0.6% and inflation falls by one percentage point after two to three years.
Large flows of bank lending from core countries in the Eurozone to the periphery lead to large financial imbalances. This column explains what motivated such financial flows. With the advent of the Eurozone, banks in core countries gained relative advantage in lending to the periphery, making such lending very attractive. They also served as intermediaries for financial flows from outside the Eurozone to the periphery. Now – five years since the start of the euro crisis – Eurozone financial markets remain segmented.
African regions where Protestant missionaries were active had indigenous newspapers a century before other regions. This column argues, based on new research, that this difference has had lasting effects. Proximity to a mission that had a printing press in 1903 predicts newspaper readership today. Population density and light density (a proxy for economic development) is also higher today in regions nearer to missions that had printing presses. The results suggest that a well-functioning media – not Protestantism per se – was important for development.
Although Eurozone inflation has persistently surprised on the downside and has been below 1% since October 2013, the UK macroeconomics profession is not convinced that this heralds a deflation. In the second monthly survey by the Centre for Macroeconomics (CFM), summarised in this column, a small majority of respondents do not think there is a significant risk of Eurozone deflation in the next two years. But nearly two thirds of respondents to the CFM survey think that sustained Eurozone deflation would pose a significant threat to the UK recovery.
Joining international production networks has been the successful path to industrialisation taken by some Asian and eastern European countries in the last decades. This column argues economic integration agreements are a major force behind the formation of these international linkages. Using a global dataset of establishments to measure global value chains, it shows that countries with integration agreements have 8% more linked subsidiaries.
Apologies are often hard – that’s the point. An apology is due when trust is broken, and to restore trust the apology must be hard. This column discusses a model of apologies as costly signals with some recent experimental evidence.
The pain of the UK’s Great Recession has been spread more evenly than previous downturns, with falling real wages across the distribution. This column asks why this happened, how it compares with the US experience, and what the prospects are for recovering lost wage gains.
The debt-growth link is essential to today's marcoeconomic policy choices. This Vox Talk discusses new evidence based on data on total public debt for 105 economies between 1972 and 2009 and two centuries of data for the UK, US, Sweden and Japan. There is no convincing proof that austerity works and that it is dangerous for policy makers to pretend otherwise.
Global value chains play an important role in many nations’ globalisation and development policies. Using a new indicator based on a global dataset – the World Input-Output Database – this column shows that international production networks have, since 2000, spread across regional blocs faster than they have spread within them. ‘Factory World’ is still a work in progress, but the construction is progressing rapidly
Inflation targeting and price-level targeting have excited economists for decades. This column reviews a survey on the merits of price-level targeting. The latter could potentially help monetary policy deal with the zero bound on nominal interest rates. Such beneficial effects depend on rational expectations and a New Keynesian structure of the economy.
Generic medicines are cheaper than their branded counterparts, offering potential savings in healthcare budgets. Medicine-price regulation plays an important role in the expansion of the market for generic medicines. This column presents new evidence that higher levels of price regulation, by lowering the expected price to generic manufacturers, lead (ceteris paribus) to greater delays in generic entry.
The height of today’s populations cannot explain which factors matter for long-run trends in health and height. This column highlights the correlates of height in the past using a sample of British army soldiers from World War I. While the socioeconomic status of the household mattered, the local disease environment mattered even more. Better education and modest medical advances led to an improvement in average health, despite the war and depression.
Many claim that China will soon overtake the US. This column argues that this claim is based on a misuse of statistics. ICP price data is necessary to compare living standards, since a dollar’s worth of yuan buys more in China than a dollar buys in the US. But the fact that rice and clothes are cheap in rural China does not make the Chinese economy larger. What matters for size in the world economy is how much a yuan can buy on world markets. Using the correct prices, the US remains the world’s largest economic power by a substantial margin.
Recent supreme court action has reintroduced labour reform into India’s public debate. This column estimates productivity effects of deregulation exploiting state-level variation in policy and plant-level data. Even modest deregulation has improved total factor productivity substantially; this sets the scene for a deep liberalising reform
Cross-border funding between banks collapsed following the bankruptcy of Lehman Brothers, but the withdrawal of funding was not uniform across countries. This column argues that the composition of cross-border bank-to-bank funding can help to explain why. Interbank funding between unrelated banks is particularly vulnerable to global shocks, but intragroup funding between related banks can act as a stabilising force, particularly for advanced economies with a high share of global parent banks. Policymakers should look at disaggregated cross-border bank-to-bank flows, as doing otherwise could result in a misleading assessment of financial stability risks.
During the recent financial crisis, not much attention has been paid to the indebtedness of non-financial corporations, as little is known about what drives their financing. This column looks at financial policies of non-financial corporations over the last century. It shows evidence that a primary factor affecting the amount of corporate borrowing is the amount of borrowing by the government. Government borrowing crowds out the ability of the corporate sector to borrow. Thus, policymakers should be cautious in altering government policies in an attempt to reduce corporate debt usage.
Several US states have recently implemented laws requiring the collection of sales tax on online purchases. In practice, however, only Amazon.com has been affected. This column shows that households living in these states have reduced their Amazon expenditures by 9.5%. It also shows that the decline in Amazon purchases is offset by a 2% increase in purchases at local brick-and-mortar retailers and a 19.8% increase in purchases through the online operations of competing retailers.
The undergraduate economics curriculum is hugely influential, since today’s undergraduates are tomorrow’s policymakers. The massive policy failures before and after the Global Crisis have thus prompted a rethink. This column argues that there is a reasonable degree of consensus on the need for curriculum reform, but no agreement on whether this means rejecting the basic building blocks of the subject. Nevertheless, undergraduate courses in five or ten years will almost surely have changed considerably in character.
Developing countries gained significant market shares in both industrial and developing countries throughout the 1990s and 2000s. This column highlights that China accounts for more than 70% of market share gains by developing countries in both industrial and developing countries during the 2000s. Recent increases in the industrial capabilities and competitiveness of developing countries can thus be considered predominantly a Chinese affair.
David Autor talks to Viv Davies about his recent research that analyses the differential effects of trade and technology on employment patterns in US local labour markets between 1990 and 2007. While the effect of trade competition is growing over time, the effect of technology has shifted from automation of production activities in the manufacturing sector towards computerisation of information-processing tasks in the service sector. The interview was recorded in April 2014 at the annual conference of the Royal Economic Society.
Inflation expectations are not fully captured with a single number. One important aspect is the degree of "disagreement" or "dispersion" in such expectations. This column discusses how the distribution of Japanese households' medium-horizon inflation expectations evolved using survey data. As prices have been rising since 2013, the expectations distribution showed a decrease in respondents expecting deflation or high inflation, and there was a substantial increase in respondents expecting moderate inflation.
There is a robust positive association between support for cannabis liberalisation and cannabis use, but it is unclear whether users have discovered that cannabis is innocuous, or if these types are inherently more liberal regarding drug policy. This column exploits variations in opinion between current and former cannabis users to work towards establishing causality. Results suggest that supporters of liberalisation are speaking from experience rather than personal interest.