Exact predictions of policy outcomes and estimates of the state of the economy are routine; expressions of uncertainty are rare. This column argues that with the US approaching the beginning of an administration, the incredible certitude of past governmental policy analysis will soon seem a minor concern relative to what lies ahead. Whereas analysis with incredible certitude makes predictions and estimates that are possibly true, analysis in a post-truth world makes predictions and estimates that are clearly false.
Economists are just starting to understand how observed input-output linkages and productivity differences are connected. This column investigates how differences in the distribution of sectoral input-output multipliers interact with sectoral productivities to determine cross-country differences in aggregate income. It finds that the impact of the linkages on productivity are substantial, which in turn has significant implications for policy.
Team Vox wishes to thanks all its readers and contributors for making 2016 a great year for the site. Vox will post no new columns between 25 December 2016 and 2 January 2017. There is, however, plenty to catch up on. This column presents a list of topical columns written by leading economists in 2016.
Policy advice for countries managing oil and gas windfalls is typically to smooth consumption boosts by borrowing on international capital markets pre-windfall, repaying the debt and accumulating assets in a sovereign wealth fund during the windfall, and withdrawing from that fund when the windfall ends. This column outlines various reasons why this approach can be disastrous for developing countries, and also considers the best response to a commodity price crash.
Global Value Chains have become the paradigm for the international organisation of production in almost all sectors. Bilateral gross trade flows no longer accurately represent interconnections among countries, so new methods of analysis are needed. Using tools of network analysis, this column assesses the roles of goods and services as both inputs and outputs in GVCs between 1995 and 2011 and examines the profile of Germany, the US, China and Russia as suppliers of value added.
Globalisation is in retreat, but while the slowdown in trade is widely recognised, what is more striking is the collapse of global capital flows. This column shows how banking deglobalisation is a substantial contributor to the sharp slowdown in global capital flows. It finds that certain types of unconventional monetary policy, and their interactions with regulatory policy, can have important global spillovers. Policies designed to support domestic lending may have had the unintended consequence of amplifying the impact of microprudential capital requirements on external lending.
Events of the last year have raised questions about the future growth of international trade. This column examines the role played by ‘global firms’ that both import and export, and are likely to be part of multinationals, in the international economy. In a world of interdependent firm decisions, small reductions in tariffs or trade costs can have magnified effects on trade flows, as they induce firms to serve more markets with more products at greater volumes, and also to source greater volumes of intermediate inputs from more countries. At the same time, policies to restrict imports can end up hurting producers for whom both importing and exporting are a central pillar of their overall business strategy.
A new set of historical national accounts for Spain constructs estimates of output and expenditure from 1850 onwards, which means we can estimate the evolution of GDP per capita and labour productivity during this period. This column argues that the data demonstrates that GDP per capita captures long-run trends in welfare in Spain, but not short and medium run trends.
The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions of finance and the real economy has been widely recognised since the Global Crisis. This column argues that the flaws in these models stem from unrealistic micro-foundations for household behaviour and from wrongly assuming that aggregate behaviour mimics a fully informed ‘representative agent’. Rather than ‘one-size-fits-all’ monetary and macroprudential policy, institutional differences between countries imply major differences for monetary policy transmission and policy.
Innovation is often associated with a few visionaries working in new and dynamic industries. In practice, however, critical innovation occurs daily at many points throughout a supply chain. This column uses recent survey data to examine innovation in the US automotive supply chain. Process innovations can have major downstream benefits, and ‘collaborative creativity’ between suppliers and customers is found to be critical in innovation efforts. US automakers should focus on strengthening ties with their suppliers in order to remain competitive.
African countries are scrambling to bring industrial firms into the continent, and workers face a choice between industrial jobs and self-employment. This column reports the results of a randomised controlled trial of 1,000 job applicants in Ethiopia, which suggests that industrial workers earned no more in a year than those given training as entrepreneurs, and had higher disability rates. Two-thirds of industrial workers chose to quit, suggesting that low wages and poor working conditions are a concern for policymakers who promote industrialisation.
A recent Vox eBook examined the potential issues facing various EU members when it comes to negotiating with the UK over Brexit. This column, taken from the ebook, argues that Poland should be in favour of a ‘soft’ Brexit, with the UK retaining access to the Single Market and remaining open to exports from EU countries – including Poland – and contributing to the EU budget.
It is generally assumed that central bankers often argue over the appropriate conduct of monetary policy. Focusing on the Bank of England’s Monetary Policy Committee, this column argues that based on what policymakers vote for, there is no evidence that they disagree with one another in any meaningful sense. Either policymakers essentially agree all the time, or they do not vote their view.
Emerging economies are substantially reliant on foreign corporate debt issuance, which has major macroeconomic implications. This column quantifies the extent to which debt issuance matters for macroeconomic performance in emerging economies, and how much macro vulnerability it has entailed. It finds evidence that a large increase in debt reliance has had a considerable effect on macroeconomic performance, but suggests that potential negative impacts on overall health of economies can be reduced in the future if policymakers have access to more and better information.
Regulation is a barrier to trade. This column uses French firm-level panel data to assess how technical barriers to trade impact firms’ exports. In the presence of stringent barriers, exporters balance the cost of complying with this regulation against the fixed cost of entering a new market. Barriers reduce the number of exporting firms in each sector-destination, especially in sectors with many multi-destination firms.
Since the Global Crisis, many governments around the world have initiated policies against tax evasion and harmful tax avoidance. This column uses data from an Austrian commuter allowance scheme to explore how the design of tax schemes and the social environment affect compliance. A substantial share of employees in the study misreport their commuting distance in order to receive more compensation. Employees also appear to be influenced by the misreporting behaviour of their co-workers, showing how tax evasion can have spillover effects.
When a government wants to cut a deficit, it must decide both how and when to do it. Research has treated the two questions as if they are independent, which risks attributing good policy to good timing, or vice versa. This column argues that when the effects are considered simultaneously, the composition of fiscal adjustments is much more important than the state of the cycle. Fiscal adjustments based upon spending cuts have losses that are on average close to zero, while those based upon tax increases are associated with large and prolonged recessions, regardless of whether or not the adjustment starts in a recession.
Per-capita income in developed countries has stagnated, which most economists regard as a departure from the long-run trend. This column argues that zero long-term growth will be the new normal. In this zero-growth world, spending increases must always be balanced against spending reductions elsewhere or in the future, which creates a further problem: no politician could implement policy changes with such bleak outcomes.
A recent Vox eBook examined the potential issues facing various EU members when it comes to negotiating with the UK over Brexit. This column, taken from the ebook, argues that Sweden should work for a happy divorce that lays the foundation for a remarriage, or 'Brentry'. As part of this, the authors advocate a temporary escape clause concerning the free movement of labour, which any member state can invoke when and only when they can prove that EU migration is directly harming a significant part of domestic society.
Global natural wealth has shifted from North to South over the past decades, with discoveries of major oil and gas fields and mineral deposits first in Latin America and more recently in Sub-Saharan Africa. This column argues that a more outward market orientation on the part of developing countries has been the key driving force behind this shift – over and above other forces such as the increase in emerging markets’ demand and/or developed countries running out of natural resources.
Discretionary macroprudential policies aim to be countercyclical by adjusting risk-taking across the financial cycle. This column argues that the opposite effect may happen in certain cases. Depending on how regulators measure risk and how they react, the eventual outcome may well be procyclical, with serious unintended consequences.
Lack of access to credit in developing countries traps farmers in poverty. At the same time, there is a lack of evidence that microfinance raises the incomes of the poor while maintaining high repayment rates. Using a field experiment in West Bengal, this column argues that incentivising local intermediaries to select loan recipients improves both average income growth and crop yields compared to traditional microfinance. There is no evidence that this strategy lowers equity, although some disadvantaged groups performed better in the existing system.
Since its inception, the Eurozone has had lower growth and higher unemployment rates than other regions, which suggests the need for new fiscal instruments. This column argues for a stabilisation instrument based on unemployment as the driving indicator. This unemployment benefit scheme coud take the form of a basic common European scheme, or a reinsurance fund supporting national systems. In either case, the instrument wouldn’t be a panacea, and the key obstacle to implementation would be political.
An efficient allocation of inputs across firms is a necessary condition to boost TFP growth. This column presents evidence that in large Eurozone economies, capital misallocation trended upwards in the period 2002-2012 while labour misallocation dynamics were flatter. Uncertainty and credit market frictions were strongly associated with the observed developments in capital misallocation, whereas the overall deregulation in the product and labour markets contributed to dampening input misallocation dynamics.
A recent Vox eBook examined the potential issues facing various EU members when it comes to negotiating with the UK over Brexit. This column, taken from the ebook, suggests that France is likely to seek to include the UK in a comprehensive free trade zone to maintain easy access to the UK markets, but with a view to safeguarding its own competitiveness.
In the years since the Global Crisis, there has been substantial public opposition to taxpayer-funded bailouts of financial institutions. Reflecting this sentiment, a cornerstone of the EU’s post-crisis resolution framework is that losses be borne by private investors and creditors. This column surveys some of the details that need to be worked out before such bail-in measures can work. Effective implementation requires clear identification of the limits to bail-in. In particular, for such measures to be successful, bailout cannot be ruled out by assumption.
Understanding the key determinants of people’s life satisfaction will suggest policies for how best to reduce misery and promote wellbeing. This column discusses evidence from survey data on Australia, Britain, Germany, and the US which indicate that the things that matter most are people’s social relationships and their mental and physical health; and that the best predictor of an adult’s life satisfaction is their emotional health as a child. The authors call for a new focus for public policy: not ‘wealth creation’ but ‘wellbeing creation’.
Japan and South Korea are distinctive among developed countries for their gender inequality in managerial positions. This column looks at the ‘glass ceiling’ in the two countries. After controlling for age, education, and employment duration, between 70% and 80% of the gender disparity is unexplained in both countries, with women appearing to face greater inequality as they move up to more senior managerial positions.
The macroeconomic effects of immigration are a hot topic, particularly during elections. Using immigration records from Norway, this column argues that an increase in immigration lowers unemployment (even for native workers) and has no negative effects on public finances. However, it identifies a negative effect on productivity that may be a worry for long-term growth.
A recent Vox eBook examined the potential issues facing various EU members when it comes to negotiating with the UK over Brexit. This column, taken from the ebook, asks which negotiating strategy the Belgian government should take in the process of achieving new trade relations with the UK, and also which strategy the Belgian government is likely to take.
Youth unemployment is a growing problem around the world, particularly in urban areas. This column assesses the impact of labour market interventions in Addis Ababa targeting two issues commonly faced by unemployed youth: job search costs and a poor ability to signal their skills. A transport subsidy and a job application workshop were both found to have significant positive effects on youth labour market outcomes, pointing to the important role policymakers can play in helping young people find satisfying employment.
The Global Crisis has triggered substantive policy responses, but assessing the impacts of these and the effects on the real economy is a challenging task. This column discusses the work of the International Banking Research Network in examining international spillovers of prudential instruments through credit provision by banks. It finds that prudential instruments sometimes spill over across borders through bank lending, and that international spillovers vary across prudential instruments and are heterogeneous across banks. There appears to be no one channel or even direction of transmission that dominates spillovers.
Political risk is a major cause of systemic financial risk. This column argues that both the integrity and the legitimacy of macroprudential policy, or ‘macropru’, depends on political risk being included with other risk factors. Yet it is usually excluded from macropru, and that could be a fatal flaw.
Despite lifting millions out of poverty, globalisation is facing growing political opposition. This column surveys the successes and failures of globalisation, and some of the critical policy implications. Globalisation has reached a stage where its benefits have been captured but its costs have been largely ignored. Going forward, governments need to address inequality and social inclusion, boost global investment, and restore confidence.
A recent Vox eBook examined the potential issues facing various EU members when it comes to negotiating with the UK over Brexit. This column, taken from the eBook, examines Spain's negotiating position, including the possible stumbling block of Gibraltar.
The Bank of Japan has recently implemented one of the largest central bank policy shifts in modern times, raising its inflation target explicitly to 2% and kicking off the most rapid balance sheet expansion among the leading central banks. This column assesses this policy decision and its potential pitfalls, and compares it to similar policies enacted in the past. Unless policy has a significantly larger impact on financial conditions going forward than it has to date, the revised framework will likely be insufficient to achieve the Bank’s inflation target any time soon.
A recent Vox eBook examined the potential issues facing various EU members when it comes to negotiating with the UK over Brexit. This column, taken from the eBook, focuses on Germany and argues that as the country's prosperity is inseparable from the success of Europe and the Eurozone, Germany's priority has to be to preserve both and to avoid corrosive, possibly divisive or even destructive compromises with a country that wants to leave.
As with previous systemic crises, the 2007-2009 crisis has created regulatory reform, but is it adequate? This column argues that prudential regulation should consider interactions between conduct – capital, liquidity, disclosure requirements, macroprudential ratios – and structural instruments, and also coordinate with competition policy. Though recent reforms are a welcome response to the latest crisis, we do not know how effective they will be in future.
Behavioural economics has been playing an increasingly important role in public policy the world over, and Canada is no exception. This column outlines the steps Canada is taking towards incorporating insights from the literature into its policies. It also highlights the emphasis that many agencies in Canada are placing on testing their prospective behavioural interventions through randomised control trials.
Thirty years ago, a distinguished group of economists advocated a ‘two-handed’ approach to unemployment that targeted supply as much as demand. This column examines recent work on the effectiveness of cyclical and structural policies – the two ‘hands’ – targeting unemployment in Europe. It further considers the pressures from greater integration of capital and labour markets on the success of these reforms. Cyclical measures, particularly the easing of monetary policy, have been successful, but further structural reforms are still needed in many countries where average unemployment remains too high.
There is a belief among the general public that employment volatility tends to be greater for firms with higher foreign exposure, but the relationship between the two is ambiguous in theory. This column uses firm-level data for Japan to compare the impact of foreign exposure on employment volatility for multinational, trading, and non-trading firms; for manufacturing and wholesale and retail trade; and for intra-firm and inter-firm trade. In manufacturing, the effect of exports on the volatility of employment varies, depending on the share of intrafirm exports to total sales. In wholesale retail, the effect of exports is generally insignificant.
Conventional logic suggests that lowering the policy interest rate will stimulate consumption and investment while discouraging people from saving, but low interest rates may also prompt people to increase their saving to compensate for the low rate of return. Using data on 135 countries from 1995 to 2014, this column shows that a low-interest rate environment can yield different effects on private saving across country groups under different economic environments. A well-developed financial market, an ageing population, and output volatility can all contribute towards turning the relationship between interest rates and saving negative.
Employment subsidies have been widely used in OECD countries to counteract the recent job crisis, but their effectiveness is difficult to assess. This column summarises the findings of a recent study analysing a 2012 Spanish employment subsidy given to firms with fewer than 50 employees that make use of a new type of permanent contract. Consistent with other country studies, it fails to find robust evidence for increased employment growth due to the subsidy scheme.
Despite its many benefits, donor governments show little enthusiasm for budget aid, instead preferring to give project aid over which they have greater control. This column argues that budget aid is better than project-specific aid because it attributes full responsibility of expenditure to the recipient government, allowing voters to respond at the ballot boxes to how well the aid is used.
Policies aimed at encouraging entrepreneurship are popular around the world, but a recent literature suggests that entrepreneurship might be more predetermined than previously thought. This column uses sibling correlations to tease apart the importance of genes, family background, and neighbourhood effects for later entrepreneurship. Parental entrepreneurship and genes are the two main drivers of sibling similarities in entrepreneurship. However, children do appear to be able to learn about entrepreneurship through their family and community, so it may be possible to teach relevant skills to young people.
Over the past three years, 18 states plus the District of Columbia have implemented minimum wage increases, joining ten other states that have raised their minimum wages at least once since the last Federal increase in 2009. This column examines the impact of the more recent state increases on wages, weekly earnings, and employment among workers in the low-wage leisure and hospitality Industry. A comparison with states with no minimum wage increase since 2009 suggests that the recent legislation contributed to substantial wage increases with no discernible impact on employment levels or hours worked.
Between 1870 and 1914, 68 countries – both sovereign and British colonies – used the London Stock Exchange to issue bonds. This column argues that bond prices and spreads in this period show that the colonies’ semi-sovereignty lowered credit risk at the price of higher illiquidity risk, and further worsened liquidity by attracting investors that rarely traded. Parallels between Eurozone and colonial bonds suggest that the pricing of liquidity and credit in government bond markets is an institutional phenomenon.
A recent literature has shown that successful firms have in common a deliberate and active management of their internal structure. This column uses an export promotion programme in Brazil that provided consulting on management and production practices to small and medium enterprises to examine whether policies can prompt and support firm reorganisations. It finds that firms participating in the programme were 20% more likely to add a new layer of workers with more specialised skills and competencies.