The notion that Europe and other advanced economies are suffering secular stagnation is gaining traction. This column by Larry Summers – first published in the Vox eBook “Secular Stagnation: Facts, Causes and Cures” – explains the idea. It argues that a decline in the full-employment real interest rate coupled with low inflation could indefinitely prevent the attainment of full employment.
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Wealth inequality in the US has followed a U-shaped evolution over the last century – there was a substantial democratisation of wealth from the Great Depression to the late 1970s, followed by a sharp rise in wealth inequality. This column discusses new evidence on the concentration of wealth in the US. Growing wealth disparity is fuelled by increases in both income and saving rate inequalities between the haves and the have nots.
House price fluctuations take centre stage in recent macroeconomic debates, but little is known about their long-run evolution. This column presents new house price indices for 14 advanced economies since 1870. Real house prices display a pronounced hockey-stick pattern over the past 140 years. They stayed constant from the 19th to the mid-20th century, but rose strongly in the second half of the 20th century. Sharply increasing land prices, not construction costs, were the key driver of this trend.
There has been renewed interest in sovereign debt since the Global Crisis, but relatively little attention has been paid to its composition. Sovereign debt can differ in terms of the currency it is denominated in, its maturity, its marketability, and who holds it – and these characteristics matter for debt sustainability. This column presents evidence from a new dataset on the composition of sovereign debt over the past century in 13 advanced economies.
Most of the world is now at the point where the support ratio is becoming adverse, and the growth of the global workforce is slowing. This column argues that these changes will have profound and negative effects on economic growth. This implies that negative real interest rates are not the new normal, but rather an extreme artefact of a series of trends, several of which are coming to an end. By 2025, real interest rates should have returned to their historical equilibrium value of around 2.5–3%.
In December 2008, the Fed lowered the federal funds rate to essentially zero and has kept it there since then. This column argues that, contrary to traditional macroeconomic thinking, monetary policy has not been severely constrained by the zero bound until mid-2011. The results imply that the Fed could have done more to ease monetary policy between 2009 and 2011. These findings could also help explain why the fiscal stimulus package adopted in 2009 did not bring the expected success.
There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
The current debate on the efficacy of Keynesian stimulus mirrors the resistance Keynes met with when initially advocating his theory. This column explains the original controversy and casts today’s policy debate in that context. Now that concepts of Ricardian equivalence and the fiscal multiplier are formally defined, we are better able to frame the arguments. The authors argue that a simple model of the short-run economy can substantiate the argument for stimulus.
Economists disagree over the origin of the Eurozone Crisis. This column uses a quantitative framework to sort through the various channels and policy impacts. It argues that fiscal and macroprudential policies are complements, not substitutes. Prudent fiscal policy is helpful but cannot by itself undo private leverage booms. Both prudent fiscal policies and macroprudential policies are required to stabilise the economy and make the Eurozone a viable monetary union.
There are large rewards of higher education in terms of earnings. However, a sizeable fraction of workers hold occupations that not require as much schooling as they have. This column considers the effects of being overeducated on future employment and wages for a representative cohort of Americans. Around 38% of the college graduates in the sample have higher education than the typical worker in their profession. Rather than transitory, the bulk of overeducation persists in the long run. Even if workers manage to transit to better jobs, they experience wage penalties similar to those after unemployment.
Optimal tax rates for the rich are a perennial source of controversy. This column argues that high marginal tax rates on the top 1% of earners can make society as a whole better off. Not knowing whether they would ever make it into the top 1%, but understanding it is very unlikely, households especially at younger ages would happily accept a life that is somewhat better most of the time and significantly worse in the rare event they rise to the top 1%.
The ECB seems to be edging towards QE, but faces a quandary on what to buy. This proposal suggests that the ECB buy ‘Safe Market Bonds’. These would be synthetic bonds formed by the senior tranches of EZ national bonds combined in GDP-weighted proportions. The ECB would merely announce the features of the synthetic bonds it will purchase. The market would create the bonds in response to this announcement, thus avoiding new EZ-level institutions or funds.
It is generally agreed that firms can improve their employees’ wellbeing through improvements in job quality – but is it in their economic interests to do so? This column reports research showing that satisfied employees and higher productivity go together. Analysis of the British Workplace Employment Relations Survey finds that employee job satisfaction is positively associated with workplace financial performance, labour productivity, and the quality of output and service.
The ECB conducted a comprehensive assessment of banks and identified capital shortfalls for 25 banks, totalling €25 billion. In this column, the authors provide a number of benchmark stress tests to estimate capital shortfalls. The analyses suggest possible capital shortfalls between €80 billion and more than €700 billion depending on the model. They find a negative correlation between their benchmark estimates and the regulatory capital shortfall, and a positive one between the benchmarks and the regulatory estimates of losses. This suggests that regulatory stress test outcomes are potentially affected by the discretion of national regulators.
Recent advances in artificial intelligence could affect manufacturing and the labour markets in a number of ways. This column explores two of them. First, it finds no confirmation that machines have decreased the cost of labour and brought manufacturing back to rich countries. Second, it argues that machines could replace highly skilled workers rather than increase the demand for their labour. Technology and skills are thus substitutes not complements.
In the massive circumstances of total war, economic factors play the deciding role. Historians emphasise size in explaining the outcome of WWI, but this column argues that quality mattered as well as quantity. Developed countries mobilised resources in disproportion to their economic size – the level of development acted as a multiplier. With their large peasant sectors, the Central Powers could not maintain agricultural output as wartime mobilisation redirected resources from farming. The resulting urban famine undermined the supply chain behind the war effort.
Climate change has been the main driver of mass extinctions over the last 500 million years. This column argues that current evidence provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent.
While participation in global value chains is giving developing countries the opportunity to diversify production and to acquire know-how from global buyers, few countries in Latin America are taking advantage of these new forms of production. Using a combination of innovative datasets at the macro and micro levels this column presents a comprehensive picture of the participation of Latin America and the Caribbean in global value chains and describes why it is so low.
Heightened economic uncertainty has attracted much recent attention. Policymakers repeatedly emphasise uncertainty as a key factor driving the last two recessions – in particular the depth and length of the Great Recession. This column proposes asymmetric hiring rules as a mechanism that generates endogenous and joint movements in macro and micro volatility of employment growth.
Global current-account imbalances narrowed substantially over the past eight years. As a result, the systemic risks associated with these imbalances have decreased. This column argues that despite this narrowing, the net creditor and debtor positions diverged further. Some large debtor economies remain exposed to changes in market confidence. Containing remaining imbalances requires a rebalance in global demand.
Concerns about inequality are at the forefront of many policy debates. While inequality has increased in many countries over the past few decades, in others it has decreased. This column uses data from 117 countries over the past four decades to investigate the importance of such changes in inequality, as well as of overall economic growth. Whereas inequality changes in most countries have been small, differences in overall growth performance have been large. Policymakers should therefore be careful not to undermine growth in the quest for greater equality.
It’s a common perception that big cities are expensive. This column argues that most of the variation in prices across cities can be attributed to flaws in the conventional indexes. One problem with the standard methodology is that it compares prices of similar but not identical goods. A second issue is that most price indexes do not adjust for the availability of goods across locations. Correcting for these two problems, the authors find that grocery prices are actually lower in large cities.
Children born in crises face different initial conditions. Data on children born in East Germany just after the Berlin Wall came down confirms that this corresponds to worse adult outcomes. ‘Children of the Wall’ have 40% higher arrest rates, are 33% more likely to have repeated a grade by age 12, and are 9% more likely to have been put into a lower educational track. This column argues that these negative outcomes can be explained by the lower average parenting skills of those who decided to have children during a period of high economic uncertainty.
Many organisations are developing open platforms to create, store, and share knowledge. This column analyses editing data by Wikipedia users to show how content creation by individuals generates significant ‘spillover’ benefits, encouraging others to contribute to the collective process of knowledge production.
The impact of the stock and maturity of government debt on longer-term bond yields matters for monetary policy. This column assesses the magnitude and relative importance of overall bond supply and maturity effects on longer-term US Treasury interest rates using data from 1976 to 2008. Both factors have a significant impact on both forwards and term premia, but maturity of public debt appears to matter more. The results have implications for exit from unconventional policies, and also for the links between monetary and fiscal policy and debt management.
The ECB has published the results of its asset quality review and stress tests of Eurozone banks. This column argues that, while this process had clear shortcomings, it still constitutes a huge improvement over the three previous exercises in the EU. Nevertheless, the banking union is far from complete, and the biggest risk now is complacency. A long-term reform agenda awaits Europe.
India was among the hardest hit by the Fed’s ‘taper talks’. This column argues that this impact was large for two reasons. First, India received huge capital flows before 2013. This had made it a convenient target for investors seeking to rebalance away from emerging markets. Second, macroeconomic conditions had worsened, which rendered the economy vulnerable. The measures adopted in response were ineffective in stabilising the financial markets. Implementing a medium-term framework that limits vulnerabilities and restricts spillovers could be more successful.
A triple-dip recession in the Eurozone is now a distinct possibility. This column argues that additional monetary stimulus is unlikely to be effective, that the scope for further fiscal stimulus is limited, and that some structural reforms may actually hurt growth in the short run by adding to disinflationary pressures in a liquidity trap. The author advocates using tax incentives and tighter regulations to encourage firms to replace environmentally inefficient capital.
Sound corporate governance is essential for a well-functioning banking system and the integrity of financial markets. This column discusses the corporate governance of Italian banks, its regulatory framework, and the specific challenges arising from the role played by foundations and large cooperatives. Although Italian banks have recently made progress in improving their corporate governance, more needs to be done.
The TransAtlantic Trade and Investment Partnership (TTIP) has become a full-blown political issue as the two largest economic entities in the world are negotiating a deep integration agreement, going beyond what has been done previously in any agreement except the EU’s Single Market. This column estimates that a phasing-out of tariffs accompanied by a 25% cut in the trade restrictiveness of non-tariff measures would increase trade in goods and services between the two regions by 50%.
The feedback loop between banking crises and sovereign debt crises has been at the heart of recent problems in the Eurozone. This column presents stylised facts on the mechanisms through which banking and sovereign crises combine and become ‘twin’ crises. The results point to systematic differences not only between ‘single’ and ‘twin’ crises, but also between different types of ‘twin’ episodes. The timing of ‘twin’ crises – which crisis comes first – is important for understanding their drivers, transmission channels, and economic consequences.
Data on social attitudes show that the perceived burden of immigration on a nation’s public finances is one of the strongest economic concerns associated with hostility to immigration. Yet recent official reports suggest an important positive role for immigration in the long-run health of public finances. This column argues that there can be no general conclusions applicable in all circumstances about whether immigration is favourable or unfavourable for public finances. But evidence is emerging on particular cases through studies of immigrant composition and use of services, and the effects of immigration on native outcomes.
A common view in international finance is that currency trades make money because high-interest-rate currencies tend to appreciate. This column argues that this view is flawed, suggesting that currency risk premia may be much simpler than previously thought. The carry trade has little to do with the appreciation of the currency, but instead exploits persistent differentials in interest rates across countries. It is thus important to understand why some currencies have persistently higher interest rates than others.
Bankers’ bonuses are increasingly regulated but we know little about how they affect risk-taking and value-creation. Based on payroll data from 1.2 million bank employee-years in Austria, Germany, and Switzerland, this column finds evidence that bonuses affect both profits and risk-taking. Policy thus needs to strike a balance and acknowledge the limited regulatory capacity to determine optimal incentives. Higher capital requirements and shareholder empowerment might outperform simple bonus regulations.
Eurozone countries need to stop the stagnation and improve their management of future crises. In this column, the authors argue that both issues should be addressed simultaneously. To achieve this goal, they propose the creation of a European Federal Institute. This Institute would coordinate short-run anti-recession measures, and implement steps towards a federal budget that would fix the European institutional design in the long run.
The retreat to protectionism since the Global Financial Crisis has been more severe than previously imagined. Peak protectionism was believed to have passed in 2009. With evidence from the latest Global Trade Alert report, this column shows that since 2012 protectionist measures by G20 countries have exceeded the 2009 peak – which has also been revised upwards. Despite committing to liberalisation, G20 countries have a substantially worse record of protectionism than the next ten largest trading countries.
Capital flows to emerging markets have been very volatile since the global financial crisis. This has kindled debates on whether – and how – to better manage cross-border capital flows. In this column, the authors examine the role of capital account restrictions in both source and recipient countries in taming destabilising capital flows. The results indicate that capital account restrictions at either end can significantly lower the volume of cross-border flows.
The past three years have witnessed a slowdown in global trade. This column shows that the slowdown was particularly pronounced in advanced economies, especially the Eurozone. In a panel of 18 OECD economies, most of the slowdown can be explained by cyclical factors. However, structural factors – global value chains and especially protectionism – may have played a role too.
Critics of the ‘audit society’ and the so-called ‘new public management’ doctrines have gained momentum in recent years. At the centre of the critique is the so-called motivation crowding-out hypothesis. This column presents evidence from a field experiment involving Swedish non-profits. Far from crowding out intrinsic motivation, the threat of an audit improved all aspects of efficiency.
With WTO trade talks on the brink of failure (again), global trade governance is being decided elsewhere. This column argues that China and the US are pushing competing visions for free trade in Asia-Pacific. The US-led Trans-Pacific Partnership, TPP, could be challenged by a China-led ‘Beijing Road Map’ that may be announced at this week’s APEC summit. Neither vision is an end-game but merely one more stroke on an ugly picture of trade agreements characterised by an unsustainable amount of disorder and incoherence.
Although central banks have a natural desire to influence household inflation expectations, there is no consensus on how these expectations are formed or the best ways to influence them. This column presents evidence from a series of survey experiments conducted in a low-inflation context (the US) and a high-inflation context (Argentina). The authors find that dispersion in household expectations can be explained by the cost of acquiring and interpreting inflation statistics, and by the use of inaccurate memories about price changes of specific products. They also provide recommendations for central bank communication strategies.
In the aftermath of the Global Crisis, models with pecuniary externalities have gained popularity. This column presents a new framework that encompasses many of these externalities. The authors also show how to design financial contracts and markets in such a way that ex ante competition can achieve a constrained-efficient allocation.
A quarter of a century ago, the Iron Curtain and Berlin Wall were demolished. This was one of the most visible consequences of the fall of communism. In the decades before 1989 political conflict had shaped the world trade pattern. Against the background of political tensions in the Ukraine, this column investigates the vulnerability of the world trade system.
Understanding the probability and magnitude of financial contagion is essential for policymaking. This column applies a framework for modelling financial contagion to data on the cross-holding and credit risk of sovereign debt in Europe. Credit markets perceived little risk of contagion from these spillovers following a sovereign default. It is important for policy to assess other possible channels for contagion that could generate even bigger losses.
Recent scandals involving some financial benchmarks have shaken the confidence in them. Regulators have responded with sanctions and with actions to support more robust benchmarks. This column presents new research on how a benchmark administrator would optimally weigh transaction prices to produce a fixing. Weights assigned to the observed prices should be increasing in the size of the transactions. However, in this setting, it is typically impossible to implement a benchmark in a complete absence of manipulation.
Foreign reserve accumulation by China and other east Asian countries has been a controversial way to boost exports. This column argues that it is not even in their own national interests. The policy has been ineffective in maintaining China’s ordinary trade surplus, while its processing trade surplus continues to rely on devaluation in countries further up the supply chain. Foreign reserve divestment would increase purchasing power in east Asian countries, free up government revenue, and be innocuous to export competition if properly coordinated.
In the aftermath of the Global Crisis, policymakers and academics alike discussed how uncertainty surrounding macroeconomic policymaking has impacted domestic investment. At the same time, concerns regarding the spillover impact of monetary policy in advanced economies on emerging market economies featured strongly in the international policy debate. This column draws the two debates together, and examines how policy uncertainty in advanced economies has spilled over to emerging markets via portfolio capital flows. It finds remarkable differences in the spillover effects of EU vs. US policy uncertainty.
Forecasts of many macroeconomic variables tend to be serially correlated, which is inconsistent with rational expectations. This column presents new evidence from a two-decade panel of individual forecasts from 36 different nations. While there is evidence of sluggish behaviour in average forecasts, individual forecasts are revised quite often. Sticky information theory might not be an adequate description of the expectations formation of forecasters.
Like any insurance mechanism, unemployment benefits involve a trade-off between risk sharing and moral hazard. Whereas previous studies have concluded that unemployment insurance is close to optimal in the US, this column argues that replacement rates should vary over the life cycle. Young people typically have little means to smooth consumption during a spell of unemployment, while the moral hazard problems are minor – regardless of replacement rates, the young want jobs to improve their lifetime career prospects and to build up human capital.
The Fed is stretching out its zero interest-rate policy waiting for labour market improvements. As unemployment fell the emphasis shifted to wages, which are an even more problematic measure of economic conditions. Basing monetary policy on a notoriously long cyclical laggard is prone to policy mistakes. This column argues that moving up rate hikes would be wise and prudent.