One common concern about membership of the EU is the notion that poorer members have more to gain than richer ones. This column focuses on the countries that joined the EU in 1973 (Denmark, UK and Ireland) and in 1995 (Austria, Finland and Sweden). The authors estimate that these rich countries benefited substantially from joining the EU. Furthermore, while the benefits from EU membership to poorer countries tend to be mostly in terms of per capita income, for richer countries the benefits tend to be mostly in terms of productivity.
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Illegal drugs are one of the planet’s most pressing problems. They shatter hundreds of millions of lives and wreak untold social, economic and political damage in both consuming and producing nations. In this column - originally published 22 May 2012 -- the ex-President of Mexico, Ernesto Zedillo, introduces an eBook he edited on the issue that points very strongly in the direction of a serious reconsideration of drug policy.
The economic consequences of leaving the EU are at the heart of the Brexit debate. This column studies how changes in trade and fiscal transfers to the EU following Brexit would affect living standards in the UK. Across a range of scenarios, Brexit leads to lower income per capita, but the magnitude of the loss depends on what trade policies the UK adopts post-Brexit. To minimise the economic costs of Brexit, the UK would have to remain closely integrated into the Single Market.
Diagnosing the EZ Crisis is a critical first step towards developing a consensus on how the monetary union should be fixed. This column contrasts views that place the blame mostly on markets with those that place the onus on governments. The fixes necessary for the survival of the euro are – correspondingly – more ‘market discipline’ or ‘political discipline’ exerted at the European level. Neither is very attractive, but it should be clear that ‘market discipline’ is not a mechanism run by atomistic players. Global wealth is highly concentrated, so market discipline means, de facto, a regime of plutocracy.
It costs a relatively large amount of money to buy a house in the UK – something readers from the UK will almost certainly agree with. But economists differ over why this is. This column argues that strict planning regulations are a prime culprit for sky-high prices and that without any real regulatory change, it is the young that will suffer.
Some analysts claim that secular stagnation is responsible for the disappointing post-crisis economic performance. This column provides a different explanation that points to an unsuspected villain: the misallocation of resources (in our case, labour) during the pre-crisis financial boom and the long shadow it has cast post-crisis. The findings draw on an empirical analysis covering more than 20 advanced economies over 40 years. They add strength to the view that the economy has been struggling with the legacy of a major financial boom and bust that has left long-lasting scars on the economic tissue. They also raise broader questions about the interpretation of hysteresis effects, the need to incorporate credit developments in the measurement of potential output and the design of policy more generally, and the role and effectiveness of monetary policy in the short and long term.
The increasingly digital 21st century economy – with many zero-priced goods and services – is a challenging place for those striving to measure economic activity. This column reviews some of the main themes of the Bean Report on UK economic statistics. It suggests the exploitation of new data sources and the creation of a network of academics, private sector actors, and expert users. They would undertake research and development into the measurement of the economy and propose experimental statistics to capture the new phenomena.
On 23 June, the UK will decide whether or not to leave the EU. While the general population is divided on the issue, the overall consensus among economists at a session on Brexit at the Royal Economic Society’s annual conference was that Britons should vote to stay in the EU. This column presents the views of the four panellists at the session on the trade implications and the economic and political economy costs of Brexit.
Lloyd Shapley, game theorist and co-recipient of the 2012 Nobel Memorial Prize in Economic Sciences, passed away in March. This column, by the economist with whom he shared the Nobel, outlines Shapley’s intellectual life and career, which was among the most fertile of the 20th century. Shapley made fundamental contributions to the analysis of both cooperative and non-cooperative games. Some of his foundational ideas have led to the study of matching markets and to the thriving branch of practical economics known as ‘market design’.
Oil prices have fallen sharply and remained persistently low, but the expected demand boost has not materialised. This column notes that when nominal interest rates are pinned at zero, lower inflation due to a drop in oil prices raises real interest rates, working against the traditional positive income effects. Dangers arise from the possibility of unanchored inflation expectations and dislocations – including corporate and sovereign defaults – that could spook already jittery financial markets. To combat such negative loops, demand support by the global community – along with a range of country-specific structural and financial-sector reforms – is urgent.
Entrepreneurship often concentrates in certain geographic locations, with Silicon Valley the most famous example today. While a large literature focuses on these cross-location differences in entrepreneurial density, questions remain about the supply of entrepreneurial skills across locations. Using Italian data, this column investigates whether selection into entrepreneurship is affected by learning opportunities in adolescence. Those who grow up in an area with higher entrepreneurial density are found to be more likely to become entrepreneurs themselves. They are also more likely to succeed and earn a higher income.
The effects of mandatory military conscription on the education, crime, and labour market outcomes of the draftees are not clear. This column suggests that the heterogeneous nature of the effects could be an explanation for the lack of consensus. The findings show that military service increases the likelihood of future crimes, mostly among males from disadvantaged backgrounds and with a previous criminal history. The only positive effect of conscription for this group is the decrease in disability benefits and the number of sick days.
The dramatic episodes in the Eurozone in the past few years called for a number of policy reactions. Yet the response was usually limited to what was deemed indispensable to ensure survival. This column discusses how such half-solutions paved the way for future crises. The author also puts forward a few proposals regarding the Eurozone’s policies. Among them are a European Monetary Fund, an overhaul of surveillance, the completion of banking union, an insolvency procedure for sovereigns, and Eurobonds of some sort. And the sooner such issues are deeply discussed, the faster coherent solutions can be reached.
Recent decades have seen a remarkable increase in the concentration of wealth in the hands of the wealthiest in the US. This column examines which factors may have driven this increase. The evidence points to higher wage inequality, often attributed to new developments in the technology of production, as the main driving force, followed by tax cuts for top earners and more generous public transfers as secondary factors.
The quantity theory of money implies that sustained inflation requires a sustained increase in the money supply. It does not, however, imply that the reverse is also true. This column explores and illustrates this issue by comparing inflation in the US following the collapse of Lehman Brothers with Germany’s hyperinflation experience after WWI. A key factor explaining the vastly different inflation experiences is how the monetary expansion translated into demand. The Fed’s base expansion did not translate into demand for goods and services, whereas the German monetary expansion was motivated by the government’s hunger for seigniorage revenues.
Lower oil prices are putting increasing pressure on Arab oil producers, and many pundits have been quick to blame US shale oil producers for the decline in prices and in Arab oil revenues. This column measures how much the the shale oil boom contributed to the fall in the global price of crude oil. The Brent price of crude oil since 2011 would have been as much as $10 per barrel higher in the absence of US shale oil. But as large as this effect is, it pales in comparison with the decline in the price of oil that took place after June 2014, to which shale oil actually contributed little. The column goes on to discuss the policy options facing Arab oil producers.
Helicopter money is frequently in the headlines but frequently misunderstood. This column reviews the VoxEU columns that have – since 2010 – provided research-based policy analysis of this ‘beyond unconventional’ policy.
Forecasts of business conditions affect investment decisions. This column provides evidence that this is the case in Japan, using firm-level data collected between 2004 and 2014 covering several significant economic events. It also shows that the impacts of business condition forecasts on investment are similar across manufacturing and non-manufacturing industries.
In order to preserve financial integration and stability, the Eurozone needs to build elements of a common fiscal policy. This column, first posted 12 February 2016, discusses how this could be done. It proposes the creation of a European Fiscal Institute, modelled on principles similar to those used for the ECB. Such an establishment would require treaty and constitutional reforms in member states, which would not be politically feasible in the short term.
A lot has been achieved in terms of institution building to turn the Eurozone into a sustainable currency union. The Eurozone Crisis, however, has shown that the Eurozone is still not a properly functioning currency union. This column, first posted 12 February 2016, points to three areas of further reform to achieve such a goal. These include the disentanglement of sovereigns and banks, completion of a banking union, and an institutional convergence for a fully integrated financial system.
The euro is unique in that it is a currency without a sovereign. Since the crisis, there have been major developments towards making the Eurozone more resilient, including the banking union and the European Stability Mechanism (ESM). This column, originally published 12 February 2016, explores whether further normalisation is required to make the Eurozone function properly. It argues that the Eurozone, unlike existing federations, lacks the ability to deliver counter-cyclical fiscal policies while complying with fiscal discipline. Macroeconomic coordination will thus require rules, a strong and independent European Fiscal Board, and the strengthening of the ESM.
Geographic proximity between innovating actors has been shown to facilitate knowledge transfers and spillovers. However, the degree to which these effects are driven by serendipitous encounters has yet to be examined. This column explores this issue for a sample of Norwegian firms. Of the relationships that help firms innovate, fewer than 10% are formed in purely casual circumstances. The results imply that knowledge isn’t so much ‘in the air’; transfers usually result from purposeful search.
The ECB recently announced a new monetary operation – targeted longer-term refinancing operations, or TLTRO II – that essentially subsidises bank loans to the real economy. This column argues that this ‘cash for loans’ scheme, which might cost up to €24 billion, is unlikely to affect the real economy greatly. This is because banks can easily window dress their loans to qualify. TLTRO II also tests the limits of the ECB’s mandate by stepping into the fiscal policy space.
Financial deregulation in the US has been shown to be associated with rising income inequality over the past four decades. This column looks at the income effects of financial deregulation in the UK and Japan during the 1980s and 1990s. As in the US, deregulation substantially increased the shares of income going to the very top of the distribution. These findings highlight the importance of financial markets in the evolution of income inequality in society.
Women remain underrepresented in many aspects of political and civic life. This column explores the empirical significance of representation, exploiting a 1919 law that made women eligible to serve on English juries. Archival court data show that female representation boosted convictions in sex offenses cases. The magnitude of results highlights how dramatically underrepresentation can influence the functioning of civic institutions.
Over the past two decades, the ICT revolution has changed the meaning of distance. But we still do not fully understand the impact of the internet on economic activity such as international transactions. This column shows that virtual distance has an important impact on international investment flows, and more so on portfolio equity than on portfolio debt investment.
Since the breakup of Bretton Woods in the early 1970s, the housing market has been at the centre of the biggest banking crises across the world. This column considers the nexus between housing, banking, and the economy, and how these ties can be broken. It argues for two modest regulatory changes in banking and insurance. These would result in life insurers and pension funds providing mortgage finance, better insulating the economy and homeowners from the housing cycle.
A new National Living Wage (NLW) replaces the UK’s National Minimum Wage from April. This column reports the views of leading experts on its likely effects on employment, wages, and prices. A majority of respondents in the monthly Centre for Macroeconomics survey believe that the NLW will not lead to significantly lower employment; similarly, a majority of respondents believe that the NLW will only have a muted effect on wages and prices. The key unknown for many in considering the overall economic impact of the NLW is how quickly the UK economy will grow over the coming years.
Through the Eurozone rescue mechanisms, Germany provided the periphery with hundreds of billions in debt at very low rates. There is a widely held notion that these savings would have been better used at home. This column challenges this notion, presenting evidence that Germany’s net asset position held up well, remaining much higher than domestic returns. The main reason is that Germany’s part in the rescue operations was actually much smaller than its claims towards the periphery.
Big Data is changing the world, even economics. This column describes MIT’s Billion Prices Project and discusses key lessons for both inflation measurement and some fundamental research questions in macro and international economics. Online prices can be used to construct daily price indexes in multiple countries and to help avoid measurement biases.
The slowdown of global trade growth since the Global Crisis has raised concerns across the world. This column puts recent changes into perspective by presenting evidence on the export/GDP ratio and a rough measure of the gains from trade back to 1830. It shows that the interwar period was marked by a reversal of globalisation that makes recent trends look like a small blip.
Since the Crisis, macroprudential policy has become a necessary complement to monetary policy. The ECB is striving to be a major contributor to the growing body of thought about the role and instruments of this new policy area. In this column, Vice-President Vítor Constâncio introduces the new bi-annual ECB Macroprudential Bulletin aimed at widening awareness about the Bank's macroprudential policy mandate, enhancing transparency, and informing about current ECB discussions and approaches in the field.
Pollution levels are orders of magnitude higher in lower-income countries than in the developed world. This means that studies of the health effects of pollution based on data from the latter will not necessarily be relevant to the former. This column reports on the effect of air pollution on infant mortality in Mexico City. Significant effects are found that are much larger than found in earlier work based on US data. These findings highlight the potential pitfalls of naively extrapolating findings from high-income to developing countries.
Short-term contracts are viewed as a way of stimulating youth employment. This column presents evidence that this is the case in Spain, but that such contracts are also detrimental to job stability and lifetime earnings. The negative effects get stronger the longer workers are exposed to fixed-term contracts.
The recent refugee crisis in Europe has highlighted that increased immigration leads to political success for extreme right-wing parties. This column uses evidence from three elections in Italy to quantify the impact immigration has on the political success of non-extreme right-wing parties. In the Italian case, immigration leads to bigger gains for centre-right parties than extreme right parties.
Many claim that monetary policy has hit diminishing returns. They use that as an explanation for the slower economic growth and low inflation in the Eurozone. This column argues that the main problem is that the ECB acted late and with half-measures to the Global Crisis, which was seen as falling short of its promises. The real problem is thus not a lack of ammunition, but a lack of credibility.
A longstanding question in economics is whether labour-saving technology affects firms in the medium term by increasing output, by decreasing employment, or both. This column provides evidence on this issue using a novel dataset from the concrete industry during the Great Depression. Cheaper electricity caused a decrease in the labour share of income, an increase in productivity and electrical capital intensity, and a decrease in employment. Furthermore, these effects were stronger in counties where the Depression hit hardest, consistent with the idea of ‘the cleansing effect of recessions’.
Central banks are there to ensure price stability, and economists generally agree that politics and central banking don’t mix well. This column takes us through the inflationary and more controlled history of Israel’s central bank, highlighting the current policy dilemmas facing the country.
The trade literature has long focused on firms’ productivity as an explanation for export performance. But what about the demand side? This column looks at firms’ appeal in terms of quality and consumer taste. Using Belgian firm-level data, it suggests that tastes could account for 45% of the variation in export quantities across countries.
Areas experiencing poor economic performance are often targeted by governments with programmes aimed at improving employment. However, there are concerns that any increases in employment come at the cost of reduced employment elsewhere. This column examines the displacement effects of one such programme in the UK. While employment increased within the targeted areas, there were comparable decreases in employment just outside the areas’ boundaries. These findings suggest place-based policies should focus on traded activities that are less susceptible to local displacement effects.
Most countries with a generous pay-as-you-go social security system and ageing demographics will need to implement significant welfare reform, such as a major cut in benefits or a significant increase in distortionary taxation. Individuals’ uncertainty about when such a policy change will occur will cause precautionary saving and changes in factor prices, affecting aggregate welfare. This column uses evidence from Japan to show that delaying welfare reform will benefit the elderly, at a long-lasting cost to the young.
Since the Global Crisis, a number of regulatory policies have been discussed, proposed and sometimes implemented to address shortcomings in the regulatory framework. This column presents the views of the speakers at a recent conference on whether we have reached an efficient outcome. For most of the speakers, the answer was a resounding “no”.
Post-crisis banking is in trouble, with cross-border bank lending significantly slower than before. Many economists think that this is down to complications from government ownership. This column argues that although government ownership is not the only possible friction or reason for cross-border bank lending, it is an inhibitor of cross-border bank activity in both the UK and the US. If the same mechanism applies to other countries around the world, then global banking intermediation may rebound once again, once banks are privatised.
Job quality plays a significant role in individuals’ well-being as well as promoting labour force participation, productivity, and economic performance. But it can be an elusive concept if not grounded in hard data. This column presents a new OECD framework to measure and assess the quality of jobs based on three measurable dimensions – earnings quality, labour market security, and quality of the working environment. The data reveal a great deal of heterogeneity in job quality across OECD countries and also across socioeconomic groups. Furthermore, the relationship between the quantity and quality of jobs is more complex in the short term, especially in the aftermath of the Global Crisis.
The distributional effect of inherited wealth has been a long-standing question in economics. This column presents new evidence on the issue using population-wide register data from Sweden. The findings show that inheritances decrease wealth inequality but increase the absolute dispersion of wealth. The equalising effect of inheritances is diluted, however, by the fact that less wealthy heirs consume most of their inherited wealth, whereas wealthier heirs tend to save theirs.
Current de jure measures of labour regulation stringency point to negative consequences of labour laws. This column presents new evidence on cross-country measurements of enforcement of labour laws from almost every country in the world. The authors argue that the consequences of labour enforcement cannot be credibly assessed using de jure measures which ignore the chance that enforcement is lower in places with stricter laws. On average, there is a negative correlation between the stringency of labour regulation and the intensity of its enforcement.
Though there is a consensus that competition is welfare enhancing, it is less clear whether competition policy effectively stimulates competition. This column presents new findings on the deterrence effects of merger policy in the EU. The evidence shows that initial phase remedies uniquely involve deterrence in the European context, while other policy actions do not. Secondary phase remedies, however, do not lead to deterrence effects.
The refugee crisis that erupted in 2015 has raised concerns about potential violence and criminality of the migrants. This column investigates whether past exposure to conflict makes asylum seekers in Switzerland more violent. The findings show that cohorts exposed to civil conflicts/mass killings during childhood are, on average, 40% more prone to violent crimes than their co-nationals born after the conflict. Certain policies can mitigate this result. In particular, offering labour market access to asylum seekers eliminates all the effect.
Both the US and the Eurozone reacted to the Global Crisis by injecting liquidity and loosening monetary policy. This column argues that despite the similarities in the behaviour of bank credit, the behaviour of bank reserves has been quite different. In particular, while US bank reserves have been on an uninterrupted upward trend since Lehman’s collapse, EZ bank reserves have fluctuated markedly in both directions. At the source, this is due to differences in the liquidity injections procedures between the Eurozone and the Fed.
Monetary policy has significantly heterogeneous effects on private consumption, which depend on the household's debt and balance sheet position. This column suggests that households with mortgage debt behave in a liquidity-constrained manner, while those without are far less sensitive to movements in interest rates. Though the direct channel of monetary transmission – i.e. the movement in interest cash flows – also affects the expenditure of mortgagors, most of the aggregate effect comes via the stimulus to the income of all housing tenure groups.