August 2009
New evidence on international trade, offshoring, and US wages
This column revisits the heated debate over international trade, offshoring, and US wages using new data. It says that increased international exchange with low-income countries has depressed US wages. That effect only arose during the 1990s, suggesting a different conclusion about trade, offshoring, and income inequality than the previous round of debate.
Triple time-inconsistent policies
This column introduces "triple time-inconsistent" episodes. First, a public institution is expected to cave in and offer a bailout to prevent a crisis. Then, in an attempt to regain credibility, it pulls back. Finally, it resumes bailing out the survivors of the wreckage caused by the policy surprise. This column characterises the 1998 Russian crisis and the current crisis as triple time-inconsistency episodes and says that a financial crisis may simply be a bad time to try to build credibility.
When carbon is priced, who ultimately pays?
Opponents of US climate change legislation voice concerns about its effect on consumers in coal-reliant states, industries’ competitiveness, and regressive distributional consequences. This column argues that these concerns are either unfounded or have been addressed fairly. It says the conflict is more about ideology than distributional issues.
A case for (even) more transparency in the OTC markets
Over-the-counter (OTC) markets produced most of the toxic assets that played a prominent role in the ongoing crisis. This column advocates further transparency in OTC markets regulation, arguing that it would make participants apply appropriate risk controls, lower systemic risk, and better situate regulators to address failures of large institutions.
US trade’s transmission of the global recession
International trade has transmitted demand contractions across national boundaries throughout the crisis. This column analyses the transmission of the recession through US trade flows at the sectoral level. US imports of housing construction inputs peaked before many other popular housing indicators.
Fear of appreciation in emerging economies
After a crisis-induced hiatus, the exchange rate landscape seems to be moving back to a situation that resembles 2007. This column says that fear of appreciation is part of a leaning-against-the-wind exchange rate policy that promises to be the norm for emerging economy currencies for years to come. That may pose difficulties for global rebalancing.
Are women better loan officers?
Does gender matter in banking? This column presents evidence from an Albanian bank that it does. Female loan officers build better portfolios, such that loans to borrowers working with a female are significantly less likely to incur arrears.
Game theory: emergence, applications and prospects
Avinash Dixit of Princeton University talks to Romesh Vaitilingam about game theory in economics: its emergence and development after the Second World War, particularly from the 1970s onwards; its applications in business, public policy and daily life; and the future research agenda. The interview was recorded in Princeton in August 2009.
Markets and values: Competition builds trust
Recent research argues that culture affects economic outcomes. Do markets instil cultural values that support good outcomes? This column provides evidence that more competitive markets raise employees’ trust levels. That suggests that competitive markets build the values that support them.
The timing of fiscal interventions
The composition and timing of the fiscal stimulus is a major concern for policymakers. This column presents research showing that anticipated tax cuts result in reduced economy activity before they take effect. During the current downturn, that constitutes a strong argument against stimulus policies that phase in tax cuts over time.
Why have Canadian banks been more resilient?
Why have Canadian banks fared better during the crisis than their OECD peers? This column attributes their stability to their reliance on depository funding rather than more risky wholesale funding. It recommends a Pigouvian tax penalising banks using excessive short-term wholesale funding.
Why we need a new macroeconomic paradigm
Do the US and Europe risk repeating Japan’s lost decade? This column warns that if the US or European financial clean-ups falter, they will be vulnerable to recurring financial crises. It argues that macroeconomic models should not treat finance as an innocuous veil and calls for a new approach that places financial intermediaries at the centre of its models.
Fiscal stimulus for debt-intolerant countries
Developed economies are implementing massive fiscal stimulus packages. Should emerging economies? This column warns them that fiscal multipliers are not certain, financing budget deficits will not be easy, the risk of default looms, and central bank independence may be eroded.
Layovers may be riskier than you think
Like flights, securities can be non-stop (direct claims) or they can involve (sometimes many) intermediate stops (indirect claims). How should we measure the vulnerability of different securities to "systemic risk"? This column proposes a simple index to capture the important information of interest to both regulators and investors.
Emerging market debts: Why don’t investment banks pay attention?
How would financial markets assess complicated structured products in the absence of ratings agencies? This column uses the history of emerging economies’ government debt to argue that investment banks used to win market share by building a reputation for quality products. It says that ratings agencies insulated investment banks from reputational rewards and freed them to deal in junk.
Hurricane Katrina: benefits for student evacuees
Bruce Sacerdote of Dartmouth College talks to Romesh Vaitilingam about his research on the academic performance of school children from New Orleans who were forced to relocate as a result of Hurricane Katrina in August 2005. The interview was recorded at the Centre for Market and Public Organisation in Bristol (UK) in February 2009.
Universal early education in the US: Gains and shortcomings
Proponents of universal early education hope that such investments will yield long-term socioeconomic benefits. This column presents evidence that state governments funding public kindergartens in the US actually widened socioeconomic disparities across adults, as whites made gains that blacks did not. That result highlights the sensitivity of policy interventions to their means of funding and the structure of existing alternatives.
Is Iceland too small?
Is Iceland perhaps too small to be sustainable as a sovereign state? This column argues there are many reason why small is beautiful. Even though they do not benefit from scale economies and large pools of talent, small countries with cohesive societies can be successful as long as they are open to the world. Still, Iceland stands to gain from joining the EU.
The original “cash for clunkers”: International trade in used vehicles
Under the US “cash for clunkers” programme, billions of dollars are being allocated to pay drivers to purchase a new vehicle and scrap their old automobile. This column says the programme will reduce international trade in used cars, which significantly benefits consumers in developing economies. Such trade also increases the average emission efficiency of automobiles in both the US and developing nations, which raises the possibility that “cash for clunkers” might raise global emissions.
Firm profitability and political connections in Italy
Rent-seeking by politicians and firms likely distorts the allocation of public resources. This column shows that, in Italy, when politicians appointed with the majority coalition are directly involved in the economic activity of private firms, those firms’ profits increase by 5% on average. The increase can be as high 20% in markets highly dependent on public demand, implying a significant welfare loss.
Democracy, diversification, and growth reversals
What explains developing countries’ greater economic volatility? This column documents the relationship between democracy and growth reversals. It argues that greater democracy, not higher income, is responsible for dampening economic volatility. Greater democratisation and economic diversification would reduce both dramatic declines and growth accelerations.
Animal spirits
Robert Shiller of Yale University talks to Romesh Vaitilingam about his book, co-authored with George Akerlof, Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism. The interview was recorded in London in May 2009.
Education and growth: Quality, not quantity
Latin Americans are relatively educated, so why has their economic growth lagged over the past four decades? This column attributes the disappointing performance to the difference between educational quantity and quality. Schooling is relevant for economic growth only insofar as it actually improves cognitive skills, and Latin American economies have lagged in terms of educational quality.
Simple explanations for global financial instability
Why is there so much disagreement about the causes of the crisis? This column says that lax monetary policy and excessive leverage are to blame. It argues that many alleged causes are simply symptoms of these policy errors. If that is correct, then the recommended corrective is remarkably simple – there is no need for intrusive regulatory measures constraining non-bank intermediaries and innovative financial instruments.
Economists, economics, and the crisis
This column outlines tough questions about economics and economists raised by the global crisis.
A responsible approach to fiscal sustainability
Though Germany’s 2006 fiscal rule was designed to achieve fiscal sustainability, it could be a valuable “exit” mechanism from the crisis-linked build-up of public debt. Contradicting criticisms of the new rules as too constricting, this column argues there are few constraints on the ongoing counter-cyclical fiscal policy, and provisions allow for future flexibility. Ironically, the more serious risk is that the flexibility could weaken implementation.
Measuring convergence in the new European system of financial supervisors
The financial crisis introduced a sense of urgency to the debate on the desirable structure of financial supervision in the EU. This column, which accompanies a new CEPR Policy Insight, provides two policy recommendations. First, policymakers could consider the harmonisation of supervisors´ governance arrangements. Second, consideration should be given to the introduction of a European mandate for national supervisors in order to better align incentives in the EU supervisory framework for micro-prudential supervision.
Could Greenland be the new Iceland?
As Greenland moves away from Denmark and acquires more autonomy, this column asks whether it might be too small. In assessing the relationship between country size and economic performance, it warns that small states have more volatile GDP, more volatile consumption, and more incompetent civil servants.
Should managers of big banks be required to act as crisis insurers?
The crisis is a brutal reminder of the fragility of banks. This column suggests that managers of large banks be obliged to act as insurers against systemic crises. This would create incentives for them to be concerned about the stability of the banking system as a whole.
The fiscal effects of A8 migration to the UK
Are new immigrants a fiscal burden on incumbent residents? This column looks at Eastern European immigrants in the UK and shows that they are net contributors to public finances because they have a higher labour force participation rate, are likely to pay more in indirect taxes like VAT, and make much lower use of benefits and public services.
Creditor protection and financial crises
Finding reliable indicators that predict the likelihood and severity of crises across countries has been a frustrating quest for economists. This column suggests that countries with better creditor protection suffer less when a crisis hits.
Resegregation in US schools: unintended consequences of parental choice
Helen Ladd of the Sanford School of Public Policy at Duke University talks to Romesh Vaitilingam about her research on the impact of parental choice on educational segregation, which analyses data on the changing racial composition of schools in North Carolina. The interview was recorded at the Centre for Market and Public Organisation in Bristol (UK) in June 2009.
The next food crisis
The food crisis caught some policymakers off guard. Will they be ready next time? This column argues that most studies of the crisis offer little in the way of tractable policy responses. This knowledge gap leaves policymakers unprepared to prevent or mitigate the next food price crisis.
Financial liberalisation and “partial democracy”
Will the current crisis reverse the past two decades of democratisation and financial liberalisation? This column documents the complex, non-linear relationship between political and financial reform. Financial liberalisation often reverses as countries move from autocracy to democracy, as “partial democracies” are less liberalised, and there are big differences between de jure and de facto liberalisation.
Potatoes, the fruit of the earth
How important is nutrition to economic development? This column shows that the introduction of the potato can explain 22% of the rise in population and 47% of the rise in urbanisation during the 18th and 19th centuries.
The effect of joint custody on marriage and divorce
Marriage rates have been falling over the last thirty years and cohabitation has emerged as an important social institution. A large number of US polices have been designed to increase the incidence of marriage and to stabilise existing marriages. This column shows that custody law is one such policy – it has had a large positive impact on marriage rates since 1969.
Could an early warning system have predicted the crisis?
The 2008 global financial crisis has led to renewed calls for “early warning models” to reduce the risks of future crises. But this column says that few of the characteristics suggested as potential causes of the crisis actually help predict the intensity and severity of the crisis across countries. That bodes poorly for the performance of future early warning models.
Assessing the Obama administration’s financial supervision white paper
This column examines the white paper on financial supervision issued by the Obama administration in mid-June. It focuses on the proposal’s preference for interagency cooperation over supervisory consolidation and warns that such an approach, while politically expedient, risks worse governance outcomes.
Debunking decoupling
Less synchronised business cycles would be good news for the world economy, allowing for more stable global growth and opportunities for risk-sharing across countries. However, is decoupling fact or fiction? This column says that, contrary to much current commentary, there is no downward trend in synchronisation.
Presidential leadership and US trade policy
Six months into his presidency, Barack Obama has failed to grasp the nettle on trade and investment policy. This column says Obama has been weak and indecisive in the face of deep divisions within the Democratic Party over international economic policy. His deference to Congress has resulted in poor policymaking.
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