July 2010
The distributional burden of cap and trade
The carbon-pricing implications of cap-and-trade programmes have raised concern that they might be a regressive policy tool. This column documents how allowance allocation schemes similar to those in recently proposed US legislation address distributional concerns and challenges the view that carbon pricing is necessarily regressive.
Rebalancing the global economy will require coordination and a collective responsibility
Bernard Hoekman of the World Bank talks to Viv Davies about the Vox eBook on rebalancing the global economy. They discuss why imbalances persist, what can be learned from history and the need for a more collective responsibility in responding to the current problem. Hoekman highlights the importance of supply-side factors as well as the implications of imbalances for developing countries. Regarding the current debate on austerity versus stimulus, Hoekman maintains that the real issue is more about timing and coordination. The interview was recorded in July 2010.
Fetters of gold and paper
The world economy is experiencing tensions arising from inflexible exchange rates – particularly the dollar-renminbi peg and the Eurozone. Drawing on lessons from the gold standard, this column points out that an international monetary system is a system – nations’ policies have spillovers. Now, as in the 1930s, surplus nations’ refusals to increase spending force deficit countries to contract. Keynes drew this lesson from the Great Depression, which is why he wanted measures to deal with chronic surplus countries. Sixty-plus years later, we seem to have forgotten his point.
The evolution of agricultural trade flows
This column sketches the changing face of global agricultural trade over the last 20 years. It finds that developing countries have not been able to increase their export shares in agriculture in line with their manufacture shares. What little increase there has been is largely the result of expanding exports to other developing countries.
Is the current account or the capital account driving global imbalances?
Global imbalances have taken centre stage in the debate on the global economic outlook. This column surveys the debate over the roots of global imbalances and argues that asymmetries in the supply and demand for assets, rather than goods, are responsible. With this interpretation, global imbalances are unlikely to go away any time soon.
In memory of Angus Maddison (1926 – 2010)
In this column in memory of Angus Maddison, Harry Wu pays tribute to a mentor, friend, and pioneer who mapped economic performance across the world, and nurtured a passion for Japan and China.
Just how risky are China’s housing markets?
Reinhart and Rogoff’s recent influential study of financial crises finds a recurring root – the country’s property markets. This column argues that a similar housing bubble may be developing in China. Urgent research is needed to determine the risk of a full blown crisis.
ECB interest rate policy and the “zero lower bound”
Monetary policy during the global crisis entered unchartered territory. This column suggests that fear of a global recession may have led policymakers to cut rates more aggressively in order to prevent the need for negative interest rates.
Budget cuts in Europe: The "virtuosi" and the "laggards”
Are Europe’s budgets cuts too little too late or too much too soon? This column asks how each country’s adjustments compare with the European average. It finds that Germany and the Netherlands are ahead of the pack along with highly indebted nations such as Spain, but Italy is lagging far behind.
Does happiness affect productivity?
Happiness economics typically looks at how macro-level variables such as economic growth affect happiness. This column turns such thinking on its head and asks whether a rise in happiness might change behaviour at the micro-level, looking specifically at productivity. Experiments suggest that happiness raises productivity by increase workers' effort. Economists may need to take the emotional state of economic agents seriously.
E-commerce and the market structure of retail industries
The internet is changing the way people do business. This column looks at how e-commerce has affected market structure among travel agencies, bookstores, and car dealerships. It suggests that low-cost firms will gain market share and may even become more profitable as e-commerce spreads, while higher-cost firms will be hurt, perhaps fatally.
Budget cuts across Europe: Coordination or diktat?
Despite the lack of formal mechanisms for fiscal coordination across Europe, this column suggests that the planned exit strategy seems to support convergence among European countries aiming to cut deficits. Yet it argues that the budget cuts do not reflect the unemployment situation of member countries and appear inspired by Germany's fiscal orthodoxy.
Two centuries of commercial banking: crises, bailouts, mergers and regulation
Richard Grossman of Wesleyan University talks to Romesh Vaitilingam about his new book ‘Unsettled Account: The Evolution of Banking in the Industrialized World since 1800’. Among other things, they discuss the problems of striking a balance between a dynamic banking system and a stable banking system. The interview was recorded at a conference on ‘Lessons from the Great Depression for the Making of Economic Policy’ in London in April 2010.
Send lawyers, guns, and money: Deals versus rules in Africa
Does government policy make any difference? This column argues that, in many developing countries, firms often make decisions based not on the policy itself, but what it implies in terms of “deals” they may have to make with middle men and corrupt officials. This “policy uncertainty” is a major concern for firms and can help explain some of the puzzles of development.
The “stimulus debate” and the golden rule of mountain climbing
The global macroeconomy is at a juncture; some economists argue for continued fiscal stimulus to avoid a double dip recession while others argue for fiscal prudence. In this column, one of the world's leading macroeconomists argues for continued stimulus combined with a plan to ensure long-run sustainability by reforming the funding of pension liabilities.
A new measure of national “opportunities” for development
This column introduces the Index of Opportunities – a ranking of countries by their capacity to undergo structural transformation and develop. It suggests countries at the bottom are in urgent need of implementing policies that lead to higher diversification and sophistication of exports.
Upping their game? The impact of new contracts on football referees’ performance
After losing the football world cup final in South Africa, the Dutch press blamed the “chump” of a referee from England for losing control of the game. Yet this column presents evidence that, as one of the few countries where referees are paid a salary, English referees have the incentives to be among the best.
Boom and bust in the Baltics
In 2009 the Baltic countries were hit by record recessions. Growth rates fell to -14% in Estonia, -18% in Latvia, and -15% in Lithuania. This column argues that structural adjustment towards the tradable sector is needed not only for a durable adjustment of their external position, but also for sustained growth in the long run – and sooner, rather than later.
The effect of home computer use on children’s outcomes
Do policies to bridge the digital divide, such as the One Laptop per Child programme, work? This column analyses a scheme offering vouchers for home computers to low-income families in Romania. It finds that while children’s computer skills and cognitive ability increased, academic achievement fell, suggesting that such policies should not overlook how children use these computers and the role played by parents.
Leaving the euro: Lessons from Argentina
Rumours of Eurozone break-up are mounting. This column argues that exiting a strong currency for a weak one poses almost unthinkable challenges, from the redenomination of contracts and the imposition of bank restrictions to the restructuring of external debt and limiting of capital mobility. Lessons from Argentina illustrate just how radical the changes would need to be.
How housing slumps end
The world's current economic problems started when housing bubbles burst in several advanced economies. Economic recovery without housing market recovery is unlikely to be sustained. This column presents new research on the probability of housing slumps ending. There is at least a one-in-eight chance of housing slumps in the three big economies (US, Japan and Germany) ending imminently, but there is nothing approaching the same probability elsewhere. If things turn out as projected here, we may be about to have a test of the locomotive theory – whether the big economies can pull along their smaller brethren – both for housing markets and generally.
Monetary theory from a Chinese historical perspective
While many commentators focus on China’s future, this column draws economic theory insights from its past. It argues that Chinese monetary theory preceded Western thought and influenced the likes of Adam Smith and Karl Marx. Moreover, it says the Eastern emphasis on the pursuit of wisdom, as opposed to knowledge, has a role to play in today’s economic debate.
Tax policies for low-carbon energy
Economists often advocate taxes or cap-and-trade schemes to fight pollution, but US policy primarily subsidises clean energy alternatives. This column critiques such subsidies on four counts: they lower the cost of energy, pick favourite technologies, are often “inframarginal”, and interact in unexpected ways with other policies.
The low-interest-rate trap
Should the crisis spur central banks to change how they conduct monetary policy? This column argues that strict inflation targeting, which ignores financial fragility, can produce interest rates that push the economy into a “low-interest-rate trap” and increase the likelihood of a financial crisis.
Risk panics: When markets crash for no apparent reason
Why did the world economy plunge into the worst recession since the Great Depression? This column argues that economic fundamentals do not explain the global crisis. But they did play a role. Events such as the fall of Lehman Brothers can become focal points for investors’ risk perceptions, changing the way the fundamentals are interpreted. This can lead to “risk panics” – self-fulfilling spikes in risk and a collapse in asset prices.
Calling recessions in real time
Is the world economy about to experience a "double-dip" recession? This column argues that, while there may be a recession on the way, the current recession ended in the summer of 2009. Any subsequent downturn should thus be labelled a new recession.
One fix for the US mortgage default problem
Foreclosure is often seen as a lose-lose situation. This column describes a new incentive scheme aimed at reducing strategic defaults. The Responsible Homeowner Reward, a debt-like security that only pays off if the lender is repaid in full, is being implemented in the US.
Introducing a free database of nearly all jobs for PhD economists
To help grow the next generation of economists, VoxEU.org has teamed with walras.org to form the world’s largest database of job openings for PhD economists. In addition to this comprehensive database of nearly all job openings for PhDs in economics and related fields, our partner walras.org also offers a free online application system allowing the exchange of all application documents and reference letters.
Chinese foreign direct investment: What's happening behind the headlines?
While China is recognised as one of the world's leading destinations for inward foreign direct investment, outward investment by Chinese companies has also taken off in recent years. This column presents survey data suggesting that, similar to western firms, Chinese companies tend to invest in well-developed countries with a large market size and a favourable institutional environment.
The Cinderella of regulatory reform? Why cross-border resolution shouldn’t be neglected
Stijn Claessens of the IMF and the University of Amsterdam talks to Viv Davies about the 12th Geneva Report on improving the resolution of systemically important financial institutions (SIFIs). Claessens discusses the trilemma of national authority, financial integration and global stability, and proposes a new concordat approach to the resolution of SIFIs on an international basis that would harmonise resolution with supervision. The view of the Report's authors is that this will help to improve the incentives for collaboration among supervisors and enhance market stability while respecting the sovereignty of individual countries. The interview was recorded on 13 July 2010.
Why Germany should not listen to the US
Some Americans are calling on Germany to pursue expansionary fiscal policy. This column says that the German government should ignore US criticism of its savings measures.
Immigrants and US Innovation
How does high-skilled immigration affect innovation in receiving countries? This column examines how large fluctuations in the admissions levels of H-1B visa holders between 1995 and 2008 influenced US patenting. It suggests higher H-1B admissions increased US innovation through the direct contributions of the immigrants without crowding out those of natives.
EU patent: Good for innovation and revenue, bad for lawyers
For more than 40 years, many governments and professional associations have acted, voted, or lobbied against the implementation of the EU patent. This column argues that the EU patent would drastically reduce patenting costs for applicants and generate more income for both the European Patent Office as well as most national offices, all the while saving €120 million in legal fees.
New thinking on executive compensation: Pay CEOs with debt
Recovering US insurance giant AIG recently announced that 80% of their executives’ bonuses will depend on the price of their firm’s bonds and only 20% will depend on the price of their equity. This column argues that such moves will better align CEO fortunes with those of all investors – both shareholders and bondholders – and help prevent future financial crises.
Ending the scourge of dual labour markets in Europe
Many economists across Europe agree on the need for labour market reform. In this column economists from France, Italy, and Spain argue that while the reforms of the 1980s increased flexibility, they also led to a two-tier system with ultra-secure permanent workers and vulnerable temporary workers – increasing unemployment in the downturn. In order to complete the reform path, governments should fight dualism by making job security provisions increase smoothly as workers acquire tenure.
The political economy of the subprime crisis
Is the US government to blame for the subprime crisis and by extension the global crisis? This column presents a unique study of how vested interests, measured by campaign contributions from the mortgage industry and the share of subprime borrowers in a congressional district, influenced US government policy during in the build up to the subprime crisis and subsequent global crisis.
Life expectancy around the world
In the least 30 years, the difference in life expectancy at birth across the globe has fallen dramatically. This column presents new data on life expectancy within and between countries for the period 1970 to 2000. Controlling for infant mortality, it finds that while within-country inequality in life expectancy fell, between-country inequality rose, leaving total inequality unchanged.
The dollar question: Where are we?
The global crisis has led some to question the dollar’s place as the dominant currency. This column discusses three camps in the literature: those advocating a new synthetic global currency, those arguing that a new reserve currency will emerge, and those suggesting a return to sharing the role. It concludes that talk of the dollar’s death – or even its decline – are exaggerated.
Fixing the financial system
Raghuram Rajan of the University of Chicago talks to Romesh Vaitilingam about ‘The Squam Lake Report’, which brings together 15 leading US financial economists to map out a long-term plan for financial regulation reform. Among other things, they discuss capital requirements, contingent convertibles, living wills and executive compensation in financial services. The interview was recorded in London in July 2010.
Disasters, recoveries, and the equity premium
Previous research suggests that the potential for rare, but large, economic disasters helps explain the equity-premium and related asset-pricing puzzles. This column presents evidence from a new empirical model of consumption disasters and discusses a range of assumptions required for the model to predict the observed long-run average equity premium.
Can real exchange rate undervaluation boost exports?
Current discussions over the value of China’s currency demonstrate the controversy that exchange-rate policy is capable of igniting. This column suggests that while a managed real undervaluation can enhance domestic competitiveness, it is difficult to sustain in the post-crisis environment – both economically and politically. It says that a real undervaluation works only for low-income countries, and only in the medium term.
A safer world financial system
The major economies' financial reforms come up short on one crucial aspect – the resolution of systematically important cross-border financial institutions. This column introduces the latest Geneva Report on the World Economy, which advocates a two-tier solution to this problem – a universal approach for closely integrated countries such as EU members and a modified universal approach for other countries. It explicitly rejects the territorial or go-it-alone approach.
Trade accounting in the recent recession
The great trade collapse during the global crisis has reignited interest in the relationship between trade and GDP over the business cycle. This column argues that trade patterns in the recent recession largely reflected the shift away from demand for durable goods, although increasing trade frictions did play a moderate role in some countries.
Fiscal consolidation as a policy strategy to exit the global crisis
Are governments right to start cutting their deficits? This column presents good news and bad news. It supports a strongly precautionary approach to fiscal consolidation, but warns of the macroeconomic costs that come with each additional cut in the deficit. The financial crisis is not over yet.
Will abandoning the dollar peg help China rebalance its economy?
Will China’s decision to ditch the dollar peg help rebalance the global economy? This column argues that China’s action may facilitate a concerted appreciation in Factory Asia, helping the region redirect production away from western markets and towards domestic consumers.
Let’s do a Doha deal
Originally scheduled to end in 2005, Doha negotiations have dragged into their ninth year. This column argues that, while many observers assign blame to the complexity of 153 members reaching a consensus, the heart of the matter is far simpler. It says that if the US and China come up with new offers, the momentum for a speedy agreement will be unstoppable.
Car thieves: Not too bright, please!
How economically minded are car thieves? This column presents evidence from the Netherlands suggesting that car thieves stay away from cars in unpopular colours because of their relatively low resale value. It argues that driving a car in a bright, uncommon colour such as yellow is a highly effective deterrent against car theft – about as effective as an expensive security device.
Regulate short-term funding to make banking safe
This column argues that government measures to restore confidence in the financial system have achieved a “pause in the panic”, but this is not enough. Governments still need to reverse the dramatic slide of the financial system towards unstable funding – a trend that holds a gun to the heads of governments and central banks.
Capital controls and the crisis in emerging markets
Despite recovering faster than developed countries, many emerging markets are struggling to cope with large capital inflows. This column discusses the recent capital controls imposed by Indonesia and South Korea. It argues that while the international community is warming to these policies, it would be wrong to view capital controls as a panacea.
Capital inflows in India
Despite the recent drop in capital inflows to India, this column argues that once global markets recover from the latest setback, the country will need to contain volatility in foreign portfolio investment. This column provides a detailed analysis of capital inflows to India and policy recommendations for how to deal with them.
International trade in services: A portrait of importers and exporters
Services trade accounts for a large and growing share of international trade - but we know very little about the firms carrying out this trade. Using firm-level data from the UK between 2000 and 2005, this column paints a detailed picture of importers and exporters of services, and discusses some of the resulting implications for economic policy.
Pull together or fall apart: can the Eurozone stand the stress?
Daniel Gros of CEPS talks to Viv Davies about Vox's latest eBook, which brings together the views of leading economists on what more needs to be done to rescue the Eurozone. While not excluding the possibility of a breakup of the eurozone, Gros discusses a potential solution for Greece and the key role of the proposed stress tests on European banks, warning that the "devil is in the detail". The interview was recorded in late June 2010.
Early warning indicators and the 2008-09 crisis: New evidence
Can “early warning indicators” predict which countries are most vulnerable to a crisis? This column argues that, contrary to findings released last year, early warning indicators were useful in identifying which nations were hit hardest by the Global Crisis from 2008 to 2009. The authors argue that the level of central bank reserves was particularly useful. Other useful early warning indicators include real effective exchange rate overvaluation, current accounts, and national savings.
Which level of government should regulate air pollution?
In a federal system like the US or EU, should the central government or the individual governments regulate environmental damage? This column argues that – subject to certain conditions – individual states often undervalue pollution whereas a centralised system, by imposing an average price, often overshoots the optimum price – but mispricing too high causes fewer distortions than mispricing too low.
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