Steffi gave an interview to CEPR’s Tim Phillips about the team’s research:
Policies to avoid zombification of the economy
In an accompanying VoxEU column, the authors discuss the risks that government responses to COVID-19 could “zombify” the economy.
“A representative consumer survey in five EU countries indicates that many consumers do not miss certain goods and services they have cut down on since the COVID-19 outbreak,” the authors explain in their column. “Fiscal policy must recognise that some firms will become obsolete in the altered post-COVID-19 environment. To achieve a swift recovery, these obsolete firms must be allowed to fail fast so that resources can be reallocated to more efficient uses. Instead, fiscal support should be laser-like in targeting those households who are particularly hard hit by the crisis. Such support should be oriented towards helping displaced workers retrain and find new jobs.”
Prospective economic developments depend on the behavior of consumer spending. A key question is whether private expenditures recover once social distancing restrictions are lifted or whether the COVID-19 crisis has a sustained impact on consumer confidence, preferences, and, hence, spending. Changes in consumer behavior may not be temporary, as they may reflect long-term changes in attitudes arising from the COVID-19 experience. This paper uses data from a representative consumer survey in five European countries conducted in summer 2020, after the release of the first wave’s lockdown restrictions. We document the underlying reasons for households’ reduction in consumption in five key sectors: tourism, hospitality, services, retail, and public transports. We identify a large confidence shock in the Southern European countries and a permanent shift in consumer preferences in the Northern European countries. Our results suggest that horizontal fiscal support to all firms risks creating zombie firms and would hinder necessary structural changes to the economy.
Alexander Hodbod ’12 (International Trade, Finance, and Development). Counsellor to ECB Representative to the Supervisory Board, European Central Bank (DGSGO-SO), Frankfurt, Germany.
Cars Hommes. Professor of Economic Dynamics at CeNDEF, Amsterdam School of Economics, University of Amsterdam, and research fellow of the Tinbergen Institute, Amsterdam, The Netherlands, Senior Research Director (Financial Markets Department), Bank of Canada.
Stefanie J. Huber ’10 (Economics). Assistant Professor at CeNDEF, Amsterdam School of Economics, University of Amsterdam, and research candidate fellow of the Tinbergen Institute, Amsterdam, The Netherlands.
Isabelle Salle. Principal Researcher at the Bank of Canada (Financial Markets Department), research fellow at the Amsterdam School of Economics, University of Amsterdam, and research fellow of the Tinbergen Institute, Amsterdam, The Netherlands.
Elliot Jones ’18 (Macro) and Maximilian Magnacca Sancho ’21 (incoming ITFD)
Maximilian and Elliot connected through social media due to the Barcelona GSE connection and started working together on this piece due to shared research interests.
The COVID-19 pandemic is changing the way that we live our lives. As time passes it is becoming apparent that even once the lockdown policies have been eased and some level of normality has been resumed, the new world that we live in will be different to the one we knew before. This article focuses on emerging trends within the UK that have largely taken place as a result of COVID-19, or in some cases the pandemic has simply accelerated a trend that was already occurring. We then look to offer a range of public policy solutions for the recovery period where the overarching objective is to increase wellbeing in society in a sustainable way. These are focused towards the UK but several could be paralleled to other advanced economies.
But first, before we get to the policy solutions, briefly, what have been the main economic and wellbeing effects that we have seen as a result of COVID-19? In 2020, it is expected that the fall in overall economic output is going to be larger than during the financial crisis in 2008. Much of this is due to the level of decline in economic activity as a result of the UK governments lockdown policy. This was a necessary decision in order to reduce the spread of the virus and ensure the health service still has capacity to treat those that have unfortunately caught the disease. However, it has led to a significant liquidity shock for both households and businesses. Large portions of the labour market are now out of work and levels of consumer spending have declined rapidly (Chart 1). Alongside sharp falls in measures of economic performance, measures of wellbeing have declined rapidly as well (Chart 2). Increases in measures of uncertainty have mirrored increases in anxiety. While, social distancing policies are having a large impact on measures of happiness.
The UK government responded to the shock posed by COVID-19 with a range of policy interventions to provide funding to those that have been most impacted. At a macro level, the long-lasting effects of this crisis will be more pertinent if economic activity does not respond quickly after the government’s schemes have ended. Large portions of UK businesses have limited cash reserves to fall back on in a scenario where demand remains subdued for some time. However, even if the recovery period is strong there will still have been some clear winners and losers during this crisis. Younger workers, those on lower incomes and those with atypical work contracts are the ones that have been most heavily impacted (Chart 3). Whilst those on higher incomes, that are more likely to be able to work from home, have increased their household savings during this period, due to less opportunities to consume.
The policy solutions outlined below aim to be complementary of one another and look to amplify observed trends that are positive for wellbeing and to provide intervention where trends have been negative for wellbeing:
Climate at the centre of the response: This is less a policy recommendation and more a theme for the response. However, our message here is that increased public spending projects, focused towards green initiatives should be combined with a coherent carbon tax policy which influences incentives and helps to support the UK’s transition to a low carbon economy.
Labour market reforms: The government should look to develop a centralised job retraining and job matching scheme that supports workers most impacted by COVID-19, helps to encourage structural transformation towards emerging industries and increases the amount of highly skilled workers in the UK workforce.
Tough decisions on business: Some businesses will require further assistance from the UK government in the form of equity funding, rather than the debt funding seen so far. This should be done on a conditional basis, requiring all these businesses to comply with the UK’s climate objectives and should only be provided to businesses in industries that are expanding or strategically important to the UK economy.
Modernising the regions on a cleaner, greener and higher level: Looking to build on the governments ‘levelling up the regions’ policy to reduce regional inequalities, our policy consists of government funded infrastructure policies that include green investments for regions outside of the UK’s capital.
Harbouring that rainbow effect: Building on the increased community spirit that has been observed during the pandemic, this policy solution looks to increase localised community funding to maintain social cohesion and support those with mental health issues.
Lastly, as the policy recommendations focus on expanding public investment to support the recovery, it is important to consider what this means for public debt sustainability in the UK. The conclusion is that as a result of the low interest rate environment, the most efficient way out of this recession is to borrow and spend on projects that will increase resilience to future shocks and support the UK’s transition to a low carbon economy.
Please click on the link below to read about this in more detail. Comments are welcome.
BIS Bulletin by Sebastian Doerr ’13 (Economics) and Leonardo Gambacorta
The outbreak of Covid-19 and the ensuing measures to contain the pandemic have brought Europe into a deep downturn. GDP is expected to drop by around 8% in the euro area this year (ECB (2020)), a significantly steeper decline than forecasted for the United States or Asia (IMF (2020)). One of the major reasons why the European economy is expected to be so hard-hit is its high share of small firms, especially in southern and eastern European countries. Small firms are financially more constrained and bank-dependent than larger firms. They also sell goods predominantly in local markets and with less diversified sources of revenue.
This Bulletin investigates which European regions face higher risks to employment from Covid-19. We first use data on local industry-level employment before the outbreak and construct a measure of local employment exposure to Covid-19, using the methodology developed in Doerr and Gambacorta (2020) for the US. We then extend the analysis by taking into account the share of employment among small firms in different regions. Specifically, we calculate an employment risk index based on the interaction of sectoral exposure and the share of small business employment. Our results show that while several European regions employ a high share of people in sectors particularly exposed to the economic consequences of the pandemic, the high share of small firms in southern Europe puts employment in those regions particularly at risk. We show that regions with a higher employment risk index, ie those with higher sectoral exposure and a higher share of small businesses, also exhibit a stronger increase in Google searches for unemployment, providing a cross-check of our measure of local employment risk.
We construct employment risk indices for European regions that reflect the share of jobs under threat from Covid-19. The risk index is based on local employment in sectors that are more exposed to the pandemic and on the regional incidence of small firms.
Employment in regions in southern Europe and France is shown to have high risk indices, while regions in northern Europe have lower risk indices. Eastern and central European regions have intermediate risk indices.
Regions with a higher risk index have a bigger jump in Google searches for unemployment-related terms.
Help Economics alum Steffi Huber ’10 by participating this survey!
I’d like to invite Barcelona GSE students and alumni to participate in a survey I’m conducting with Isabelle Salle (Bank of Canada, research fellow at the University of Amsterdam) to help understanding households’ consumption and investment responses to the prolonged “dance” phase of the COVID-19 crisis.
As yet, policymakers and academics do not have good estimates for how people might behave in this crucial period. You can help to fill this gap, and in the process help to build a collective understanding of the economic consequences of the pre-vaccine crisis.
We’ve received around 1,000 responses to the survey so far, and we are using it as a trial survey which will be adjusted for a large grant application to run a representative survey in all major European countries.
Please read below to know more about what is involved.
Purpose of the research
This research survey aims to shed light on household responses to the COVID-crisis in two ways. First, we want to investigate how the crisis has already changed investment and consumption demands. Second, we want to understand the expected consumption and investment behavior of households when lockdown restrictions are progressively lifted but prior to an effective treatment or vaccine being available.
What taking part involves
There will be a series of questions about your current and planned consumption and investments. The survey requires no special knowledge for you to complete it. Your participation is voluntary, you do not have to answer all the questions if you do not want to, and you may withdraw from the study at any point.
The information provided by you in the survey will be held anonymously, so it will be impossible to trace this information back to you individually. The anonymous data itself will be held indefinitely and may be used to produce reports, presentations, and academic publications. If you have any questions or concerns about this research please feel free to contact any of the researchers involved in the project, using the contact details below.
In my all-time favourite book ‘Antifragile’, Nassim Taleb divides the world into 3 categories- fragile, robust and antifragile. He refers to fragility as the state of being that involves avoiding disorder and disruption for fear of the mess that threatens to disrupt your life: you think you are keeping safe, but really you are making yourself vulnerable to the shock that will tear everything apart. Robustness is the ability to stand up to shocks without flinching, without changing who you are. But you are antifragile if shocks make you better able to adapt to each new challenge you face. You are antifragile if you can opportune from disruptions, to be stronger and more creative. Taleb thinks we should all try to be antifragile!
On March 11, 2020, declared a world pandemic, the COVID-19, is an epitome of the chaotic disruption Taleb was referring to. The onset of this crisis got me pondering whether populations, institutions, financial bodies, governments and policy-makers -i.e. the world as a whole will be able to be resilient in the face of the aftermath of this crisis? Do we have the acceptance, courage and strength besides the technical, innovative and problem-solving skills to start afresh and turn this disequilibrium around into the most memorable salvation story we have ever seen? Or will we succumb to this dooming, seemingly apocalyptic spiral, and lose everything we take for granted in our day-to-day lives? When the noise of this unprecedented shock dies, will we be left at the inception of a brand new system that will push us to rethink policies, and rewrite mandates that shape, govern and structure the world?
The outbreak of this global health crisis saw a strong backlash against globalization in the form of acceleration of trends underway. Before COVID-19 slammed the global economy earlier this year, China had adopted selective international exchange rates for political incentives. This had consequently led to US-China trade wars involving up to 25% tariff imposition on Chinese imports.
In March, COVID-19 contributed to this backdrop by declining the number of cargo ships setting off for the United States by 10%. The cost of shipping goods by air nearly doubled, restricting trade further. In order to contain the outbreak of the rapidly spreading virus, countries were forced to close their borders to foreign visitors which severely restricted the movement of people worldwide.
With no signs of the situation returning to normalcy, countries are desperately trying to be “self-sufficient” by ordering factories at home to produce ventilators, banning exports of face masks, and localizing pharmaceutical supply chains even at the cost of added expenses. The declaration of a potential suspension of immigration into the U.S by the President seemed like a final nail in the coffin for the era of globalization.
The world’s response to COVID comes across as ratifying Trump’s argument for protectionism and supply chain controls. This alludes to a pressing question in such uncertain times: Will the world remain flat after the curve flattens after all? Let’s first look at what does it mean for the “world to be flat”? In the book, ‘The world is flat’ by Thomas L. Friedman, the author endorses his view of the world as a level-playing field, wherein all players have equal opportunity and the world is a global market where historical and geographic boundaries are becoming increasingly irrelevant.
Globalization has persisted in different forms for decades. In my opinion, just like the dotcom bubble, 9/11 debacle, 2008 financial crisis, the COVID-19 pandemic too, is a temporary shock, which will perhaps change the face of globalization but not sink it. In the near future, we will likely either have a vaccine or much of the world will be infected by the virus. Either way, the current restrictions will neither be needed nor sustainable in the long run.
For instance, by the time the curve peaks, most countries will perhaps already have bought or produced enough inventory. In that case, will it really make sense to use tax-payers money on incurring exorbitant production costs to set up ventilator factories at home when their supply is already bolstered by sufficient purchase? Evidently, medical supply chains will change less than politicians currently promise!
But even after the shock evanesces, COVID-19 will heavily influence the decision-making process with regards to investment and relocation. Many argue that the crisis was an exemplary demonstration of increased risks associated with globalised supply-chains. A flip-side to the dispute is that in the quest to maximize profits and reduce the risk of localized disruption from the crisis, if anything, firms might only expand production lines across the world, creating employment more evenly, and promoting eventual global recovery. In fact, the renowned economist, Obstfeld, who served as IMF’s chief from late 2015 through 2018, said that “While global supply chains will undoubtedly change in a post-crisis economy, much of that change will be in the form of diversification, not on-shoring.”
While layoffs and increasing unemployment in a post-crisis recessive economy are inevitable, they will not mark the end of outsourcing. Turning to autarky-like economies will be too costly to be sustainable for countries world-over. There will be plenty of opportunities to employ people in jobs that demand highly skilled labour to meet the needs of the recovering economies. This will pave the way for Globalisation 3.0, described in Friedman’s book as individuals focusing on finding their foothold in the present global competition and making significant global collaborations. In fact, skill up-gradation of this form, to ensure relevance as demanded by the need of the hour, will push humans towards becoming antifragile, as recommended by Taleb.
However, “Outsourcing is just one dimension of a much more fundamental thing happening today in the world”, Friedman claims. Experts often view globalization from a one-dimensional perspective- physical goods and services crossing borders. But in fact, many intangibles- data, value, ideas, innovation frequently cross borders. In his book, Friedman emphasizes that “You don’t need to emigrate to innovate”. “Globalization in recent times has created a platform where intellectual work, intellectual capital, can be delivered from anywhere. It could be disaggregated, delivered, distributed, produced and put back together again — and this gave a whole new degree of freedom to the way work is done, especially work of an intellectual nature.” In light of this view of global integration, I believe that the world is going to get flatter. With workforces across nations getting training on Zoom video conferencing, to extensive sharing of knowledge in research on medical advances, the spillover of ideas and innovation is going to witness only an onward spur. The quantity and value of data transmitting between countries are increasing and with the high-value data processing replacing supply chains as the predominant channel of global economic exchange, I see this only increasing further.
So is the world after coronavirus tending to globalization or deglobalization? I think it depends on where you look. COVID can make it harder to ship Chelsea fan-club merchandise around the world, but no quarantine can contain cryptos from crossing borders!
Article by George Bangham ’17 (Economics of Public Policy)
In an article for the Resolution Foundation, George Bangham ’17 (Economics of Public Policy) looks at data on UK family finances in the period before the coronavirus pandemic and thinks about policy measures for those who may lose their primary source of income during the crisis.
Here is an excerpt:
We won’t know exactly how many people have lost their jobs due to coronavirus until at least the summer, when official statistics come out. But as well as monitoring the ongoing impact of the crisis, it’s equally important to consider the state of the country as the economic downturn hit home…
Amid the horror of the pandemic, and the legitimate fears of many families for their finances, it might seem frivolous to worry about statistics for the time being. But the lessons from the data are vital. They point us to new issues that the Government must fix. In a crisis, statistics can save livelihoods and save lives.
In this new publication for the Bank for International Settlements, Egemen Eren ’09 and co-authors Stefan Avdjiev and Patrick McGuire review recent events in FX swap markets in the context of the longer-term trends in the demand for dollars from institutional investors.
Since the start of the Covid-19 pandemic, indicators of dollar funding costs in foreign exchange markets have risen sharply, reflecting both demand and supply factors.
The demand for dollar funding has grown in recent years, reflecting the currency hedging needs of corporates and portfolio investors outside the United States.
Against this backdrop, the financial turbulence of recent weeks has crimped the supply of dollar funding from financial intermediaries, sharply lifting indicators of dollar funding costs.
These costs have narrowed after central banks deployed dollar swap lines, but broader policy challenges remain in ensuring that dollar funding markets remain resilient and that central bank liquidity is channelled beyond the banking system.
Opinion piece by Francesco Amodio ’10 (Economics) on Canada’s response to COVID-19 crisis
In a piece published on March 31 in the Montreal Gazette, Francesco Amodio ’10 (Economics) looks at measures taken by the Canadian government in response to the coronavirus pandemic.
Here’s an excerpt:
The measures taken by the Canadian government are in line with those taken in other countries, where governments are adopting either one or the combination of the following two approaches. In the first one, the government lets firms lay off workers, then pays out employment insurance benefits or other kind of income support transfers. The second approach focuses instead on “saving jobs,” with the government subsidizing wages in order to avoid layoffs.
Each approach has its pros and cons. In the short run, the size of wage subsidies and number of potential layoffs will determine which one is costlier. Perhaps more importantly, the two approaches differ in their medium- to long-run impacts.
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