On a personal note
As already announced on Twitter, I will be leaving The Business School (formerly Cass) at the end of this academic year and join the Robert Schuman Centre for Advanced Studies at the EUI in Florence as Chair in Financial Stability. Even before that I will take on the role of director of the Florence School of Banking and Finance (FBF) on a part-time basis from 1 March. The FBF has been built up by an amazing team under the leadership of Elena Carletti over the past few years and I am absolutely thrilled to join this great team. The FBF has been very active with training programmes and seminars and has smoothly transitioned to an on-line format for both in 2020. For the second semester of 2021, we hope to return to a mix of on-line and residential courses, conferences and seminars. Having a European research and training centre on financial sector issues is more important than ever, as the challenges in this area have only increased over the past years – starting from the fall-out of COVID-19 (where we will see more this and in coming years) over challenges of green finance to digitalisation and the rise of fintech. And while it is still early days, I also hope to broaden the geographic focus beyond Europe to other regions of the world, including emerging and developing countries; as well as build up research capacity. The interdisciplinary nature of the Robert Schuman Centre will support a similarly broad approach for the FBF. And obviously, this will also be reflected in my blog entries – less on Brexit, more on academic fields and disciplines beyond finance. Stay tuned!
13. January 2020
UK exits Erasmus – penny-wise, pound-foolish
Among the many details of the FTA between the EU and the UK that was supposed to smooth the exit of the UK from Single Market and Customs Union was that the UK declined to continue participating in the student exchange programme Erasmus (there are other components to Erasmus that I will not focus on). Rather, in the spirit of sovereignty and independence, the UK will set up its own programme that will support UK students who want to study abroad for a term or two, though with very limited resources per student. While this might save indeed money (especially, as the UK is more attractive as destination than as sending country of students), there are clear negative repercussions for Higher Education in the UK. Exchange students who spend part of their undergraduate students in the UK might return as post-graduate (highly paying) students; while I did not participate myself in the Erasmus programme, I spent a seminar in the US during my undergraduate studies, which ultimately informed my decision to apply for PhD programmes in the US. Penny-wise, but pound-fool! Of course, there are other, non-monetary benefits – a more international student body makes UK universities more attractive for domestic students and for international academics; it fuels the intellectual environment and debate etc., as eloquently discussed in this article.
The replacement scheme (Turing) has little to speak for it – it is one-sided, i.e., focused on outbound UK students only rather than on two-way partnerships with non-UK universities; even so, building up new partnership is costly and takes time (as mentioned in the above article, but also squaring with my own experience of three years working in the international study office in Tübingen). And with cooperation shifting from department/school to university level, there will be less ownership in UK universities for such a scheme.
All in all, I see this decision as another negative shock for the UK Higher Education sector, which has been under pressure in recent years and even more so during the COVID-19 crisis, as it depends to a large extent on (international and post-graduate) student fees. Brexit has made UK universities less attractive for both European students who have to pay more and non-European students who might see fewer job perspectives in the UK after their study. Brexit makes UK universities less attractive for academics who face more red tape than before (if they come from the EU), a less international student body, and cost pressures due to COVID-19 (and lower student fee revenues). While I have no doubt that the UK university sector will recover in the long-run (let’s say 20 to 30 years), the short- to medium-term perspectives are not positive. One important challenge will be the funding model with its extensive reliance on student fees, even though I do not see any political appetite to address this, given other more urgent political priorities. But I would expect more turmoil and decline before things will turn eventually to the better.
10. January 2020
Looking back, looking forward
2020 promised to be an interesting year, full of new projects and interesting policy work. It started with great trips to Barbados and Nairobi. Then, as for most people, in March, my world split into two parallel universes: in one, I was scheduled to travel to Albania, Japan, Korea, Myanmar, Tanzania and Uganda with lots of shorter trips within Europe – and that was before the summer. In the other – real – universe, all travel got cancelled and then the first lockdown started. Teaching had to be transferred online within a few days and I learned quite a lot of new communication tools. My initial plan was to use the lockdown to do what I had been wishing to do for years – read up on lots of interesting papers and books that had been piling up in my office and on my computer. Again, reality had different plans. On the one hand, I became part of a swift trend among economists to use the COVID-19 shock for research purposes, not just to increase the number of papers with my name on it, but also to contribute to the policy debate in the current crises. Some of my existing research also took on renewed urgency, such as my paper on bank resolution frameworks. On the other hand, I was asked to chair a Task Force at the European Systemic Risk Board on pay-out restrictions for financial institutions, which resulted in an ESRB Recommendation in June. There is a lot to be said and written about the policy making process, which I will leave for another day, but seeing economic policy discussions feeding directly into actual policy making is certainly fascinating. And as discussed in my previous post, I was asked to co-chair a second task force in late September to prepare a potential extension or amendment of this recommendation, which now has also concluded.
If 2020 was ‘interesting’, I very hope much hope that 2021 will be both more boring and more interesting. More boring in the sense of bringing more certainty. However, it will certainly be also more interesting, as it will bring professional changes for me and exciting new challenges (more on this in the New Year).
On a final note, we economists often describe ourselves as introvert. When talking on Skype before COVID-19 I would normally not have turned on the camera. The pandemic has taught us the importance of personal contact – seeing people on the screen is certainly better than just hearing them. Neither substitutes for face-to-face and so, like most in our profession and in our world, I hope we are back to traveling and in-person meetings soon.
24. December 2020
Brexit – the final episode… for this season
Here we are. While negotiators in Brussels are hunkering down to discuss the fishy details of a possible deal and we still do not know whether or not there will be a deal, the UK press keeps itself busy with a xenophobic hate campaign against German chancellor Merkel. This simply repeats a well-known scheme of Brexiters: always blame someone else if things do not turn out as they promised and, if in doubt, blame foreigners. And if it is not Angela Merkel, anti-Macron pamphlets are waiting in the drawers to be published. As disgusting as it is, as predictable it is. One interesting observation is that while under Teresa May, it was the Prime Minister herself and her ministers who used Nazi language to drive home the point that the EU was the enemy and EU citizens are no longer welcome in the UK, under Boris Johnson this is being outsourced again to the Tory press.
Independent of the trade deal, the implications of the de facto Brexit (after de jure Brexit on 31 January) are slowly sinking in: British citizens are now being treated like citizens from any non-EU country in terms of travel to and stay in the EU – while some anti-EU hate-campaigning newspapers refer to these as new rules and revenge, these rules have always been there and are now simply being implemented to UK citizens, as the UK exits the transition period and thus Single Market. There will be many more of these – small changes here and there – that will affect daily life of UK citizens (and residents as my family and me); more important will be the long-term negative changes for businesses on both sides. While there has been a strong focus on immediate disruptions in early January, it will be the long-term economic damage that will be more important. While the Tories hope that this additional loss in economic growth and welfare will not be noted among the COVID-19 fall-out, the COVID economic crisis and Brexit might actually exacerbate each other. Nevertheless, I do not think it will be until the end of this decade that it will become clear even for non-experts what long-term damage Brexit has brought to the UK.
As the last episode of this Brexit season seems to be never-ending, there is lots to ‘look forward’ to in the next season, independent on how this season will end. With a barebones deal, there will be calls on both sides (but especially on this side of the channel) to extend cooperation to other areas. At the same time, there will be lots of areas of “interpretation” of the agreement, especially when it comes to the implementation of the Northern Ireland protocol. There will infighting on the UK side of whether a better deal was there to be had but also on the EU side on the fishing deal. If there is no deal, expect even more “action”: British gunboats attacking French fishing boats; French fishing boats blockading Calais; serious transportation delays and traffic jams, not for a few days, but for weeks, especially on the British sides. Suggestions that the British government will not return to the negotiating table are as credible as Boris Johnson’s announcement a few weeks ago that “Christmas will not (I repeat: WILL NOT) be cancelled”.
Finally, what are the long-term perspective for the Brexit soap opera? This being increasingly one of the least popular political shows ever, expect it to go on for years if not decades. But one idea can be discarded easily – a quick return of the UK into the EU: this will not only require both major parties in the UK to agree (i.e., Labour and the English Nationalist Party) but – even more of a constraint I would argue – 27 EU member states to agree. And if anyone thought that the current free trade negotiations were difficult, the EU membership negotiators later this century on the UK side will simply laugh about the naivete of our generation.
21. December 2020
Restricting financial sector’s profit distribution – part 2
Important disclaimer: I am a member of the Advisory Scientific Committee of the ESRB and was co-chair of the ESRB task force on restrictions of distributions that helped draft this recommendation. However, the views expressed below are exclusively mine and do not necessarily reflect the official stance of the ESRB or its member institutions.
The ESRB issued a recommendation today extending and amending the existing Recommendation on pay-out restrictions, after the discussion at the General Board meeting on Tuesday (the same day the ECB’s Supervisory Board issued its recommendation on pay-out restrictions). It amends the previous recommendation from 27 May, which would have lapsed on 31 December. This recommendation comes at the end of an intensive consultation process and among a lively debate between bankers, regulators and academics on the usefulness of such restrictions.
There are valid and important arguments on both sides: on the one hand, the COVID-19 crisis is still ongoing, and uncertainty remains about the future impact on the economy and financial institutions, with a risk of further worsening of health and economic conditions. Markets and authorities lack information on the long-term impact of the crisis on the financial sector and credit markets. Financial institutions also remain strongly dependent on public policy support. This calls for an approach that aims at maintaining a sufficiently high level of capital to mitigate systemic risk and contribute to economic recovery. On the other hand, the uncertainty has a different character now than it had in the spring: we have moved from unknown unknowns to known unknowns. Further, regulators are aware of the importance of distributions in enabling financial institutions to raise capital externally, as rewarding investors for their investment is critical for the long-term sustainability of financial institutions and markets. Extending the pay-out restriction with an expectation that it will be lifted in a few quarters could result in perverse incentives in that banks will hold back on lending and risk-taking to save capital space to pay out later, the opposite to what is the intention. Finally, restricting proper market functioning to allow for reallocation of capital across sectors and within the banking sector is certainly not in line with the need for further restructuring and consolidation in the sector. So, there is a clear trade-off or – in line with a long-standing tradition in the dismal science – good arguments on both sides. And beyond the economic arguments, there is the issue that the recommendation is not legally binding, so a degree of moral suasion is needed, which might carry only so far.
This trade-off if not tension has resulted in an amended recommendation by the ESRB, with the following highlights:
First, it is recommended that relevant authorities request financial institutions under their supervisory remit to refrain until 30 September 2021 from (i) dividend payments, (ii) buy-back ordinary shares and (iii) creating an obligation to pay variable remuneration to a material risk takers, which has the effect of reducing the quantity or quality of own funds. So, far this is in line with the previous recommendation.
Second, if, however, financial institutions decide to distribute profits, they are asked to apply extreme caution and that the resulting reduction in own funds does not exceed the conservative threshold set by their competent (i.e., supervisory) authority.
Third, the recommendation offers three criteria to competent authorities when setting this threshold: one, ensuring that financial institutions maintain a sufficiently high level of capital - including taking into account their capital trajectory - in order to mitigate systemic risk and to contribute to economic recovery; two, ensuring that the overall level of distributions of financial institutions under their supervisory remit is significantly lower than in the recent years prior to the COVID-19 crisis; three, an appropriate and possibly differentiated approach across the different sectors, banks, insurers and investment firms.
Fourth, CCPs are no longer included in the recommendation, as the stress test exercise regarding CCPs in the Union conducted by the European Securities and Markets Authority following the outbreak of the COVID-19 pandemic confirmed the overall operational resilience of Union CCPs to common shocks and multiple defaults for credit, liquidity and concentration stress risks.
So, here we are. I am sure the debate on the merits and risks of such pay-out restrictions will not end. While a rigorous analysis of the effects of these regulatory measures might be a far way off (and might not include all the different dimensions of this multi-faceted challenge), I am sure such analysis will be forthcoming at some point in the future.
The initial restrictions on profit distribution in the spring has already led to some analyses. Here are two papers I find worth mentioning. Leonardo Gambacorta, Tommaso Oliviero and Hyun Shin show in a recent BIS working paper that banks with a low price-to-book ratio have a greater propensity to pay out dividends, a correlation that is especially strong for banks with price-book ratios below 0.7. This also explains why the ratio of cumulated dividends to retained earnings is particularly large for banks in the euro area, reaching 60% over 2007–19, against about 30% for banks in other advanced economies. Using data on dividend payments of previous years and based on capital-lending elasticities from the literature, the authors then show that a complete suspension of bank dividends in 2020 during the Covid-19 pandemic would have added, under different scenarios, an additional US$ 0.8–1.1 trillion of bank lending capacity in their sample, equivalent to 1.1–1.6% of total GDP across 30 advanced economies. Obviously, this estimate is based on certain assumptions on the elasticity of lending to capital buffers and does not take into account bank reactions to dividend restrictions, so is certainly an upper limit.
My former colleague Steven Ongena co-authored an article for the European Parliament, assessing the potential increase in lending in the EU following different regulatory measures, including relaxing capital and liquidity requirements and restricting pay-outs. They document an overall reduction in capital requirements by 1.7 percentage points, which would translate into a 2.0–2.6% increase in lending to the real economy (as the previous paper these are based on capital-lending elasticities from the literature). Interestingly, the actual increase in lending was even stronger, driven by drawdowns of pre-committed credit lines and government loan guarantee schemes. The article argues for either a lifting of the pay-out restriction or a clear exit strategy from these restrictions as the policy uncertainty created by it might counter the positive effects of the other policies on lending.
18. December 2020
Are bank catching Corona?
I have completed another Covid paper, this time on the effect of the pandemic and lockdown policies on banks’ health, lending growth and loan pricing in the US. Jointly with Jan Keil, we exploit geographic variation in the exposure of US banks to COVID-19 and lockdown policies using branch network and branch-level deposit data. We find first that unemployment rates (the most accurate and most rapidly available indicator of economic activity) co-varies significantly across counties in the US in the first three quarters of 2020 with COVID outbreaks and lockdown policies. Second, focusing on banks, we find that banks geographically more exposed to the pandemic and lockdown policies show (i) an increase in loan loss provisions and non-performing loans, (ii) an increase in lending to small businesses, but not in other lending categories, and (iii) an increase in interest spreads and decrease in loan maturities. These results are consistent with previous findings that show a general increase in lending after the onset of the crisis (related mostly to the drawdown of credit lines by large firms), while the bank-specific increase in small business lending might be explained with demand for government support programmes by small businesses in the areas most affected. In a nutshell, these findings show that banks have already seen the negative impact of the pandemic and have reacted to higher lending risk with an adjustment in loan conditionality, but have also responded to higher loan demand and government support programmes.
11. December
Emerging scholars conference
Last week saw the 7th edition of the Emerging Scholars in Banking and Finance conference, in virtual format given circumstances. I do not have time or space to mention all the interesting papers, so herewith just some highlights:
In Monetary Policy Corporate Debt Maturity, Andrea Fabiani and co-authors show that a loosening of the US monetary policy rate lengthens corporate debt maturity, an effect entirely driven by the adjustments of very large firms. They explain this empirical finding with a theoretical model that combines standard financial frictions of moral hazard with short-termist, yield-oriented investors who rebalance their portfolios towards longer-term securities when the policy rate and thus short-term rate descends. This effect seems to be driven by corporate bond funds that increase their holdings of corporate bonds in reaction to looser monetary policy and rebalance their holdings towards longer-term debt securities. It is then larger firms that can take advantage of this higher demand by issuing more longer-term bonds. As Andrea discusses in this blog entry, these findings can have quite important policy implications in times of increasing corporate debt and show another channel through which loose monetary policy and the search-for-yield channel affect firm financing patterns.
Leslie Shen presented a very interesting paper (Global Banking and Firm Financing: A Double Adverse Selection Channel of International Transmission) that explores theoretically and empirically global monetary policy transmission through cross-border lending to firms, both on the extensive (global vs. local banks) and the intensive (interest rate) margins. The key mechanism (for which she provides empirical evidence) is that cross-border lending relies more on information on the global dimension of borrowers’ returns, while domestic lending relies more on information on the local dimension of borrowers’ returns. This has important repercussion for the transmission of the monetary policy. Take as example an increase in US interest rates: this results in more firms at the margin in the euro area switching away from US banks, while it raises (lowers) interest rates for firms that keep borrowing from US (Euro area) banks. This is a very nice paper that uses micro-data to test theories of international finance and links nicely to both the banking and the international macro literatures.
Carola Mueller and co-authors focus on the effectiveness of stress tests in Europe in The disciplining effect of supervisory scrutiny in EU wide stress tests. Stress tests have been an important tool to test the resilience of banks against tail risk and guide supervisors in their dialogue with banks and setting pillar 2 capital requirements. Using proprietary data on the EU-wide Stress Test conducted in 2016 by the European Banking Authority and the European Central Bank, the authors provide evidence that supervisory scrutiny that comes with stress testing can have a disciplining effect on bank risk, i.e., banks that received more supervisory scrutiny (as measured by the intensity of communication between banks and supervisors during the stress test exercise) reduce risk weighted density more than banks that were under less intense scrutiny. On the other hand, there is no significant evidence that higher capital requirements resulting from the stress tests and higher publication requirements resulting in higher market discipline might have resulted in lower risk taking. Overall, this is compelling evidence in support of supervisory discipline. This paper provides complementary evidence to research from the US on the effect of stress tests on banks’ risk-taking (part of a special JFI issue I discussed earlier), but provides more detail on the actual channels through which stress tests work.
10. December 2020
Interesting Covid papers
The last months have seen an explosion of research papers on the pandemic (to which I have done my small contribution, with another one coming up shortly). Herewith three recent ones I liked especially, two of them by Thiemo Fetzer (who has achieved certain fame among political economist by linking austerity policies in the UK to the Brexit vote): In Subsidizing the Spread of COVID-19: Evidence from the UK’s Eat-Out-to-Help-Out Scheme, he shows that government subsidies for the hospitality sector in England (50% of food and non-alcoholic beverages on Monday through Wednesday in August, up to 10 pounds per client and order – and yes, yours truly also benefitted from it) are responsible for an increase in new COVID-19 infection clusters. He does so by linking the number of participating restaurants in an area to mobility and restaurant booking data and COVID infection data, comparing Monday-Wednesday in August to the same weekdays in July and September. To control for any simultaneity bias, he uses rainfall data (during lunch and dinner hours) to show that rainfall dampened restaurant bookings and COVID infections during Monday-Wednesday in August but not the months before and after and not Thursday-Sunday in August (weekdays with no subsidies). His estimates suggest that the subsidy scheme may have been responsible for around 8 to 17% of all new detected COVID19 clusters emerging during August and into early September in the UK. If this does not sound too dangerous, remember that due to the exponential growth of infection, this economic support programme might very well have contributed to the second wave (on 10 August, a week after the programme started there were 826 new cases in the UK, while there were 2,948 on 7 September, a week after the programme ended). While some might argue that this shows the trade-off between economy and public health, that would certainly be penny-wide and pound-fool, given the second lock-down we are currently in, plus the enormous economic (not to speak of human) costs of COVID patients.
Another depressing paper by Thiemo and Thomas Graeber considers the importance of a functioning track-and-trace system. In Does Contract Tracing Work? Quasi-experimental Evidence from an Excel Error in England, they exploit a unique quasi-experiment in England that generated exogenous variation in the intensity of contact tracing: On October 3, 2020, the government announced that due to a “technical error,” 15,841 COVID-19 cases that should have been reported between September 25 and October 2 had not entered the official case statistics and had therefore not been referred to the central contact tracing system (around 15-20% of all cases during this time period and randomly distributed across England)). As Thiemo and Thomas show, this mistake had deadly consequences: In areas with higher exposure to the contact tracing mistake, they find a notable subsequent increase in COVID-19 infections and, with the usual delay, in COVID-19- related deaths, for a total of between 1,500 and 2,000 additional COVID-19-related deaths. One important channel was a sharp decline in the efficiency of the track-and-trace system in contacting positive cases, once they were overwhelmed with the additional 16,000 cases. Far from the world-beating track-and-trace system that Boris Johnson promised, England rather got a world-killing system.
A final paper (Revenge of the Experts: Will COVID-19 Renew or Diminish Public Trust in Science?), gauges the effect that pandemics have on the public’s trust in scientists. Using data from the 2018 Wellcome Global Monitor (WGM), which includes responses to from over 75,000 individuals in 138 countries, Barry Eichengreen, Cevat Giray Aksoy and Orkun Saka link individual responses to questions about trust in science and scientists to the incidence of epidemics since 1970. Focusing on individuals that were between 18 and 15 during an epidemic in their country (“impressionable late-adolescent and early-adult years”), they find that epidemics do not significantly affect trust in science, but reduce trust in scientists, with the consequence that these individuals are subsequently less likely to vaccinate their children. While the authors are careful to not use their findings to predict a similar reaction to the COVID-19 pandemic, their findings should clearly ring alarms across the globe.
24. November 2020
Undermining democracy in the US
The last two weeks have seen a sad political spectacle in the US, where an incumbent president who fairly and squarely lost his bid for re-election, is refusing to accept the results. One might see this as just the last political chapter of a deranged Donald Trump who has never allowed to get reality in his way. Rudy Giuliani’s press conferences in front of a garden centre and in an overheated room (with his hair dye dripping down his face) will serve as material for Saturday night shows for years to come. It is clear that the legal path through courts is close to failure. But there is a much more sinister side to Trump’s attempt to overthrow the democratic verdict. His attempts to openly pressure Republican legislators and state officials into setting aside legally cast votes and overturn popular majorities in their respective states is as close to a coup that the US has come over the past decades. And as much as one appreciates the few Republicans that are doing the obvious – recognising and congratulating Joe Biden as president-elect – the more worrisome is the fact that most Republican leaders are either silent or openly support Donald Trump in his attempt to overthrow the electoral verdict. It has become clear that the Republican party has taken yet another step towards turning itself into an authoritarian caudillo-type support group for one man.
It has also become clear over the past two weeks that these attempts to overthrow the electoral decision will almost certainly fail. So, chapter closed, heal the nation and move forward? As much as one can wish for that, I do not think that this will happen. To the contrary, even if he fails to overthrow the results of the election, Donald Trump and his henchmen will have cast sufficient doubt on the legitimacy of Joe Biden’s presidency - at least in the mind of a large minority of the US population. And that is where the danger for the republic stands.
I am aware that it is easy to reject history lessons by Germans for today’s political situation in the US, but there is a dangerous parallel to post-WW I Germany history. It was the German military leadership who requested on 29 September 1918 that a new democratically legitimised government negotiate a cease fire with the Allied forces, given that German troops were facing defeat. At the same time, the centre-left parties, unions and Jewish groups were blamed for this defeat by having undermined the home support for the successful German troops. This stab-in-the-back myth has been debunked extensively, but was successfully used by conservative groups and parties and – most prominently – by Hitler’s Nazi party to delegitimise centre and centre-left parties that participated in most of the short-lived governments of the Weimar Republic and ultimately the Weimar Republic itself. It served as justification for more than 300 murders by the terrorist group Organisation Consul.
If one considers the infamous (hair dye) conference, there are scary parallels to the stab-in-the back myth – in the case of the US elections, it seemed to have been Venezuelan and Cuban communists, George Soros (the inevitable anti-Semitic link) and “lock-her-up” Hillary Clinton (how could she not be involved?) who are responsible for the election outcome. And Donald Trump’s landslide win (according to his lawyers) resembles the undefeated German troops in 1918.
“History doesn’t repeat itself but it often rhymes,” Mark Twain is reputed to have said. The risk is not that Donald Trump and his henchmen will be able to overthrow the results of a democratic election, but that they manage to undermine the legitimacy of democratic elections themselves.
22. November 2020
A beautiful day
It was not a landslide, but it was also not tight – the drawn-out US elections were only drawn-out because of the peculiarities of the US election system, organised on the county and state-level, underfunded and technologically challenged. The elections were a clear vote against Trump (with the popular vote difference most likely amounting to four or five percentage points once all votes have been counted). The obvious question for many outside observers (and many Americans) is why the vote difference was not even larger – Donald Trump received more votes than he did in 2016. Why would voters support an authoritarian crook? Lots has been written about this; one answer lies in one of my summer readings: The Righteous Mind, by Jonathan Haidt, a social and cultural psychologist who argues that moral judgments and political opinions arise not from logical reasoning, but from gut feelings and “groupish righteousness”, in turn driven by culture; liberals, conservatives and libertarians have different intuitions about right and wrong as they prioritize different values. As powerful as this explanation is, however, over the eight years since this book has been written, another important development has taken place: alternative facts. Watching CNN and Fox one might get the impression that they report about different countries. What in the UK are the open lies and mis-representations by the Brexit press, are right-wing radio and TV stations in the US – the result: conspiracy theories about child-trafficking rings, Bill Gates, COVID-19 etc.
Will this be the end of Trump and Trumpism? Well, a lot will depend on what happens next to private citizen Donald Trump. He is facing a fair number of lawsuits that he was able to delay by being a sitting president. The outstanding tax charge will most likely come up shortly as will the billion or more of debt repayments. So, in one thing he was right: the presidency might have cost him dearly. There are talks about him running again in 2024 – he would be 78, as old as Joe Biden will be in a few weeks. A lot will depend on what will become public in the next few years on his shady business dealings over the past decades, his tax evasion and his corruption. There has been only one previous president (Grover Cleveland), running for a second non-consecutive term after having lost reelection. While one might think that today’s politics is too fast-moving (there has not been a losing presidential candidate presenting himself for a second time since Richard Nixon in 1968) for Donald Trump to return as candidate, it seems that he has managed to build a personality cult that resembles more that of a religious sect than a political party, so one cannot exclude this possibility. And being charged (and possibly convicted) in several cases might actually turn him into a martyr. The biggest post-election soul searching is certainly for the Republican party, even though they seem in a pole position to maintain control of the Senate and have gained seats in the House. Which way should they go – follow the populist authoritarian personality cult of Trump or return to a somewhat more sober version of conservatism a la Mitt Romney and Paul Ryan (anyone remember the former Speaker)?
As shocked as many of us were on the morning of 9 November 2016, as relieved are we in the afternoon of 7 November 2020 – I will certainly remember where I was when the election was called for Joe Biden. My expectations are not high, but as many I hope for a stop of presidential hatred, foul language, and racism and for more respect for institutions and norms (it is rather bizarre that Republican Trump enablers focus so much on an originalist interpretation of the constitution but have supported Trump in the destruction of long-standing norms and institutional arrangements). Just a return to normalcy would be welcome, both domestically within the US and on the international level. One can hope for more competence in the US government – as Trump kicked out the B-team running government during the first two years, we are now at the C-team. This utter incompetence is most prominently illustrated by the Trump campaign’s invitation to a press conference at the Four Seasons…. Total Landscaping company in Philadelphia, located between a crematorium and a sex shop, rather than at the Four Seasons hotel as one might have expected. Finally, one can hope for less corruption and theft in the government, as soon as the crook and his henchmen have left the White House.
There are lots of implications of this elections beyond the U.S. Closest to (my current) home, the EU-UK trade negotiations. For a long time, the British government has hoped for an easy and early trade deal with the US. While this was naïve from the start, the defeat for Donald Trump buries these plans definitely. Joe Biden’s Irish roots and the importance of Ireland in US politics (to remind ourselves: the Good Friday Agreement was negotiated by former US senator George Mitchell) will make a US-UK trade agreement only possible if it does not undermine the open border between Northern Ireland and the Republic. However, the fading dream of an easy and early US-UK trade deal makes a EU-UK trade deal politically even more important for Boris Johnson (obviously also for economic reasons, but we know how Johnson thinks about business). So, I think the odds of a last minute deal between the UK and the EU just went up.
But there will certainly be a reset in many relationships across the globe, starting from the pressing issue of the trade war with China (and others) and the more general competition with China to the conflict with Iran (which I have a small personal stake in, as a former PhD student is living and working there). It is naïve to think that the US-EU relationship will go back to what it used to be, but at a minimum one can expect them to be on a more rational and civilised basis; similarly, the conflict with China will continue, but maybe with less megaphone and more direct talks.
8. November 2020
Economic Policy – the hunt for new ideas
I read several very interesting books over the summer, among them two books on the challenges for post-GFC and post-pandemic economics and economic policy. The Global Financial Crisis, the Eurodebt crisis and the long-drawn out recovery processes have undermined trust in many long-standing economic concepts and policy prescriptions and are also one important factor in the rise of populist movements across the globe, including Brexit and the Trump election. As shown by Thiemo Fetzer, David Cameron’s and George Osborne’s mistaken austerity policies were a big driver for Brexit support. If economists have learned one important lesson over the past decade, it is that we cannot treat policy solutions independent of their distributional and political implications. This is the topic of Martin Sandbu’s The Economics of Belonging and Angrynomics by Eric Lonergan and Mark Blyth. Both books were written pre-COVID but their analysis will be as if not even more relevant to address the economic fallout from the current crisis.
Martin Sandbu provides a comprehensive overview of the problems and offers an array of solutions. He is certainly not the first one to do so (and he makes lots of references to previous work), but ties together lots of different analyses and policy discussions, starting with the distributional and political consequences of 30 years of market-oriented (“neo-liberal”) economic policies. This includes the changing bargaining equilibrium between labour and capital as results of the decline of unions and the negative consequences of austerity mentioned above. He makes the strong case that the rise of populism is really a result of economic fault lines rather than cultural trends. Even more important than the diagnosis are policy solutions: First, minimum wages can serve as substitute for collective bargaining, to avoid low productivity jobs persisting, but compression from the top is also needed through progressive income, net wealth and corporate taxation. Interestingly enough, I have used the national living wage (introduced by the same Cameron/Osborne government that forced austerity on the UK) as group assignment topic in my MBA economics class over the past years, requiring students to think beyond the simple demand-supply implications of a price floor. Second, the time of universal basic income might have come as one tool to address economic uncertainty and volatility caused by the move to the gig economy (there are some parallels here to the concept of flexicurity, combining flexible labour markets with income security). Third, policies to counter the trend towards monopolisation, as for example in the digital economy (there might an interesting historic parallel here to anti-trust policies by Theodore Roosevelt in the early 20th century). Martin also has a very interesting discussion on “left behind places”: while a reversal by attracting big investors is certainly not feasible as strategy for everyone, increasing connectivity of the geographic areas and increasing the attractiveness of such places for investors (through human capital investment) can work; a policy idea very similar to the levelling up agenda in the UK (which unfortunately and as so often is currently only an empty slogan). Finally, on the macroeconomic level, asymmetric aggregate demand policies are critical to avoid hysteresis, i.e., persistent unemployment that results in part of the labour force left behind. While the analysis and policy ideas are the results of the post-Global Financial Crisis, they will be as if not even more important in the post-pandemic discussion. Take the discussion on how to pay for the economic losses of the pandemic – future government spending cuts, taxation or debt?
Angrynomics is not as exciting and satisfactory, at least not for someone who has followed the debate closely over the past decade. The style is an interesting one – in form of a dialogue between the two authors, though sometimes it reads a bit artificial. The book includes a nice explanation of how the wide-spread anger about recent economic developments came about and how it is correlated with economic thinking (i.e., the move from full employment in the 1960s and 70s as policy goal to inflation targeting), including a discussion on personal distress about rapid changes as source of anger. The authors also include a nice discussion on the increase in intergenerational inequality over the last decade (a challenge that will only be exacerbated post-Covid-19). The policy discussions, however, are a bit superficial and focus a bit too much, for my taste, on macroeconomic policies and sovereign wealth funds (which can work in the right institutional environment and with the right governance structure), without discussing possible government failures (one of my pet peeves during the Corbyn years was that he was never really forced to explain why the failed UK economic policies of the 1970s would suddenly work in the 2010s). And while I agree on the assessment of Canada and Australia as having escaped the worst of the Global Financial Crisis due to their market and regulatory structure, one has to acknowledge that Australia has also been benefitting over the past 20 years from commodity price boom and increasing economic interlinkages with China.
On the downside, the book is written rather sloppily: for example, in 2004 Ben Bernanke when first referring to the Great Moderation was governor of the Federal Reserve, not Chair (he became Chair 2006) – minor issue, but given that it is early on in the book, one becomes suspicious. Or gems like this one: “the euro crisis… was reprehensible” – well, which crisis is not? Followed by a call to take “policy makers to court and trying them at a human rights tribunal”. Yes, lots of mistakes were made during the euro crisis, but sweeping generalisations like this one are not helpful. Or simply stupid statements like this one: “centrist politicians, like Emmanuel Macron in France, can only win election because no one turns out to vote”, well, 75% of eligible voters in France who turned out in 2017 beg to differ! Unfortunately, this style might match the title of Angrynomics, but does not foster the necessary calm and evidence-based policy discussion we need!
These are only two out of many books that question economic orthodoxy – Raghu Rajan’s book on the importance of local community comes to mind, even though I have only read about it so far. In summary, there is an important discussion to be had, a discussion that cuts across micro- and macroeconomic and across different social sciences. In terms of politics, Martin’s book also provides an interesting agenda for a new centrist radicalism. It might also serve as interesting starting point for new political agendas, such as for social democratic parties across Europe who seems to have lost their mojo over the past decade.
19. October 2020