The Unassuming Economist

An IMF working paper finds: “This paper assesses spillovers from fiscal consolidations in 10 euro area countries using an innovative empirical methodology. The analysis lends support to the existence of fiscal spillovers, with fiscal consolidation in one country reducing not only the domestic output but also the output of other member states. Spillover effects are larger for: (i) more closely located and economically integrated countries, and (ii) for fiscal shocks originating from relatively larger countries. Most of the impact comes from revenue measures, while the impact of expenditure measures is relatively weaker. The latter result is consistent with the distortionary effects of taxation and empirical literature on fiscal multipliers using the narrative approach (Leigh and others 2010; Abiad and others 2011).

Our results have important policy implications. They suggest that fiscal consolidations in individual euro area countries, especially the larger ones, can reduce aggregate demand in others. The magnitude of cross-country spillovers has strengthened with the economic integration and introduction of a single currency. Also, spillovers can be larger if fiscal consolidations are implemented in downturns. Therefore, individual euro area countries should consider fiscal measures implemented in other members as well as the state of the economy when implementing domestic policies.”

For previous IMF work on negative demand spillovers in the euro area, see my VoxEU blog and Larry Elliott’s column.

Figure 1. Impact on Eurozone output from wage moderation, quantitative easing and structural

A new IMF report finds:

“Ireland is characterized by one of highest dispersions of market income among EU (and OECD) countries. Specific features of the Irish economy, as well as specific structural gaps, contribute to explaining this situation.

Ireland’s tax-benefit system is one of the most effective in the EU in redistributing income, thereby mitigating income disparities across a range of factors (including regions). A relatively progressive tax system funds a robust system of social benefits, a significant share of which is means-tested.

Despite the severe financial crisis and substantial budget cuts, the government succeeded in preserving most welfare expenditure, which provided an important cushion against the worst effects of the crisis. This helped safeguard social solidarity and cohesion.

During the crisis, the elderly were shielded more than younger generations, who also face more uncertain job opportunities than before the crisis. With the economic recovery and the associated decline in unemployment, including youth joblessness, the intergenerational distribution has shown some improvement. Nonetheless, it would be useful to consider potential steps to reinforce the current welfare system to address future challenges.

Although efficient, the welfare system is complex, covers a relatively high number of individuals and families, and represents a sizable portion of public expenditures. Efforts should continue to get more people into jobs, and specifically more secure and better paying jobs, thus mitigating market-income, as well as regional, inequality. To this end, the authorities recognize that upskilling and reskilling the labor force requires enhancing the effectiveness of active labormarket policies and, more broadly, better aligning educational path with enterprise needs. They are also working to address gaps in childcare provision, a crucial drag on female labor market participation.”

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Dani Rodrik writes:

“Financial globalization appears to have produced adverse distributional impacts within countries as well, in part through its effect on incidence and severity of financial crises. In a remarkable series of papers, researchers at the IMF have documented these negative inequality impacts (Jaumotte et al. 2013; Furceri and Loungani 2015). Most noteworthy is the recent analysis by Furceri et al. (2017) that looks at 224 episodes of capital account liberalization, most of them taking place during the last couple of decades. Liberalization episodes are identified by big changes in a standard measure of financial openness (the Chinn-Ito index) and large subsequent capital flows. They find that capital-account liberalization leads to statistically significant and long-lasting declines in the labor share of income and corresponding increases in the Gini coefficient of income inequality and in the shares of top 1, 5, and 10 percent of income (see Figure 4 for their key results). Furthermore, these adverse effects on inequality are stronger in cases where de jure liberalization was accompanied by large increase in capital flows. Financial globalization appears to have complemented trade in exerting downwards pressure on the labor share of income.

Why would financial globalization increase inequality and the capital share in particular? There is no analogue to trade theory’s Stolper-Samuelson theorem in international macroeconomics. So to some extent these distributional consequences of financial globalization are a genuine surprise. But there may be an obvious, bargaining-related explanation (as argued in Rodrik 1997, chap. 2). As long as wages are determined in part by bargaining between employees and employers, the outside options of each party play an important role. Capital mobility gives employers a credible threat: accept lower wages, or else we move abroad. Indeed, Furceri et al. (2017) provide some evidence that the decline in the labor share is related to the threat of relocating production abroad. As a proxy for the potential threat they use layoff propensities of different industries. They find the effect of capital account liberalization on labor shares is particularly strong in those sectors with a higher natural layoff rate. The bargaining explanation is also consistent with the finding in Jaumotte et al. (2013) that it is foreign direct investment in particular that is associated with the rise in inequality.”

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From a new post by Robert Shiller:

“My own theory about today’s stagnation focuses on growing angst about rapid advances in technologies that could eventually replace many or most of our jobs, possibly fueling massive economic inequality. People might be increasingly reluctant to spend today because they have vague fears about their long-term employability – fears that may not be uppermost in their minds when they answer consumer-confidence surveys. If that is the case, they might increasingly need stimulus in the form of low interest rates to keep them spending. ”

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From a new Macro Musings Blog by David Beckworth:

“It took the United States roughly 150 years to become an optimal currency area (OCA), according to economic historian Hugh Rockoff. This long journey meant that it was not until the late 1930s that a one-size-fits-all monetary policy made sense for the U.S. economy. Since then the U.S. economy has often been held up as the best example of a currency union that meets the OCA criteria. This especially was the case when comparisons have been made to the Eurozone, like in this classic Blanchard and Katz (1992) paper.  But all is not well in this land of the OCA.

(…)

The policy implications seem clear. Policy makers at the local, state, and federal level need to push policies that increase labor market mobility. There is a lot of work to do on this front, but it is important to do so to keep the United States an OCA. The Schleichner paper provides some suggestions and is good starting point for discussion.”

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