Recommended Weekend Reads
Germany’s Century-Long Re-Armament Challenge, How the EU Needs to Deal With Industrial Policy, Looking at Argentina President Milei’s Economic First Year, and The Return of Economic Statecraft
Please find below our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend. And let us know if you or someone you know wants to be added to our distribution list.
We hope you have a joyful Christmas and a happy Hanukkah! We’ll be back next Friday with our next set of recommended weekend reads.
The Future of Europe
Fit for War in Decades: Europe’s and Germany’s Slow Rearmament vis-a-vis Russia Kiel Institute for the World Economy
War is back in Europe, and as it becomes long-lasting, the question of armament gains central importance. This report finds that Russian military-industrial capacities have been rising strongly in the last two years, well beyond the levels of Russian material losses in Ukraine. Meanwhile, the build-up of German capacities is progressing slowly. We document Germany’s military procurement in a new Kiel Military Procurement Tracker and find that Germany did not meaningfully increase procurement in the one-and-a-half years after February 2022 and only accelerated it in late 2023. Given Germany’s massive disarmament in the last decades and the current procurement speed, we find that for some key weapon systems, Germany will not attain 2004 levels of armament for about 100 years. When taking into account arms commitments to Ukraine, some German capacities are even falling.
Industrial Policy in Europe: A Single Market Perspective International Monetary Fund Working Papers
European countries are increasingly turning to industrial policy to address the challenge of geopolitical fragmentation, enhance productivity, and accelerate the green transition. Well-targeted industrial policy has the potential to correct market failures and support production efficiency by exploiting scale effects and internalizing knowledge externalities. But even the most carefully designed unilateral industrial policies risk generating negative production externalities in other countries, and, under certain conditions, may not even be welfare-enhancing for the implementing country. The reason is that negative externalities of unilateral industrial policy can drive European and international production patterns away from underlying comparative advantages, create regional or global over-supply, and result in changes in terms of trade that reduce domestic welfare. This suggests significant benefits from coordination. Structural modeling and case studies show that a coordinated approach within the European Union and with international trading partners on a narrowly defined and carefully designed set of industrial policies could unlock untapped benefits. Closer European integration would facilitate the adjustment of firms and workers to coordinated and well-targeted industrial policies and amplify their benefits.
The Americas
Milei's Economics: The First Year and the Challenges Ahead Santiago Afonso & Sebastian Galiani/SSRN
President Javier Milei's first year in office rightly prioritized two fundamental issues: chronic fiscal deficits and economic regulations driven by rent-seeking groups. While achieving the most aggressive fiscal consolidations on record, the administration has heavily relied on inflation-driven cuts to social spending and public investment rather than on structural reforms. Despite a significant deregulation effort, limited congressional support has hindered more comprehensive reforms. Although President Milei remains strongly committed to the program implemented, the sustainability of these measures remains uncertain. As the administration approaches the 2025 midterm elections, its ability to maintain public support while managing potential currency pressures will be crucial for implementing deeper structural changes and avoiding the fate of previous reform attempts.
Latin America and the Caribbean in 2025: Ten Predictions to Shape the Year Ahead Atlantic Council
2024 was a transformative year for Latin America and the Caribbean. Elections brought some surprises, but the region also bucked the global trend as continuity was the theme. But what might be in store for Latin America and the Caribbean in 2025? How might the incoming Trump administration engage with the region? Can economies across the hemisphere grow beyond current predictions? How will leaders address security challenges? Might new tech hubs emerge? The Atlantic Council offers a fun quiz where you can see their predictions for 2025 and see if you agree.
Why a Normalization Strategy With Venezuela Is Not Viable Americas Quarterly
In less than a month, Nicolás Maduro is set to begin a third term as Venezuela’s president, even though vote tallies demonstrate that opposition candidate Edmundo González won the election by a landslide. Although the whole international community has an important role in holding Maduro and his elite accountable and supporting the Venezuelan people, all eyes point toward one country: the U.S. The return of Donald Trump to the presidency has triggered expectations of a return to the “maximum pressure” strategy of his first term. In contrast, many recent commentaries warned about the grave consequences of a return to that policy, suggesting instead a continuation of the sanction-easing measures taken under the Biden administration. But neither a return to 2019 nor normalizing relations with Maduro will create favorable conditions for a democratic transformation in Venezuela, especially considering the strong grassroots movement that coalesced to back González. New circumstances demand a new strategy.
Geopolitical Strategy and Economic Statecraft
The Price of American Retreat: Why Washington Must Reject Isolationism and Embrace Primacy Senator Mitch McConnell (R-KY)/Foreign Affairs
When he begins his second term as president, Donald Trump will inherit a world far more hostile to U.S. interests than the one he left behind four years ago. China has intensified its efforts to expand its military, political, and economic influence worldwide. Russia is fighting a brutal and unjustified war in Ukraine. Iran remains undeterred in its campaign to destroy Israel, dominate the Middle East, and develop a nuclear weapons capability. And these three U.S. adversaries, along with North Korea, are now working together more closely than ever to undermine the U.S.-led order that has underpinned Western peace and prosperity for nearly a century. Trump would be wise to build his foreign policy on the enduring cornerstone of U.S. leadership: hard power.
Economic Statecraft is Back. Here’s Why It Matters Bain Capital Group
As geopolitical tensions rise and multilateralism declines, nations are increasingly using trade and economic policies to advance foreign policy goals, complicating the global business landscape. Nations are negotiating a tapestry of new rules among smaller groups of allies, implementing sanctions and restrictions that impact firms around the world, scrutinizing inbound and outbound investments, and taking more extreme trade measures against geopolitical rivals. Winning in this new business environment has come to mean taking advantage of, defending against, or working around new rules and regulations. Yet most companies are only able to react to change. Companies need strong in-house capabilities to monitor developing geopolitical risks, understand the implications for their businesses and supply chains, and better prepare for whatever comes next.
Economics
Federal Reserve Structure, Economic Ideas, and Banking Policy During the “Quiet Period” in Banking Michael Bordo & Edward Prescott/National Bureau of Economic Research
Abstract: We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on banking policy in the 1950s and 1960s. We document that demand for research and analysis was driven by banking industry developments and legal changes that required the Federal Reserve and other banking regulatory agencies to develop guidelines for bank mergers. In response to these developments, the Board and the Reserve Banks hired industrial organization economists and young economists out of graduate school who brought in the leading theory of industrial organization at the time, which was the structure, conduct, and performance (SCP) paradigm. This flow of ideas into the Federal Reserve from academia paralleled the flow that was going on in monetary policy and macroeconomics at the time and contributed to the increased professionalization of research at the Federal Reserve. We document how several Reserve Banks, particularly Boston and Chicago, innovated by creating dissertation support programs, collecting specialized data, and creating the Bank Structure Conference, which became the clearinghouse for academic work on bank structure and later for bank risk and financial stability. We interpret these examples as illustrating an advantage that a decentralized central bank has in the production of knowledge.
Political Power and Market Power Bo Cowgill, Andrea Prat & Tommaso Valletti / National Bureau of Economic Research
Abstract: Brandeis (1914) hypothesized that firms with market power will also attempt to gain political power. To explore this hypothesis empirically, we combine data on mergers with data on lobbying expenditures and campaign contributions in the US from 1999 to 2017. We pursue two distinct empirical approaches: a panel event study and a differential exposure design. Both approaches indicate that mergers are followed by large and persistent increases in lobbying activity, both by individual firms and by industry trade associations. There is also weaker evidence for an association of mergers with campaign contributions (PACs). We also find that mergers impact the extensive margin of political activity, for example, by impacting companies’ choice to establish their first in-house lobbying teams and/or first corporate PAC. We interpret these results within an oligopoly model augmented with endogenous regulation and lobbying.
Gambling Away Stability: Sports Betting Impact on Vulnerable Households Scott Baker/Justin Balthrop/Mark Johnson/Jason Kotter/Kevin Pisciott for the National Bureau of Economic Research
We estimate the causal effect of online sports betting on households' investment, spending, and debt management decisions using household transaction data and a staggered difference-in-differences framework. Following legalization, sports betting spreads quickly, with both the number of participants and the frequency of bets increasing over time. This increase does not displace other gambling or consumption but significantly reduces savings, as risky bets crowd out positive expected value investments. These effects concentrate among financially constrained households as credit card debt increases, available credit decreases, and overdraft frequency rises. Our findings highlight the potential adverse effects of online sports betting on vulnerable households.
View of U.S. Healthcare Quality Declines to 24-Year Low Gallup
Americans' positive rating of the quality of healthcare in the U.S. is now at its lowest point in Gallup’s trend dating back to 2001. The current 44% of U.S. adults who say the quality of healthcare is excellent (11%) or good (33%) is down by a total of 10 percentage points since 2020 after steadily eroding each year. Between 2001 and 2020, majorities ranging from 52% to 62% rated U.S. healthcare quality positively; now, 54% say it is only fair (38%) or poor (16%). As has been the case throughout the 24-year trend, Americans rate healthcare coverage in the U.S. even more negatively than they rate quality. Just 28% say coverage is excellent or good, four points lower than the average since 2001 and well below the 41% high point in 2012.
