From market fundamentalism to viable wealth for the many
New Paradigm CommunityGlobal emissions of greenhouse gases are still rising rapidly and the window of opportunity to limit the increase in average global temperatures to less than 2 degrees – the maximum if we are to avoid catastrophic climate change and loss of bio-diversity – is vanishingly small.
During the high point of orthodox economic thinking, economists argued that the most ‘efficient’ way to combat climate change was to generate a carbon price through the allocation and trading of emission permits. In practice, EU carbon prices have been far too low to stimulate investment in low carbon technologies and efforts to establish a global carbon market have largely failed.
According to recent research, emissions trading schemes need to be augmented by floor prices or replaced with sufficiently high (and rising) carbon taxes. Putting a real price on carbon will not in itself bring about a zero-carbon economy: it will require large-scale public action and investment to create the necessary markets and infrastructure. For that to happen, climate policy will have to be integrated into governments’ overall economic strategies.
Two-thirds of German firms now complain about inadequate public infrastructure as a brake on their activity. As in other countries, there is an increasingly serious backlog of investment in roads, railways, schools and universities as well as in digital services and the infrastructure needed to switch to new forms of mobility.
For decades, the consensus was that reducing the role of the state and cutting public debt would liberate the private sector to generate wealth. In reality, it often weakened investment in infrastructure and public services upon which economic activity depends. Attempts to cut public spending even during recessions all too often led to a deepening of such crises.
Recent research has focused on establishing when and how governments need to intervene in order to stabilize rather than aggravate economic fluctuations. German economists have started to question the country’s constitutionally-binding debt brake which might allow the development of new fiscal rules and a redefinition of the role of the state as a co-creator of wealth.
More than a decade after the financial crisis, banks remain too big to fail and markets out of proportion to the needs of the real economy, private debt levels remain too high and interest rates extremely low. Struggling European banks in general and the crisis of Deutsche Bank and Italian financial institutions in particular are a symptom of these continuing flaws in the system but also the poor management of the euro crisis.
For thirty years, policy makers believed that bigger and more internationalized financial markets would reduce the likelihood of financial crises. Speculation was supposed to be stabilizing. In reality, the number of banking and financial crises has strongly risen during the past decades of financial globalization. The crisis of 2008 dealt a blow to this belief in the efficiency of financial markets.
The emerging new paradigm is informed by insights from behavioral finance and financial history. It acknowledges that financial markets periodically misprice risks, and contribute to boom and bust cycles by lending too much in good times and reinforcing downturns by cutting lending too sharply. A reformed financial system needs to discourage short-termism and speculative activity, curtail systemic risk and distribute wealth more broadly.
A European Central Bank buying billions of public bonds, an Italian government challenging the EU’s fiscal rules, and German banks in trouble are all indications that the euro zone is still at risk of another existential crisis.
The rationale for the euro was heavily influenced by the belief in self-regulating markets. With fiscal policies restricted by strong deficit rules, economies were supposed to converge via market forces, for example through adjustments to wages. Countries were therefore pushed to compete with each other implying wide-ranging harmonization of regulatory norms, such as labor market rules. Also, the European Central Bank was not supposed to play the role of a lender of last resort in a crisis. In reality, the euro-zone economies diverged strongly, leading to major imbalances.
New thinking focuses on the need for mechanisms to protect the eurozone from market panics and to foster economic convergence between members. New and improved fiscal rules are being discussed, which should allow for more public investment. Innovative ideas are being considered such as allowing the ECB to inject money into the economy, be it by giving money directly to people or by facilitating necessary long term investment such as in climate protection.
Since January 2020 the deadly corona virus is spreading rapidly throughout the world. The WHO has declared the outbreak of COVID-19 a pandemic. So far tens of thousands are known to have died from the virus. The containment measures that governments around the globe implemented to slow the spreading of the virus have brought the world economy to the brink of disaster.
The crisis calls for new answers. The standard models of the economy do not provide a ready solution to this scenario – for every problem would be solved by itself through the self-correcting market mechanism or small state interventions. That it could cause a problem that the production of important goods like face masks has almost entirely been offshored, did not appear in the models of market liberal globalisation. But the saving of lives in the current crisis requires massive state intervention. In the US more than 10 million people have filed for unemployment benefits within two weeks.
Renowned economists are currently proposing policies that aim to prevent the collapse of the global economy. How can we prevent a break-up of the Eurozone? Is Kurzarbeit an effective model? What plans exist for a recovery program once the health crisis is over? Can we design our economic system such that it will be more resilient in the face of future shocks? We provide an overview of recent proposals.
After three decades of poorly managed integration, globalization is today threatened by social discontent and the rise of populist forces. Economic integration across borders is on the retreat, threatening the success of export-oriented countries like Germany.
According to the long-held orthodox view, global trade and rapid technological progress will lift all boats, with those displaced by structural change moving into better paid jobs. In reality, large numbers of people have been left behind and many of them voted for Donald Trump, Brexit and right-wing parties in Germany.
New studies increasingly identify disruptions caused by globalization and new technologies as key drivers of populism. One way to counteract this as part of a new paradigm could be to design pro-active regional policies aimed at building resilience to shocks - whether they come from globalization, technology or climate change – rather than just compensating the losers.
Inequality has risen dramatically in nearly all rich countries over recent decades. Contrary to common belief, Germany has not escaped this trend, with income inequality reaching its highest level since the 1920s and wealth increasingly concentrated.
For market fundamentalists, the most productive members of society needed an incentive to take risks and work harder. Inequality would rise, but so would economic growth, thereby generating benefits for all – the trickle-down effect. In reality, rising inequalities have been accompanied by a loss of economic dynamism and the benefits of growth have increasingly been captured by the better off. Those at the bottom of the income scale have fallen further behind instead of catching up.
Economists have only recently started to comprehensively document inequalities. Current research now focuses on identifying the drivers of inequality. The policy recommendations may differ by country depending on the respective role of wealth effects, labor market conditions or the system for paying top managers.
The coalition agreement is here. Do the targeted fiscal policy instruments allow sufficient leeway for the necessary climate and other investments in the future? Tom Krebs and Janek Steitz with an assessment.
Germany is looking for a new Bundesbank president. In our last New Economy Short Cut edition, Holger Schmieding and Benjamin Braun discussed whether the upcoming change at the top is an opportunity to future fit the Bundesbank mandate.
The coalition agreement of the new traffic light government is in place. Despite mixed responses, the foundation for something new seems to have been laid. An overview of the assessments to date.
How can the ambitious German public investment agenda be financed within the debt brake? In an expert seminar, we discussed the results of a recently completed study by Forum New Economy and Agora Energiewende.
How to make economics fit for the 21st century. Steve Keen has written a book on "The New Economics".
Since our launch in 2019 we published more than a dozen studies. The latest: how to finance the 2030-targets. An overview.
More and more economists around the world are searching for innovative concepts to make economic and societal trends more sustainable. To promote such work, bringing them to Berlin and exploring their real value, is one of the main goals of this Forum.
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Michael's presentation at the launch of the Forum New Economy on October 31, 2019 in Berlin.
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