The New Paradigm Papers of the Month of October

Using labour market data from over 30 OECD countries spanning the last four decades, the authors find that stronger collective bargaining institutions can improve the health and life satisfaction of the employed as well as the un- or underemployed. During the period analyzed (1981-2018) most OECD countries deregulated their respective labour markets, contributing to a dualization between secure jobs with employment protection and work-related benefits and less secure, often part-time or temporary, jobs which lack these benefits. The authors find that the share of the workforce covered by a collective bargaining agreement is positively correlated with health outcomes across the population. The effect for the un- or underemployed is higher. This is because a higher union coverage is usually associated with more protections (incl. unemployment insurance or active labour market policies) even for precarious jobs which cushion the negative effects of dualization.

Global carbon inequality over 1990-2019

Lucas Chancel

This latest publication fills a gap in the literature by providing new empirical evidence on the link between economic inequality and climate change thanks to new data from the World Inequality Database and from input-output models on GHG emissions. Chancel shows that almost half of worldwide GHG emissions are caused by the top 10% wealthiest on average during the last thirty years, while the bottom half of the world population is responsible for only around 12 per cent of emissions. Emissions inequality is a global phenomenon. The top 10% wealthiest North Americans produce around 70 tonnes of carbon-dioxyde equivalent (tCO2e) per capita, around seven times more than the poorest half of the population. This stands in contrast to the European continent, where the richest earners emit around 30 tCO2e, the top 40% produce 10 tCO2e and the bottom half 5 tCO2e. In other regions such as Middle-East North Africa (MENA) and Russia and Central Asia, societal emissions distribution takes similar forms. In Latin America, South & South-East Asia as well Sub-Saharan Africa emissions inequality is even starker, albeit at much lower absolute levels.

This novel data also puts into perspective the climate policies of the last thirty years: while lower and middle class households in rich countries seemed to have made progress in reducing their carbon footprint, the top 1% are responsible for more than one-fifth of the increase in emissions. In comparison, the rise of emerging economies seems to have had a smaller effect, causing (only) around 16% of emissions growth between 1990 and 2019. Overall, the within-country disparities seemed to have grown relative to between-country differences. This implies that the private consumption and investment decisions taken the global top 1% wealthiest individuals within these next years will be a key factor determining whether global warming will remain below dangerous levels. For governments all over the world, this poses the intricate challenge of addressing economic inequality and climate change at the same time. To this end, Chancel offers several fiscal instruments such as progressive carbon taxes and new taxes on carbon-intensive investments.

The paper provides food for thought in rethinking current climate policies. Further research on emissions inequality could help to design climate policies which better take socio-economic factors into account, e.g., by addressing the excessive carbon footprints by the wealthiest individuals and compensating losers of the green transition. Considering that the Paris agreement requires lifestyles compatible with two tCO2e per capita until 2050 (one-third of the current global average), climate policies still seem to have a long way to go.

The Security–Sustainability Nexus: Lithium Onshoring in the Global North

Thea Riofrancos

This paper investigates the role of lithium in the global renewable energy transition through a political economy lens. Rising demand due to its critical importance in the energy and transport sector has already set in motion a ‘Lithium goldrush’. The US and the EU are increasingly taking action to explore domestic reserves so as to decrease their import dependency. Simultaneously, by drafting new regulation requiring higher environmental standards for raw materials and batteries, the EU is trying to steer industry towards a more circular economy with more predictable supply chains.

Within the framework of green industrial policy, the Global North is adopting a new trade paradigm which combines concerns for national security, resilient supply chains and climate policy: the “security-sustainability nexus”. The increasing re-/onshoring of critical goods is exemplary for this development. In more than 100 interviews with government officials, company personnel, investors, Indigenous and environmental activists, Thea Riofrancos finds that this potential new trade paradigm has gained traction during the last decade across the ideological spectrum. She concludes: „The emerging map and sheer volume of planetary extraction will intensify unequal ecological exchange at multiple scales: within Global North countries, where policy makers seek to expand domestic extraction; between the Global North and South; and in territories that defy easy classification in either supranational category, such as between China’s resource hinterlands and its industrial centers or between China and low-income countries. These developments call for an interdisciplinary research agenda on the emerging geographies, geopolitics, and political economy of the energy transition.“

Murau and Van ‘t Klooster develop the concept of “effective monetary sovereignty” to account for the increasing role of largely unregulated private credit. Building on macro-finance International Political Economy (IPE) literature by scholars such as Adam Tooze, Daniela Gabor, Benjamin Braun and others, this recent paper calls into question the common view of public money creation according to which central banks act as the main creators of currency. The authors maintain that the “Westphalian” concept of global credit governance no longer holds in reality due to financial globalization. They argue that the extent to which central banks have lost agency over their currency is not reflected in most economic theory and prominent theoretical models such as the Mundell-Fleming model of exchange rates. Instead, they offer a new conception of monetary governance encompassing three dimensions: controlling public money (i.e., central bank notes or reserves), regulating public-private money (i.e., commercial bank loans, where the “public” character refers to the effect of the official interest rate and regulatory measures) and managing “truly” private money (i.e., unregulated or lightly regulated money, shadow banks, offshore balance sheets, etc.).

Embracing this wider conception of “effective monetary sovereignty” allows a better understanding of the role of the state in relation to the global monetary system. In his Financial Times article about the paper, Brendan Greeley allegorically refers to central banks as “(…) currency shepherds, nudging banks back and forth”. Through the lens of “effective monetary sovereignty”, central bank digital currencies (CBDCs) might serve as a countermeasure to outcompete private cryptocurrencies and stabilize this highly volatile market. This conception of the global credit system also reinforces the importance of better regulatory coordination in international for a such as the Basel Committee on Banking Supervision, the Financial Stability Board or the G20. A concrete example of “effective monetary sovereignty” are new unconventional monetary policy tools such as cross-currency swap lines. In times of stress in global financial markets, the US Federal Reserve and the ECB provided liquidity backstops for USD- or EUR-denominated offshore credit, essentially allowing other central banks to create public money in a foreign unit of account.

This aspect is the subject of another recent interesting paper: “International financial subordination: a critical research agenda” by Ilias Alami, Carolina Alves, Bruno Bonizzi, Annina Kaltenbrunner, Kai Koddenbrock, Ingrid Kvangraven and Jeff Powell, published in the Review of International Political Economy.

Do higher public debt levels reduce economic growth?

Philipp Heimberger

In a recently published paper, Philipp Heimberger finds that the empirical literature does not provide an unequivocal answer to this question. Based on the assumption that debt-financed government spending crowds out private sector activity in the long run, neoclassical theory tends to assume a negative correlation between government debt as measured by gross domestic product (debt-to-GDP ratio) and economic growth. After the global financial crisis and during the European sovereign debt crisis, this discussion gained momentum. Many well-known empirical studies support the thesis of a negative correlation between government debt and growth. Some studies calculate so-called debt limits, i.e. debt ratios above which slower economic growth is to be expected. Heimberger argues that this literature has so far paid too little attention to the possible occurrence of endogeneity. His meta-regression, which includes results from 47 studies, questions the connection between government debt and growth. According to Heimberger, publication bias distorts the significance of the empirical results in this literature. In his view, it is thus not advisable to take certain debt limits as given and universally applicable.