The New Paradigm Papers of the Month of June
Once a month the Forum New Economy is showcasing a handful of selected research papers that lead the way towards a new economic paradigm.
PUBLISHED15. JUNE 2023
READING TIME5 MIN
Are climate change policies politically costly?
Davide Furceri, Michael Ganslmeier, Jonathan Ostry
This new empirical study sets out to identify determinants of political support for climate action based on OECD data from over thirty advanced economies between 2001 and 2015. The authors find that, on average, non-market-based measures such as emission limits and R&D subsidies are politically less costly than market-based instruments such as emission taxes. The results also suggest that popular support hinges on timing. Climate policies are more likely to be politically costly in times of rising social inequality and soaring energy costs, and when they are adopted during electoral campaigns. Governments can help garner more support for climate policies if they support poorer households in the green transition through redistributive instruments, social insurance, and active labor market policies. In a nutshell, climate policies are more likely to receive broad support from the population if designed equitably:
“(…) climate-related policymaking is ultimately a social question, implying that sufficient social insurance mechanisms are imperative to enable the adoption of far-reaching but necessary action against climate change.”
Mapping modern economic rents: the good, the bad, and the grey areas.
Mariana Mazzucato, Josh Ryan-Collins and Giorgos Gouzouli
Much of the surplus generated in modern economies is extracted as ‘bad’ rents – be it in the form of unproductive financial activities, harmful natural resource over-extraction, digital platform monopolies, or real estate price inflation. Mazzucato et al. argue that increasing financialization and market concentration have led these unproductive rents to build up over the last couple of decades. In contrast to (transitory) ‘good’ rents, which help spur innovation in a Schumpeterian sense of creative destruction, (permanent) ‘bad’ rents further expand market imperfections, wealth concentration and lead to short-term business decisions, often to the detriment of workers. According to the authors, the increasing number of share buybacks and aggressive M&A strategies by US corporations is an indication of a growing tendency towards rentier capitalism. Current methods of measuring economic value-added do not account for the different economic effects of ‘good’ and ‘bad’ rents. With this paper, the authors lay the groundwork for a new research agenda to bring greater clarity to modern rents and economic value creation.
“What is often missing from today’s discussions is an understanding of how different actors in the economy contribute to the creation of new markets and new rents and then how those actors are rewarded for their contributions (…)”
Tax Design, Information, And Elasticities: Evidence From The French Wealth Tax
Bertrand Garbinti, Jonathan Goupille-Lebret, Mathilde Muñoz, Stefanie Stantcheva, Gabriel Zucman
This recent working paper contributes to the literature on wealth inequality by examining how tax reforms affect the elasticity of taxable wealth. Using the reform of the wealth tax in France in 2011 as an example, the authors examine how changes in information requirements affect taxpayers’ behavior. Since the reform, wealth composition is no longer recorded, but only gross and net total taxable wealth. Using a new statistical method of dynamic bunching, the authors derive counterfactual distributions from a control group of similar but unaffected taxpayers. Their results suggest that, after the reform, taxpayers continuously fail to report an increasingly large share of their wealth over the years. In addition, the tendency to avoid taxes appears to increase over time, affecting lower wealth ranges as well. According to the authors, this suggests that lower information requirements generally result in lower tax revenues due to tax evasion.
The cyclical behaviour of fiscal policy: A meta-analysis
Whether fiscal policy has a procyclical, countercyclical or acyclical effect is intensively debated in the literature. This meta-regression examines this question for the first time on the basis of empirical results in more than 150 studies and also takes into account the interactions between fiscal policy decisions and economic growth. According to the results of this first quantitative synthesis, government spending has a stronger procyclical effect than taxes on average. In a global comparison, the Global North tends more toward countercyclical fiscal policy, while the Global South tends more toward procyclicality. Moreover, the electoral cycle seems to influence the cyclical effect of fiscal policy, as assumed by the literature on ‘political business cycles’.
The dysfunctional taboo: monetary financing at the Bank of England, the Federal Reserve, and the European Central Bank
Will Bateman & Jens van ‘t Klooster
In response to the pandemic, the ECB set up exceptionally large government bond purchase programmes, seemingly breaking the ‘monetary financing taboo’. The historical account brought forward in this paper shows that in past operations by the world’s major central banks, monetary financing has not been completely off-limits but has indeed been implemented as an economic policy tool during exceptional times. Throughout the twentieth century, the Federal Reserve and the Bank of England have served as lenders of last resort to their respective governments. Both central banks purchased large-scale government debt to finance world wars, enable post-war reconstruction, and to stabilize financial markets during the global financial crisis after 2008. Even European central banks including the Bundesbank regularly bought government securities before the start of the EMU. Throughout the history of the Bundesbank, the authors also find examples of a type of ‘macrofinancial monetary financing’ up until the 1990s, i.e., the central bank’s financial support of government debt was seen as an unintended side effect of ensuring the functioning of the financial market.
“Throughout (the European sovereign debt crisis), the ECB refused to provide the unconditional support for government bond markets that had historically been the norm. When the SMP was extended in 2011, both German ECB Governing Council members resigned in protest. That, we can see now, is surprising: before EMU the Bundesbank had taken the view that stable bond markets were a precondition for monetary stability.”