New Paradigm Papers of the Month of April
Once a month the Forum New Economy is showcasing a handful of selected research papers that lead the way towards a new economic paradigm.
PUBLISHED6. APRIL 2023
READING TIME5 MIN
Climate-social transformation – climate protection and inequality reduction work hand in hand
Miriam Rehm, Vera Huwe, Katharina Bohnenberger
As part of the publication series “Sustainable Social Market Economy” in the project “Economics of Transformation” of the Bertelsmann Foundation, this study examines the connection between distributive justice and ecological sustainability. Wealth inequality can favour the rise in emissions if higher-income groups, through their tendency towards more CO2-intensive consumption, promote more energy-intensive product innovations and corresponding consumption patterns in the middle class. In addition, high levels of wealth and income inequality may increase the ability of fossil corporate interests to delay decarbonization through lobbying. By contrast, low-income groups cause relatively fewer emissions due to their lower consumption but bear a higher risk of being affected by climate-induced health and socio-economic damages. Climate policy measures do not yet take this connection sufficiently into account, because efficiency is still considered the decisive lever of the green transformation. In order to promote climate-neutral lifestyles for all income groups, the authors believe that a broader focus is needed that includes both efficiency and sufficiency considerations and takes more demand-based instruments into consideration. Examples are a user charge on energy-intensive luxury consumption (“climate soli”) and a per capita payment of the revenues from CO2 pricing (“climate dividend”). In addition, each person should be granted a quota at consumption levels to meet existential needs with regards to food, energy, housing, mobility (“climate credit card”). In this model, market prices would only take effect from a level of consumption that exceeds the basic existential need, in order to protect low-income households, which are suffering particularly in the current energy crisis. Furthermore, an employment guarantee could promote change in energy-intensive industries (“fossil conversion”). With this study, the authors develop economic policy strategies to support the socio-ecological transformation.
Sellers’ Inflation, Profits and Conflict: Why can Large Firms Hike Prices in an Emergency?
Isabella M. Weber & Evan Wasner
This study uses company data to show how the pricing of firms with market power has affected macroeconomic inflation dynamics in the US since the beginning of the Covid 19 pandemic. This was done by analysing earnings calls and profit margins of US companies. This research suggests that the initial inflation shocks, the cost increases due to supply bottlenecks in the Covid-19 pandemic and the commodity price development after the start of the war, favoured unilateral price setting by firms and that this channel of action significantly drove inflation (“sellers inflation”). Weber and Wasner conclude that market power does not persist constantly but develops dynamically in a changing supply environment. According to this interpretation of the US inflation trend, a clear distinction between temporary and persistent inflation is not helpful. Rather, in the specific case, it depends on the reaction of firms and workers whether the original shocks, i.e., the supply shortages and the energy price shock, set off a permanent inflationary spiral. The most effective policy response could therefore be to address the causes of the inflation shock. Usual macroeconomic means of fighting inflation are not an optimal solution, according to the authors, if the inflation is predominantly fueled by microeconomic processes.
Preferences for work and leisure: Is labor supply a function of what workers prefer?
Patrick Kaczmarczyk & Andrew Bell
According to most of the labour economics literature, especially the “culture of leisure” literature, individual utility maximisation determines individual labour supply. This new study tests the underlying assumption that different workers’ preferences determine working hours and labour market participation. Using survey data from the World and European Value Surveys, the authors test this hypothesis in a multilevel logit model. They find neither a direct correlation between individual preferences of employees and the probability that a person is employed, nor with the choice between full-time and part-time. They conclude that unemployment is an institutional problem rather than a result of individual preferences.
Loose Monetary Policy and Financial Stability
Maximilian Grimm, Òscar Jordà, Moritz Schularick, Alan M. Taylor
Using historical economic data, the authors argue that expansionary monetary policy that persists for long periods of time can undermine the long-term stability of the financial system. “Cheap money” increases the likelihood of asset overheating and credit bubbles, they argue. At the micro level, the higher risk-taking of banks and households in a period of loose interest rate policy has been documented by a large literature. This new study provides new insights into how these individual investment decisions interact and contribute to boom and bust cycles in credit creation.
Institutional supercycles: an evolutionary macro- finance approach
Yannis Dafermos, Daniela Gabor & Jo Michell
Based on the Minskyan concept of macroeconomic and financial ‘supercycles’, this study introduces a novel concept to measure macrofinancial stability. In the authors’ new framework, changes in labour market institutions, systems of macroeconomic management and financial regulation (i.e. ‘institutions’) affect the balance of power between labour, capital and rentiers which, in turn, influences macroeconomic outcomes. By aggregating macroeconomic and financial variables (incl. growth, employment, deficit-to-GDP ratio, credit-to-GDP, inflation, etc.), the authors construct a Macrofinancial Stability Index. According to this index, macroeconomic and financial development in the G7 countries has followed similar patterns since the post-war era. Industrial capitalism (1960s-1990s) and financial globalization (1990s-today) are identified as the two main ‘institutional supercycles’ in the G7.