New Paradigm Papers of the Month of March

Why is it so difficult to tax the rich? Evidence from German policy-makers

Florian Fastenrath, Paul Marx, Achim Truger & Helena Vitt

Inequality in Germany has been growing for decades and tax progressivity has been on decline. A new study by Florian Fastenrath et al. analyzes why – despite this trend – there is no broad public support to tax rich more heavily. Usually, literature offers several explanations for this puzzle: powerful organized business interests that sway public opinion and politicians’ actions, global tax competition and ambiguous views by the public majority, that often do not sufficiently understand the tax system and its effects on their income. The authors of this paper argue that while plausible, they are not exogenous to the political process but work through the minds and actions of politicians. To better understand what political actors think about the debate on tax progressivity, Fastenrath et al. conducted 25 semi-structured interviews with German political actors, mostly left-wing members of the Bundestag’s fiscal committee and asked them to identify which obstacles they perceive in taxing the rich. This group has a policy-seeking motivation to increase taxes but in recent years has largely failed to do so.

Among the major obstacles offered by the majority of respondents are organized business interests, public opinion and media framing, processes within parties, German federalism, and – to a much lesser extent – international tax competition. Moreover, the interviews point to a previously unrecognized organizational barrier that the authors coin the ‘vicious competence cycle’: left-wing politicians acknowledge to being overwhelmed by tax issues, disadvantaging them when confronted with resourceful anti-tax actors. They describe how party-internal discourses shape these competence patterns by influencing motivations, feasibility perceptions, and electoral strategies.

The Safety Net: Central Bank Balance Sheets and Financial Crises, 1587-2020

Niall Ferguson, Martin Kornejew, Paul Schmelzing, Moritz Schularick

Central bank balance sheets have played a prominent role in the response to the financial and macroeconomic upheavals in the past decade. In an effort to shield households and financial markets from severe economic strains, the response to recent crises, like the Global Financial Crisis of 2008-9 and the more recent response to the COVID-19 pandemic featured large scale asset purchases and the extension of significant amounts of liquidity to the financial sector. However, the pre-2008 experience with the use of central balance sheets as policy tools has barely been studied.

A recent widely discussed publication by Niall Ferguson, Martin Kornejew, Paul Schmelzing, and Moritz Schularick fills this gap by analyzing the evolution of central bank balance sheets over the past 400 years across 17 major economies and estimating the effects of lender of last resort operations on the economy. While conventional wisdom assumes that central banks’ utilization of their balance sheets was limited prior to the 1970s, the authors document that time and again, central banks deployed their power to create liquidity in a bid to insulate economies from disasters. While the size of central bank balance sheets has varied substantially relative to economic and financial activity, over time liquidity provision during financial turmoil has become the key driver of balance sheet operations. The authors examine the historical record of such lender of last resort interventions with a novel identification strategy based on pre-determined ideological beliefs of acting central bank governors (“hawks” vs. “doves”) with respect to financial sector support.

The findings indicate that liquidity support during financial crises has indeed tended to stabilize the economy successfully: crises are less severe, asset prices recover more quickly, and deflation is avoided. However, there is also evidence that the provision of central bank liquidity to financial markets prompts future episodes of excessive risk-taking by financial intermediaries and thereby raises the probability of future boom-bust episodes, pointing to potential moral hazard effects of central bank intervention.

Changes in working hours are driving earnings inequality

Mattis Beckmannshagen and Carsten Schröder

According to Socio-Economic Panel (SOEP) data, inequality in gross monthly earnings in Germany increased significantly between 1993 and 2003 and has been stagnating at a high level since 2008. A recent contribution by Mattis Beckmannshagen and Carsten Schröder shows that, contrary to popular belief, this increase is not predominantly driven by increases in hourly wage differences but rather by the development of working hours; low-wage earners work significantly less than previously. This applies in particular to two groups: women and service sector employees, both of whose share of labor market participation has increased significantly in recent years. Often, this reduction in working hours is not voluntary. Had employees been able to work their desired number of hours, the rise in inequality would have been more moderate. The authors identify a better work-life balance and more opportunities to increase working hours in the low-wage sector as measures to counteract this trend.

The Economic Resilience Index – Assessing the ability of EU economies to thrive in times of change

Jakob Hafele, Lukas Bertram, Nora Demitry, Laure-Alizée Le Lannou, Lydia Korinek, Jonathan Barth

The current age is one of polycrisis. Governments across the world have channeled immense amounts of resources to mitigate the devastating consequences of present crises. Without proper means of measurement, predicting, preventing, and reacting to future crises, however, will remain difficult. In a recent policy paper, Jakob Hafele et al. set out to develop a comprehensive measure for economic resilience that can complement and strengthen existing dashboards currently used by the European Commission. To this end, the authors have developed an Economic Resilience Index (ERI), which derives its indicators from a theoretical framework of economic resilience and aggregates them into a single, composite indicator. In a first round of assessment, the authors ranked the economic resilience of 25 European Member States, mostly in the years 2020 and 2021. The ERI is composed of 27 indicators divided into six vital resilience dimensions: Economic Independence, Education & Skills, Financial Resilience, Governance, Production Capacity, and Social Progress & Cohesion. Findings indicate that across the EU, Scandinavian countries score the highest among their peers while lower-income countries score the lowest. There is however only a weak correlation between the ERI and GDP. Indeed, large, high-income countries such as France, Spain, and Italy, rank in the middle, or lowest, groups. Additionally, the ERI is also weakly correlated with CO2 emissions per capita. This suggests that building economic resilience does not come at the expense of climate change mitigation and environmental protection.

Reducing global inequality to secure human wellbeing and climate safety: a modelling study

Joel Millward-Hopkins, Yannick Oswald

Unprecedented emissions reductions are necessary if we want to achieve pathways towards a climate-safe future within the temperature limits agreed by global communities. To achieve these reductions, the climate change mitigation scenarios that dominate the literature assume large-scale deployment of negative-emissions technologies, which to date are highly uncertain. Therefore, researchers have started to argue for degrowth or post-growth scenarios, i.e., to prepare our economies for potential no-growth and low energy scenarios. However, to date, such pathways are equally full of uncertainties. In a recent modelling study, Joel Millward-Hopkins, Yannick Oswald have set out to explore how a climate-safe, low energy demand future, and universal decent living could be achieved simultaneously, against the backdrop of the magnitude of current global inequalities in energy consumption and technological access.

Using a threshold analysis, the authors estimate how much of the 2050 global population would fall below the minimum energy required to support human wellbeing if a low energy demand pathway was followed but inequalities in energy consumption remained as wide as they currently are. They then estimated the reductions in energy inequality and increases in technological equity that were required to ensure that no one falls below decent living energy in a climate-safe future, finding that the Gini coefficient for income inequality globally might have to fall by a factor of two and at a rate of reduction more than double that observed in the ‘golden age’ of capitalism.