Favorite Readings for a New Paradigm – Autumn 2020

Every three months Forum New Economy is showcasing a hand full of selected research papers that lead the way towards a new economic paradigm.

 

Charlotte Bartels, Simon Jäger and Natalie Obergruber – Long-Term Effects of Equal Sharing: Evidence from Inheritance Rules for Land

 

That wealth inequality has been increasing over the past 60 years is now widely accepted by most economists. But why should we care about a more equal distribution of wealth? Now a team of German economists have studied what happens in the long run when wealth is more equally distributed. Using variations in Germany’s inheritance rules in the 19th century,  the authors show that areas where land was equally divided among heirs experienced higher long-term growth and today have not only higher income and wealth levels but also higher education and higher labour productivity. The authors show that much of today’s innovative Mittelstand is the result of the more equal distribution of wealth in areas such as Baden-Württemberg. This shows that a more equal distribution of wealth increases the incentives and opportunities to invest in human capital and become an entrepreneur.

 

Olivier Blanchard, Alvaro Leandro, and Jeromin Zettelmeyer- Redesigning EU fiscal rules:From rules to standards

 

The COVID-19 economic crisis forced European governments take massive budgetary measures to avoid economic collapse. Existing fiscal rules on the national or European level – in particular the German debt break and the EU’s Stability and Growth Pact – have been suspended into 2021 to allow for the increase in public debt of the EU’s member states. Now, the three economists Olivier Blanchard, Alvaro Leandro, and Jeromin Zettelmeyer argue that these fiscal rules should be given up altogether and instead be replaced by fiscal standards. The authors argue that debt sustainability is too complex to squeeze it into a single rule. Yet, fiscal rules can also never be complex enough to accommodate for new and evolving contingencies. The authors therefore propose to abandon fiscal rules in favor of fiscal standards. These qualitative prescriptions should leave more room for judgment.

Moritz Schularick, Manuel Funke and Christoph Trebesch – Populist Leaders and the Economy

 

In the aftermath of the 2008 Global Financial Crisis the world experienced a new rise of populism. Today 25% of countries worldwide are governed by populist leaders. What are the implications for economic growth if a country is governed by a populist? In a new paper, three German economists Moritz Schularick, Manuel Funke and Christoph Trebesch have estimated the costs of populism and conclude that they are high. “Rising economic nationalism and protectionism, unsustainable macroeconomic policies, and institutional decay under populist rule do lasting damage to the economy.“ Their results suggest that 15 years of populist rule decreases GDP per capita by 10%.

 

Gavin Wright – Voting Rights, Deindustrialization, and Republican Ascendancy in the South

 

„The Voting Rights Act of 1965 revolutionized politics in the American South. These changes also had economic consequences, generating gains for white as well as Black southerners. Contrary to the widespread belief that the region turned Republican in direct response to the Civil Rights Revolution, expanded voting rights led to twenty-five years of competitive two-party politics, featuring strong biracial coalitions in the Democratic Party. These coalitions remained competitive in most states until the Republican Revolution of the 1990s. This abrupt rightward shift had many causes, but critical for southern voters were the trade liberalization measures of 1994, specifically NAFTA and the phase-out of the Multi-Fiber Arrangement which had protected the textiles and apparel industries for decades. The consequences of Republican state regimes have been severe, including intensified racial polarization, loss of support for public schools and higher education, and harsh policies toward low-income populations.“

Joseph E. Stiglitz – The Pandemic Economic Crisis, Precautionary Behavior, and Mobility Constraints

Already in April 2020 Kristalina Georgieva, managing director of the IMF, said that the COVID-19 economic crisis is “a crisis like no other”. And critics of the widely used DSGE models, would argue that these mainstream tool in macroeconomic policy analysis can’t account for the distinct features of the current economic crisis and are inadequate for policy advice. Fortunately, Nobel laureate Joseph E. Stiglitz, himself a vocal critic of DSGE modelling, recently came out with a new working paper in which he models three distinct features of the current crisis: 1) Covid-19 is a sectoral shock of unknown depth and duration affecting some sectors and technologies more than others; 2) there are constraints in shifting resources across sectors; and 3) there is a high level of uncertainty about the disease and its economic aftermath, inducing a high level of precautionary behavior by some agents and leading to others facing more severe credit constraints. The model is then used to a evaluate different policy responses.

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