New Paradigm Knowledge Base – Update on inequality

What policies can help against rising inequality? How are inequality and central bank policies connected? Why is redistribution not enough to deal with populism?

 

The second knowledge base update session of the IX New Paradigm Workshop aimed at providing an update on new economic thinking in three areas connected to inequality: i) on (wealth) inequality, ii) on financial markets through the lens of inequality, and iii) on populism.

i) On inequality

When talking about inequality, the question always is: inequality of what? In the German context, CHARLOTTE BARTELS emphasised the importance of wealth inequality, which has risen most significantly since the unification. However, policy has so far still been concerned with (labour) income inequality. Whereas policies such as the minimum wage are prominently discussed in the coalition talks, a wealth tax seems to be from the table. She made the case for a shift towards policies against wealth inequality, differentiating between two kinds: 1. Revenue side: tax the rich. 2. Expenditure side: support wealth accumulation of the poor.

In her comments, CARMEN GIOVANAZZI stretched the importance of business wealth for wealth inequality. She also agreed that the wealth effects of rents and real estate are especially concerning. Taking the referendum for the expropriation of large real estate companies in Berlin as example, she argued the majorities for policies against wealth inequality are there, but it seems to be a problem of the political decision making process to implement them.
 

ii) On financial markets

In his talk about new economic thinking in the realm of financial markets, MORITZ SCHULARICK stressed three points.

1. The promise of the 90´s that financial liberalization will lead to stabler financial markets due to higher risk sharing capacities, higher efficiency at capital allocation and, thus, higher growth proved to be wrong. Seemingly, during Covid-19 policy makers have learned from the financial crisis and central banks have extended their mandate of lenders of last resort in unprecedented magnitude (with good justification).
2. Together with the rise of heterogeneity in economic models, the assumption of the old paradigm that monetary policy in neutral has been challenged. A lot of research is focussed on the distributional effects of monetary policy. There is no consensus about the direction of the effects, but one thing is clear: central banks do not live in a world of a divine coincidence – stable inflation does not automatically lead to high growth.
3. But not only the effects of monetary policy on inequality are investigated, but also the reverse effects. There is also research about how shifts in income inequality affect saving rates, which might have played a role in the decline of the interest rates.

In her comments, DOROTHEA SCHÄFER highlighted that central bank policies have twofold effects on inequality. One side of the coin is that asset owners – mostly on the top of the wealth and income distribution – have benefitted by central bank purchases. On the other side, highly indebted households have also benefitted from low interest rates, as have lower income households by employment effects.

 

iii) On populism

A topic closely related to inequality was discussed in the last part of the session, namely populism. ROBERT GOLD interpreted populist votes as opposition against structural change, which in the light of the huge changes to come due to climate policy underlines the importance of this topic. He stretched that redistribution alone is not enough in fighting populism, as people face more than monetary losses. One way could be to not take technological change as exogenously given, but shape it, as suggested by Joe Kaeser on our workshop in May.

In his comments on how to deal with populism, GUSTAV HORN talked about the elephant in the room: uncertainty. Due to many reasons also named in the previous talks, such as wealth inequality, heterogeneity, or Covid-19 uncertainty has risen. He argued that policy measures beyond redistribution should be built around respect.

 

You can re-watch the whole session here:

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