A trade-off entails that not all conflicting goals can be realised at the same time. There must be compromises and prioritisation. As Jean Pisani-Ferry writes in a recent article, the European Union seems to be avoiding an obvious trade-off between climate protection, competitiveness and debt rules at the moment.

The most prudent course would be for the bloc to ease fiscal constraints through a green carve-out or a common-debt scheme, backed by an agreement to increase its own resources. Admittedly, such a move would risk triggering macroeconomic instability. But it would be less harmful than sacrificing competitiveness or letting the multilateral system crumble. Insisting on fiscal rectitude may confront the EU with significant losses on other fronts. Contrary to what some European policymakers may believe, the transition to clean energy will not be costless. The choice facing European policymakers is straightforward: act now to address these costs, or pay a much higher price later.

Read the whole article here.

Dieses Grundeinkommen wünschen sich die Deutschen – Article (German)
Florian Diekmann, Spiegel, 23.05.23
Jeden Monat Geld vom Staat für alle: Diese Idee ist in Deutschland sehr umstritten. Nun haben Forschende ermittelt, wie ein mehrheitsfähiges Grundeinkommen aussehen müsste, wie hoch es wäre – und wer besonders dafür ist.

European public goods and fiscal rules for the new economic policy – Article
Angel Ubide, El Pais, 21.05.23
The EU will not achieve its goals for strategic autonomy and decarbonization, without a budget to support them.

Economist Daron Acemoglu: ‘When mistakes involve powerful technologies, you’re going to have trouble’ – Interview
Rana Foroohar, FT, 19.05.23
The MIT professor on how AI can benefit the workers not ‘the takers’ — and seeing the world from Trump supporters’ point of view.

Wohlbefinden als neues Wachstumsmaß – Article (German)
Werner Mussler, FAZ, 16.05.23
Die Wachstumsaussichten für die EU sind in diesem und im kommenden Jahr eher mager. Ist das der Grund, warum die EU-Kommission sich neue Definitionen überlegt?

IWF fordert Reform der deutschen Schuldenbremse – Article (German)
Rheinische Post, 16.05.23
Alternde Bevölkerung, kaum Wirtschaftswachstum, hohe Inflation — der Internationale Währungsfonds zeichnet für Deutschland keine besonders rosige Zukunft. Um wirtschaftlich wieder leistungsfähiger zu werden, sollte die Bundesregierung die Schuldenbremse lockern, rät die Washingtoner Finanzorganisation.

Europe can’t decide how to unplug from China – Artikel (Paywall)
The Economist, 15.05.23
How should Europe handle China? The continent is trying to decide. After decades of pursuing trade, Europeans are pondering how much to decouple.

The IMF has in its recent mission report for Germany suggested to undertake reforms to create fiscal space for higher public investment and rising aging-related spending, and accelerate the green transition. In contrast to the current expenditure based austerity course of the traffic light coalition, the IMF proposes to gain fiscal space by revenue-side policies and an update of the fiscal rules. One example includes temporary solidarity taxes on higher-income households. But also reforming property taxes or reducing subsidies that are environmentally detrimental are named.

Although Germany has ample fiscal space to respond to shocks, there is hardly any room left under the constitutional debt-brake rule, which limits annual new structural borrowing to 0.35 percent of GDP at the federal level. [… ] To provide adequate funding for the green transition, digitalization, and boosting human and physical capital, Germany may need to create new fiscal room by undertaking expenditure reforms, mobilizing additional revenue, and/or adjusting the debt brake rule. Such measures could include, for example, reforming property taxes and/or reducing subsidies that are distortionary or environmentally harmful.

A reform of the German debt brake is also encouraged:

Germany should consider adjusting the debt-brake rule to better align it with EU fiscal rules and lessen reliance on extrabudgetary funds. To enhance transparency, cohesion with EU fiscal rules, and the effectiveness of the debt brake, the government should consider revising the rule to limit use of extrabudgetary funds and increase somewhat the annual deficit limit, perhaps by 1 percentage point of GDP. The latter change would make the rule more realistic, given Germany’s significant medium-term spending needs, while at the same time ensuring that debt continues to decline below 60 percent of GDP.

Read the whole IMF-statement here.

More than just women working full-time – Article (German)
Lisa Hanzl, Makronom, 15.05.23
A progressive, feminist labour market policy must have a transformative character in order to break up currently dominant structures. But what do policies that tackle inequality at its source look like?

The threat and promise of artificial intelligence – Column
Martin Wolf, Financial Times, 09.05.23
It might be the most transformative technology of all for human beings’ sense of themselves.

Credit Suisse: Too big to manage, too big to resolve, or simply too big? – Policy Brief
Anat Admati, Martin Hellwig, Richard Portes, CEPR, 08.05.23
The runs on Silicon Valley Bank and Credit Suisse in March 2023 revived attention on banking regulation, resolution, and government intervention. This column analyses the details of the run on Credit Suisse and its eventual takeover by UBS.

(No) Fear of the Grim Reaper? – Article (German)
Moritz Gartiser, Makronom, 08.05.23
A significant driver of inequality in Germany is the decline in the taxation of high wealth. An analysis of media coverage of inheritance tax now provides indications of how tax cuts are publicly commented on and legitimised.

Washington’s New Narrative for the Global Economy – Article
Dani Rodrik, Project Syndicate, 05.05.23
While the Biden administration’s economic agenda represents a welcome departure from past Democratic presidencies, its latest actions against China have raised concerns about protectionism. But recent developments suggest that the US can address its national-security concerns without undermining the global economy.

No sign of a wage-price spiral – Parliamentary News (German)
Deutscher Bundestag, Parlamentsnachrichten, 02.05.23
So far, the federal government sees no signs of a wage-price spiral driving inflation. In its answer (20/6569) to a small question of the CDU/CSU parliamentary group (20/6258), the government further writes that the relief packages and the inflation compensation premium would work against a wage-price spiral. In the Eurozone, too, there are currently no signs of a wage-price spiral.

‘Inflation is always and everywhere a monetary phenomenon.’ The idea of this (in)famous Milton Friedman quote that inflation is too much money chasing too few goods is one of the most influential ones in the history of economic thought, and also shapes the discussion of the recent price surge.

Recently, two interviews with critics of this narrative were published with James Forder and Thomas Palley. James Forder argues that there is something he calls the “Philips Curve Myth”, a kind of master narrative of modern economics.

The Phillips Curve Myth is the idea that in the 1960s — before Milton Friedman brought enlightenment to the world — there was a widespread but mistaken belief among economists, especially “Keynesian” economists, that policy makers could reduce unemployment using expansive policies that somewhat raised inflation, and that this result could be safely sustained over time. […] But the myth is the idea that lots of people ever believed this, or that it was the consensus of the time.

Thomas Palley, on the other hand, acknowledges that Friedman has made an important contribution to the understanding of inflation – but only one specific kind of inflation, which he calls demand-pull. Palley additionally distinguishes between five other kinds of inflation (conflict inflation, supply-side inflation, imported inflation, high inflation, hyperinflation), which all have different causes. Furthermore, in contrast to Forder, based on work of Tobin he argues that there is a systematic Phillips curve – but one where inflation expectations are incorporated.

Tobin’s basic idea is that we need to think of the economy as consisting of many sectors, or what you might think of as many small economies that are aggregated together into a national economy. Each sector is being hit by random disturbances. Demand and spending are shifting between these sectors. And this is going on all the time. At any moment, some sectors are at full employment, and others are below full employment. […] The implicit Tobin view is that labor markets are like escalators. You have a shock; the local labor market then slowly adjusts back to full employment. Faster demand growth is a way of speeding up the escalator so that you get to full employment sooner. But the cost is inflation in those labor markets elsewhere that are already at full employment.

Read the interview with James Forder here, and the one with Thomas Palley here.