Where and how should the boundary between state and private activity be drawn? According to Diane Coyle’s review of Mariana Mazzucato’s newest book ‘The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments and Warps Our Economies’, this question the true topic of the book:

We wouldn’t want the government to manufacture its own stationery rather than buy it, nor hospitals to make their own wound dressings. Similarly with payroll services or couriers — although they were largely in-house in private and public sector alike until the 1980s. But what about IT systems? Or cataract surgery? Outsourcing the former seems not to have gone well in general, given the number of prominent, costly IT failures, while technological advance has made it easy and efficient for cataract operations to be contracted out to specialist private providers.

When thinking about the costs of outsourcing, one should therefore not only consider costs related to asymmetric information and the price of monitoring the agents (e.g. consultancies), but also about lock-in costs which keep state capacity low. As Henry Mance writes in the Financial Times:

Consultancies and outsourcers, Mazzucato argues, know less than they claim, cost more than they seem to, and — over the long term — prevent the public sector developing in-house capabilities. ‘We’re not against consultants. The problem is when an industry [has] no incentive to get government to be independent. A therapist who has their client in therapy forever obviously isn’t a very good therapist.’ Consultants are not ‘neutral’ about the role of the state, either, Mazzucato argues, citing their private sector work. They promoted slimming the state after 2008.

Moreover, positive spillover effects of public investments should not be missed in the calculus. Governments must learn how to get rewarded for their investments, not only de-risking private activities without reaping the benefits. Mazzucato recommends, to strengthen the civil service, to rebuild internal capacity within government, to improve the process of contracting and evaluation of outsourced outcomes, and to require consultancies to disclose conflicts of interest when they bid for public sector work.

In this article, you can read the main ideas of the book.

1.5°C – dead or alive? The risks to transformational change from reaching and breaching the Paris Agreement goal – Policy Paper
Laurie Laybourn-Langton, Henry Throp & Suzannah Sherman, IPPR Blog, 16.02.2023
The historical failure to sufficiently tackle the climate and ecological crisis could create consequences that challenge the ability of societies to tackle the root causes of this crisis.

How Christian Lindner wants to save the European debt rules – Article (German, Paywall)
Martin Greive, Handelsblatt, 15.02.2023
Southern Europe is demanding more flexibility in debt-making. The German Finance Minister wants to prevent this – and is seeking to close ranks with old allies.

The role of public debt in the ‘new normal’ – Blogpost
Peter Bofinger, Social Europe, 13.02.2023
A Schumpeterian perspective provides new insights for fiscal policy in Europe.

Preventing the collapse: Through a war economy or an eco-dictatorship? – Column (German)
Fabio de Masi, Berliner Zeitung, 11.02.2023
The state will have to intervene more strongly in the economy to prevent the ecological collapse of the economy and social upheavals. But this does not have to mean a loss of prosperity.

FDP wrestles with Habeck over paradigm shift in competition policy – and with itself – Article (German, Paywall)
Julian Olk, Handelsblatt, 10.02.2023
The German competition regulators are to be given greater power than ever before – with market interventions up to and including breaking up. The FDP is split on the question of whether it can go along with this.

An economic theory for the traffic lights – Column
Mark Schieritz, die Zeit, 08.02.2023
The government wants to advance the transformation. Unfortunately, there is a lack of skilled workers and raw materials. But there is a way out.

While some blame Italy for their unwillingness to reform, others focus on the monetary integration in the Eurozone, or take a firm-level perspective. A new study by Max Krahé argues that none of these explanations alone provide a convincing account and argues that Italy’s stagnation can be traced back to two key moments: a failed attempt in the 1990s/2000s to overcome the growth slowdown, and the retention of this policy mix in the 2000s/2010s.

The paper suggests that any credible reform package must address the deep roots of Italy’s stagnation without repeating past mistakes. Positive conditionality with a focus on companies, institutions and investment may be a promising way forward.

Read the whole study here.

A recently published essay by Yakov Feygin and Nils Gilman explores the possibility of a new economic paradigm called “Designer Economy”, uniting different political camps in the US behind the idea of a pro-active role for the government in shaping the economy.

Instead of a focus on (re-)distribution in a world of secular stagnation, the authors argue for government government-enabled economic development. The Designer Economy focuses on constructing a envisioned future through promoting awareness of economic trends and providing tools for adaptation. Unlike traditional industrial strategy, however, it does promote certain industries, but aims to observe technological and economic trends in order to promote specific potentialities. Rebuilding the administrative capacity is key to enable the state to lead the Design Economy.

The idea of the Designer Economy has the potential to rescue the dream of intentionally transforming the economy to better serve our shared purposes. An emergent political consensus agrees that American capitalism doesn’t have to be a listless system where incomes are stagnant and growing prosperity is available only to the already wealthy. Rather than commanding one ideal path, the politics of design are about what features we want in that future. With the right structures in place, we can transform the government from a mere regulator and issuer of transfer payments into a direct investor in and implementer of a vibrant, verdant, family-friendly and egalitarian future.

Read the whole essay here.

The Knowledge Mismatch – Article
Dani Rodrik, Project Syndicate, 10.02.2023
While economists and policymakers have long appreciated the economic significance of knowledge, they have paid insufficient attention to the conditions that make knowledge useful. Technologies, traditions, and ideas that work well in one setting may not when they are adopted elsewhere or maintained after conditions change.

Habeck’s advisers call for change of strategy in industry restructuring – Article (German)
Julian Olk, Handelsblatt, 09.02.2023
Minister of Economics Habeck wants to restructure industry primarily with subsidies. That is not enough, according to a new report by his advisory board. A green certificate trade is needed.

Flexible pragmatism – (not) a new paradigm? – Blog post (German)
Rouven Reinke & Laura Porak, 08.02.2023
In recent years, the economy has been confronted with various new kinds of crises – and the economist scene with it. A new study has now examined how debates in economics have shifted in the recent past.

Charting Globalization’s Turn to Slowbalization After Global Financial Crisis – Blogbeitrag
Shekhar Aiyar & Anna Ilyina, IMF Blog, 08.02.2023
Trade openness increased after the Second World War, but has slowed following the global financial crisis.

Carbon leakage in times of energy crisis – Article (German)
Tim Bosch & Guntram Wolff, 06.02.2023
In the wake of the energy price shock, energy-intensive production could increasingly be relocated abroad. For European climate policy to be effective, therefore, the domestic and foreign policy dimensions of industrial transformation must be addressed together. A contribution by Tim Bosch and Guntram Wolff.

The case for a land value tax is overwhelming – Opinion Piece
Martin Wolf, Financial Times, 05.02.2023
Natural resources are quite different from the capital stock created out of human effort.

The wage gap is an indictment of Germany – Column (German)
Marcel Fratzscher, Die Zeit, 03.02.2023
Women still earn significantly less than men. If things continue like this, hourly wages will not equalise for another 50 years. Politicians must finally act.