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The latest news, debates, proposals and developments on new economic thinking at a glance.
One of the most heated debates among macroeconomists in recent years has evolved around the controversy of monetary vs. fiscal dominance. Whereas orthodox economists are calling for fiscal prudence to control the public debt levels, advocates of functional finance argue that a government which issues its own currency can never run out of money, so that the size of government debt is relatively unimportant.
This debate has become ever more important, since inflation is back, putting pressure on central banks to raise rates. Also, salience stems from the massive public investment needs necessary to meet ambitious climate goals.
A new working paper of the Centre for the Understanding of Sustainable Prosperity (CUSP) gives an overview about both sides of the controversy and shows a way out of it. The three authors Andrew Jackson, Tim Jackson, and Frank van Lerven argue against a return to fiscal austerity in the aftermath of the pandemic and make the case for greater flexibility and coordination in the use of both monetary and fiscal policy.
Read the whole working paper here.
Against the backdrop of frequent calls for debt cancellation and reorganization, the Private Debt Initiative of the Institute for New Economic Thinking is convening a conference on “Debt Restructuring” in New York City on Thursday, February 3rd and Friday February 4th, 2022, hosted by Richard Vague (Secretary of Banking and Securities, Commonwealth of Pennsylvania), Rob Johnson (INET President), and Moritz Shularick (INET Fellow).
The debts of households, corporations and the government stand at record highs. Are these debts sustainable? Will overhanging debt burdens weigh on growth in the coming decade? What role can debt restructuring play to build a more inclusive economy for the future? The conference brings together a new generation of economic thinkers, sociologists, activists, and historians to discuss the prospects, challenges and potential effects of debt cancellation and restructuring.
Registration is possible here.
Today, Commerce and Climate Minister Robert Habeck presented the annual economic report for 2022. In addition to the familiar indicators – the GDP forecast, which at 3.6% is lower than assumed in the fall (4.1%) or inflation, which at 3.3% is higher than previously estimated (2.2%) – this year for the first time the report includes a chapter on “Sustainable and inclusive growth – making dimensions of welfare measurable”. This implements the plan set out in the coalition agreement to integrate expanded reporting on prosperity that also takes environmental and equity aspects into account.
The full report is available here.
After years of almost no price movements, the fear of inflation is back – together with debates about the best way to achieve price stability. Conventional economic wisdom seems to be clear on that matter: higher base rates.
However, as Harvard economist Dani Rodrik writes, there are good reasons why Central Banks are hesitating to use this tool: the notion of merely transitory inflation paired with costly side effects of higher rates like bankruptcies. That is why in the last weeks alternative policy tools have been in the focus of heated debates between economists.
The suggestion by Amherst Professor Isabella Weber to bring price controls up for discussion was at the center of attention. Dani Rodrik´s advice for those who had a knee-jerk reaction of immediate rejection to this policy:
Economics is not a science with fixed rules. Varying conditions call for different policies. The only valid answer to policy questions in economics is: ‘It depends.’
Read the full article here.
In a review of Diane Coyle’s book Cogs and Monsters: What Economics Is, and What It Should Be, James K. Galbraith criticises the Cambridge professor to have neglected the legacy of Cambridge Economics left behind by Keynes, Kaldor and others.
He accuses the author of committing a fault typical for reformers of the Economics profession: embracing the same false premises that they should be seeking to overcome. For example fully rational agents, perfectly competitive markets and prices signalling scarcity. Of course, Galbraith acknowledges mainstream economics having left market fundamentalism of the 1980s behind, implementing behavioural insights, asymmetric information, or sticky prices in the models. Nevertheless, all these “departures” still hew to the orthodoxy treating prices as the key to everything – something strongly opposed by Nicholas Kaldor who regarded price signals ultimately as a manifestation of quantity signals.
According to Galbraith, a profound critique of Economics has yet to establish a new theoretical footing, or put differently a new paradigm. Maybe, realising that one is standing on the shoulders of giants can help.
Read the full book review here.
OUR MAIN TOPICS
New Paradigm
NEW PARADIGM
After decades of overly naive market belief, we urgently need new answers to the great challenges of our time. More so, we need a whole new paradigm to guide us. We collect everything about the people and the community who are dealing with the question of a new paradigm and who analyze the historical and present impact of paradigms and narratives – whether in new contributions, performances, books and events.
Redefining
the role of
the state
REDEFINING
THE ROLE OF
THE STATE
For decades, there was a consensus that reducing the role of the state and cutting public debt would generate wealth. This contributed to a chronic underinvestment in education and public infrastructure. New research focuses on establishing when and how governments need to intervene to better contribute to long-term prosperity and to stabilize rather than aggravate economic fluctuations.
Remaking
finance
REMAKING
FINANCE
More than a decade after the financial crisis there still seems to be something seriously wrong with the financial system. Financial markets still tend to periodically misprice risk and contribute to boom and bust cycles. A better financial system needs to discourage short-termism and speculative activity, curtail systemic risk and distribute wealth more broadly.
Greening
prosperity
GREENING
PROSPERITY
During the high point of market orthodoxy, economists argued that the most 'efficient' way to combat climate change was to simply let markets determine the price of carbon emissions. Today, there is a growing consensus that prices need to be regulated and that a carbon price on its own might not be enough.
Reducing
inequality
REDUCING
INEQUALITY
The rising gap between rich and poor has become a threat to social cohesion in most rich countries. To reverse this trend it will be crucial to better understand the importance of different drivers of income and wealth inequality.
Innovation Lab
INNOVATION LAB
Do we need a whole new understanding of economic growth? What would be a real alternative? How viable are alternatives to GDP when it comes to measuring prosperity? These and other more fundamental challenges are what this section is about.
Globalization
for all
GLOBALIZATION
FOR ALL
After three decades of poorly managed integration, globalization is threatened by social discontent and the rise of populist forces. A new paradigm will need better ways not only to compensate the groups that have lost, but to distribute the gains more broadly from the start.
Europe
beyond markets
EUROPE
BEYOND MARKETS
The euro was planned during a period in which economic policy making was driven by a deep belief in market liberalism and the near impossibility of systemic financial crises. This belief has been brought into question since the euro crisis, which showed that panics do happen. New thinking needs to focus on developing mechanisms to protect eurozone countries from such panics and to foster economic convergence between members.
Corona Crisis
CORONA CRISIS
The current Corona crisis is probably the worst economic crisis of the post-World War 2 era. Economists are working hard on mitigating the economic effects caused by COVID-19 to prevent a second Great Depression, the break-up of the Eurozone and the end of globalisation. We collect the most important contributions.