The New Paradigm Papers of the Month of April
Once a month the Forum New Economy is showcasing a handful of selected research papers that lead the way towards a new economic paradigm.
PUBLISHED21. APRIL 2022
READING TIME5 MIN.
Globalization and Factor Income Taxation
Pierre Bachas, Matthew H. Fisher-Post, Anders Jensen, Gabriel Zucman
The authors constructed a new unique dataset spanning 150 countries the last half century by harmonizing government revenue data from national accounts and from various international bodies including the OECD´s Revenue Statistics, the UN´s Government Revenue Dataset and the IMF´s Historical Government Finance Statistics. Bachas et al. (2022) find that the effective tax on capital and labour have been converging since 1965. The new statistics clearly point to an overall falling trend capital taxation and rising trend in income taxation. Furthermore, the authors show that globalization from the 1980s onwards has exerted different effects on tax systems across the world: while high-income countries lowered capital tax rates in a ‘race to the bottom’, developing countries were overall able to level up capital tax revenues, most likely thanks to trade integration.
Changing accounts of the relationship between capitalism and democracy: From incompatibility to partnership, and back?
The idea of a symbiotic relationship between capitalism and democracy (i.e., Western ‘Modernization Theory’) is increasingly being called into question. A new ifso working paper provides an account of the evolution of thinking on this relationship. Max Krahé delves into the different concepts inter alia by Pareto, Polanyi, Schumpeter, Smith, Mill and Marx, also explaining the respective historical and political context. He shows that even before Marx, scholars such as Adam Smith and David Hume in the 18th century pointed to a possible incompatibility between democracy and capitalism. While during the second half of the 20th century, globalization and democratization seemed like concurrent trends which led us to expect the ‘end of history’ (Fukuyama 1992), since the global financial crisis, a narrative has emerged according to which modern capitalism may not be inherently democratic. According to Krahé, ever more recent publications argue that Western democratic states are in some respects falling short of their ideal, exemplified in the increasing political power of economic elites and the reemergence of increasing inequality as a political factor.
What if? The economic effects for Germany of a stop of energy imports from Russia
Rüdiger Bachmann, David Baqaee, Christian Bayer, Moritz Kuhn, Andreas Löschel, Benjamin Moll, Andreas Peichl, Karen Pittel, Moritz Schularick
Against the background of an impending sudden stop of Russian gas supply to Europe, either caused by an energy embargo imposed by the European Union or a by an export ban imposed by the Russian Federation, economists are attempting to assess the possible economic consequences. Among the currently most publicly discussed studies in Germany is Bachmann et al. (2022). Building on the multisectoral model of an open economy by Baqaae & Farhi (2021), the authors estimate the GDP loss for the German economy in the range of 0.5% to 3%. An analysis by Bayer et al. at DIW which expands the analysis to Europe, also arrives at the 3% estimate, while Behringer et al. at IMK deem a 6% drop as plausible. This high deviation in estimates stems from vastly different assumptions regarding the degree of elasticity of substitution. For instance, Behringer et al. predict a much deeper recession with higher unemployment and higher inflation, arguing with the potentially cascading effects from supply chain disruptions and the unavailability of intermediate products. They argue that due to physical constraints, switching to other forms of energy is simply not be an option in some sectors. (The range of estimates may be an indication for the fact that economists themselves are currently operating under a high degree of uncertainty, as has been argued inter alia by Veronika Grimm, Michael Hüther and Tom Krebs.)
An economical business-cycle model
Pascal Michaillat, Emmanuel Saez
Michaillat and Saez offer a new business cycle model which features wealth accumulation, a liquidity trap and unemployment. Following Paul Krugman´s (2018) impression that the IS-LM model may in some cases be more suitable to assess policy than DSGE models, the authors attempt to build an ‘economical’ model which explains the effects of policy changes and exogenous shocks through comparative statics in an AS-AD-framework. In this model, business cycles are mainly explained through comovements between output and unemployment. The unemployment rate is derived from labor market frictions modelled through a matching function and a Keynesian component of unemployment. Inflation remains at a constant rate, which is interpreted as a social norm, and the central bank follows an interest-rate peg. Aggregate supply is determined by a Beveridge curve which models the inverse relationship between the unemployment rate and the job opening rate. Aggregate demand is shaped by a Euler equation which allow for households to accumulate wealth in contrast to the usual assumption of intertemporal consumption smoothing. Michaillat and Saez conclude that when interest rates remain are at the zero lower bound for extended periods, aggregated demand may be stimulated through a wealth tax. Since so far, the model lacks properties including government spending, firms, endogenous inflation, it would be interesting to see whether it will be developed further.
Who Set Your Wage?
The Nobel prize recipient reviews the theoretical and empirical literature on monopsonistic wage setting and finds that: „One of the most exciting developments in the field today is the evidence of labor economists taking questions about wage setting seriously.“ Card also maps out futures avenues for research. According to the author, most wage models explain upward-sloping labour supply curves either with idiosyncratic preferences of job seekers or frictions in the process of job search. New theoretical wage models should try to combine these two aspects. In addition, assumptions should be further aligned with reality, such as the assumption of minimum skill standards of applicants, the presence of imperfect information, and the assumption that firms base their wage setting on the evolution of industry-specific wages. In addition, Card generally recommends that labour economists become more involved in the analysis of wage setting. So far, he argues, labor economist had left this question up to the market and thus wage models have largely neglected the employers’ market power.