NEW PARADIGM
The New Paradigm Papers of the Month of August
Once a month the Forum New Economy is showcasing a handful of selected research papers that lead the way towards a new economic paradigm.
BY
SONJA HENNENPUBLISHED
4. AUGUST 2023READING TIME
5 MINThe New Economics Of Industrial Policy
by Réka Juhász, Nathan Lane, and Dani Rodrik
Mainstream economics used to be critical of industrial policy. Despite this opposition from economists, governments have continued to use industrial policy to address various challenges such as the green transition, supply chain resilience or job creation. In a recent publication, a team led by Harvard economist Dani Rodrik discusses new research showing that the arguments against industrial policy are largely no longer valid. This new generation of research focuses on assessing whether industrial policy achieves the desired outcomes in specific settings. The cases studied include support for infant industries, public R&D efforts, and place-based policies targeting specific industries. Interestingly, recent papers with improved identification methods tend to find more favourable results for industrial policy, suggesting that it often has significant and long-lasting effects on economic activity. The authors conclude by discussing how the economic context is reshaping traditional notions of industrial policy. They suggest that successful industrial policy involves collaborative efforts between governments and firms, and a broader range of policies beyond subsidies, such as tailored public services and inputs. Furthermore, as deindustrialisation shifts the focus to services, industrial policy will need to adapt to support productivity and employment in the services sector.
Making EU Economic Governance Fit for Purpose: Investing in the Future and Reforming the Fiscal Rules While Decentralizing and Democratizing
by Vivien A. Schmidt
In the past decade, the EU focused on reducing deficits and debts as a response to the eurozone crisis. However, multiple subsequent crises have prompted a reassessment of the EU’s economic governance. Now, the EU faces a crucial question: will it return to the old fiscal rules or significantly reform them? This decision will not only impact the EU’s economic direction but also its political future, according to a recent policy paper by Vivien A. Schmidt from Boston University. Schmidt argues for a permanent EU debt facility and fiscal rules that prioritize investments over debt reduction. She emphasizes the importance of finding common solutions and recognizing the interdependence of EU economies to address the Union’s existential challenges while promoting solidarity and addressing the rise of populist extremism.
The Impact of Social Security Wealth on the Distribution of Wealth in the European Union
by Marcin Wroński
The ongoing demographic change in many advanced economies means that public pension systems are becoming ever more important. In a newly published World Inequality Database working paper, Marcin Wroński examines how public pension entitlements influence wealth inequality among pensioners. Using a novel data source, the Eurosystem Household Finance and Consumption Survey, the study compares the impact of public pension systems on wealth inequality across 19 European countries. The results indicate that social security wealth significantly reduces wealth inequality among pensioners. In fact, augmented wealth inequality is approximately 30% lower when compared to private wealth inequality. This reduction applies specifically to the population of pensioners, while the equalizing effect of public pension systems may be weaker for the entire population. Furthermore, social security wealth not only mitigates wealth inequality at the country level but also across the entire European Union.
Next generation EU and the future of economic governance: towards a paradigm change or just a big one-off?
by Marco Buti & Sergio Fabbrini
The European Union’s Next Generation EU (NGEU) program, established from 2021 to 2026 to address the economic impact of the COVID-19 pandemic, represents a significant departure from past EU responses to economic crises. Is this a sign of a deeper paradigm shift on the level of EU economic governance or just a one-off? A recent policy paper by Marco Buti & Sergio Fabbrini investigates this question. The authors identify three crucial dilemmas, which will determine whether the NGEU’s departure from the previous response to the sovereign debt crisis in the early 2010s marks the beginning of a new paradigm. The first dilemma concerns the emphasis on EU supranational institutions, the second involves the promotion of a new fiscal policy mix, and the third pertains to the implementation of national reforms that align with EU objectives, despite national electoral cycles. The paper evaluates potential solutions to these dilemmas using the ‘Monnet Compatibility Test’ (MCT), which assesses the coherence between the institutional, economic, and political aspects of the new economic governance arrangements.
Poles Apart? Alternative Welfare Trajectories under Finance-Dominated Capitalism
by Fabrizio Antenucci, Walter Paternesi Meloni & Pasquale Tridico
How did high-income countries respond to increasing financialization of the economy under market liberalism? Have they extended, maintained, or reduced their welfare systems? A recent contribution by Fabrizio Antenucci, Walter Paternesi Meloni & Pasquale Tridico elaborates on this question by introducing a comprehensive index to evaluate the welfare levels of 32 OECD countries from 1990 to 2015 and comparing it with existing socio-economic models and financialization patterns. The research reveals two distinct trajectories: Scandinavian and Continental European countries show an increase in welfare, while Anglo-Saxon, Asian, Mediterranean, and Central and Eastern European countries exhibit lower welfare levels. Interestingly, the study finds that countries with stronger welfare systems experienced more significant financialization, indicating a compensation strategy. Overall, the research emphasizes the importance of policies and institutions in shaping diverse welfare systems and addressing the challenges posed by the current phase of capitalism.