The New Paradigm Papers of the Month of August

How to construct a new global order

Dani Rodrik and Stephen Walt

In the face of a disintegrating post-war international economic order, concerns about increasing geopolitical tensions are on the rise. In this study, Rodrik and Walt propose a new ‘meta-regime’ that adapts to this new situation and attempts to overcome the usual dichotomy between conflict and co-operation. In an initial agreement, the international community might define different categories of policies: the first contains prohibited actions such as violations of international law or beggar-thy-neighbour policies, the second category entails any actions that resolve conflicts between states through cooperative negotiations, the third category encompasses independent policy responses by a country that is harmed by an economic policy in another country, whereby responses shall be “well-calibrated” (i.e., only aimed at removing the harm but not be used as a pretext to cause further harm). Lastly, multilateral governance is required to resolve major spillovers and provide global public goods. The authors however concede that multilateral agreements do not always need be global but may be of more narrow reach. By focusing on a minimalistic global governance architecture, even states with differing interests and values might still be able to cooperate on the major global issues such as such as climate protection or public health in a world of escalating tensions and increasing political polarization.

The full study

Born in the land of milk and honey: Hometown growth and individual wealth accumulation

Charlotte Bartels, Johannes König, Carsten Schröder

How do the economic conditions of our hometowns influence our individual economic prospects? In a new study on Germany, Bartels et al. estimate that a person born in Munich will have accumulated two or three times more wealth than somebody born in Recklinghausen in the Ruhr area. The study uses economic growth rates across 401 German counties and data from the 2019 wave of the German Socio-Economic Panel which includes top-wealth individuals (SOEP-P). The results imply that growing up in a flourishing city increases the chances of a prosperous life both for heirs and non-heirs. High economic growth reduces the relative importance of inheritance and has an overall equalizing effect on wealth inequality. In a time of low growth and highly variate land prices however, intergenerational transfers will gain an even greater role in driving wealth inequality.

The full study

How much growth is required to achieve good lives for all? Insights from needs-based analysis

Jason Hickel and Dylan Sullivan

The conventional economic development narrative suggests that all countries need to achieve the high GDP per capita levels of current high-income nations to end poverty and ensure good living standards globally. In the needs-based approach to development presented, the authors define a minimum floor of living standard including sufficient nutrition, shelter, access to healthcare, education and mobility. According to their calculation, extending the share of the population with access to these basic living standard from currently one-fifth of humanity to the whole world would require around one-third of current global resource and energy use. This means that some less-necessary forms of production and consumption might be scaled down in order to eradicate poverty while simultaneously fighting climate change. Key to solving the (false) dilemma between human well-being and ecology is to focus on GDP´s components and not its aggregate.

The full study

30 years of the DIW proposal for ecological tax reform: a missed opportunity for climate protection

Stefan Bach, Claudia Kemfert and Barbara Praetorius

In the summer of 1994, the DIW Berlin proposed an ecological tax reform with a gradually increasing energy tax that could have generated up to 5 % of German economic output. The revenues were to be used to reduce employers’ social security contributions and grant households an “eco-bonus”. According to the proposal, this approach would have significantly reduced energy consumption and CO2 emissions, while only minimally impacting economic growth and increasing employment. However, the proposal was not implemented at the time. In 1998, the red-green government merely increased fuel taxes significantly, which helped to stabilize pension contributions but did little for climate protection. Instead, climate policy focused on promoting renewable energies. If Germany had taken up the original proposals for tax reform in the 1990s, it would be in a better position today in terms of climate protection. Against this backdrop, the authors call for a long-term and credible increase in the carbon price and substantial government investment in the transformation.

The full study

The impact of generative artificial intelligence on socioeconomic inequalities and policy making

Valerio Capraro, Austin Lentsch, Daron Acemoglu, et al.

One may think of generative artificial intelligence (AI) as a double-edge sword: while it speeds up information processing, it may also spread misinformation. In the workplace, it can increase productivity and create new jobs, but the benefits are likely to be unevenly distributed, as in the areas of education and healthcare, too. The labour market effect will mainly depend on whether AI will replace human problem-solving skills and expertise or whether it will be deployed to complement them within an “pro-worker” agenda. In line with the latter approach, the authors recommend policies such as increasing support for research into who AI can fulfill tasks that are complementary to human labour, to provide broad-based opportunities for training in AI tools for the workforce and to empower workers to have control over their data. Ultimately, the future socio-economic impact of AI will depend on the landmark development and policy decisions made now.

“(…) the rise of powerful AI will be either the best, or the worst thing, ever to happen to humanity. (…) As we stand at the cusp of this new era of human–machine interactions, it is crucial that we engage in thoughtful and inclusive discussions about the role of AI in shaping our society, because the decisions we make today will have lasting impacts on generations to come.”

The full study