The New Paradigm Papers of the Month of December
Once a month the Forum New Economy is showcasing a handful of selected research papers that lead the way towards a new economic paradigm.
PUBLISHED2. DECEMBER 2022
READING TIME5 MIN.
The three eras of global inequality, 1820-2020 with the focus on the past thirty years
In this recent Working Paper, Branko Milanovic updates the famous “elephant graph” to reflect the last decade (2008-2018). This new data suggests that the global income distribution has changed considerably. Since the global financial crisis, the bottom quintile of the distribution has on average benefited most from income growth, in part due to economic growth in rural China. In Milanovic´s own words, this data represents „the greatest reshuffling in income positions between the West and China since the Industrial Revolution“.
The power of folk ideas in economic policy and the central bank–commercial bank analogy
“Folk” ideas, i.e. popular, non-specialist conceptions about the economy, seem to have a much greater influence than fact-based policy advice. False analogies – e.g. the comparisons of government budgets and private households – all too often catch on in public discourse and among policymakers in the long run because of their apparent plausibility. This study examines the power of misconceptions in monetary policy. In interviews with current and former ECB staff, Diessner shows that the powerful analogy between central banks and commercial banks affects even those with the most expertise.
„ (…) although Europe’s central bankers are cognisant of the irrelevance of balance sheet capital in theory, they nevertheless attach weight to it in practice, in order not to contradict the public’s assumed common sense that persistent losses and negative capital are undesirable.“
Wage-Price Spirals: What is the Historical Evidence?
Jorge Alvarez ; John C Bluedorn ; Niels-Jakob H Hansen ; Youyou Huang ; Evgenia Pugacheva ; Alexandre Sollaci
The return of inflation and associated high wage settlements have brought back concerns about the wage-price spiral. The hypothesis is that wage increases negotiated by unions when inflation is rising lead to higher demand, which in turn fuels inflation. Therefore, many economists tend to argue for wage restraint from unions in times of inflation. A new study by the IMF, analyzing global data for the last 60 years, shows that this mechanism is extremely rare. Thus, the empirical evidence for the wage-price spiral hypothesis seems rather insufficient.
Net zero transition plans. A supervisory playbook for prudential authorities
Simon Dikau, Nick Robins, Agnieszka Smoleńska, Jens van ’t Klooster and Ulrich Volz
So far, commitments by the financial sector to account for climate- and environment-related risks have largely been on a voluntary basis and shaped by market-led initiatives such as ESG and CSR. The authors of this recent report argue that prudential supervisors should assess the net zero transition plans by corporations and investors more closely. In their “Supervisory Playbook” for net zero, the authors make the case for mandatory corporate disclosure and mandatory prudential transition plans that focus on the risks of misalignment with climate targets. International fora Bank for International Settlements (BIS), the Financial Stability Board (FSB), and the Network for Greening the Financial System (NGFS) can play an important role here, according to the authors.
Europe´s fiscal framework – The People´s View?
Frank van Lerven, Dominic Caddick, Sebastian Mang and Ludovic Suttor-Sorel
Against the background of the current crises, considerable state investment will be necessary in Europe. According to the authors, this requires a fundamental reform of the EU Fiscal Framework, which is currently under review. In their report, they show the downsides of the austerity measures in the wake of the euro crisis and point out that since then, European households have become poorer by an average of 3,000 euros per year.
„Austerity and overly rigid fiscal rules were ultimately a political choice, rather than an economic necessity.”
In a survey of about 5,000 citizens in Denmark, Germany, France, Ireland and Italy, two-thirds said they wanted the European Union to adopt fiscal rules that would allow for more state investment in education, labour market policies and health care.