The New Paradigm Papers of the Month of February

In this recent contribution, Weber, Beckmann and Thie argue for new economic approaches such as price stabilization in times of crisis. As a lesson of the recent energy crisis, the authors call for new institutions that monitor price movements and enable governments’ swift response to sectoral shocks.

As a response to the gas price shock following Russia’s war against Ukraine, the German government adopted a relatively unorthodox policy instrument, the so-called gas price brake. The instrument contains a two-tier pricing scheme: it cushions the inflationary shocks to heating costs for consumers, especially low-income households, while at the same time keeping savings incentives in place by leaving the upper end of the gas price range untouched. While providing some relief to households and firms, the gas brake nevertheless serves as a cautionary tale of how decision-making under extreme time pressure can lead to inadequate economic policy results. In this case, the actual instrument is being implemented with less regard for social equity than in Weber’s original proposal. Reflecting on how the gas price brake came into existence, it is notable that, having been met with overall rejection by most of German academia, media, and policy circles, it took the idea more than half a year to be seriously considered by the German government. Facing the nearing winter, the expert commission was then hurried to spell out the details within a few weeks. As a result, the implemented instrument deviates from the original idea by basing the formula on past usage instead of basic needs.

This new study identifies shipping costs as an important driver of inflation. The severely disrupted supply chains during the pandemic drove up costs for overseas freight and thus made a large share of all imports more expensive, which was reflected in the rise of both headline and core inflation as well as in rising inflation expectations. The authors have been able to demonstrate this by analyzing the Baltic Dry Index, which measures the costs of bulk shipping (including freight such as coal, iron ore, grain, etc.). In their analysis, the authors find that the inflationary effects of the pandemic were of a similar magnitude to oil and food shocks in a global context and lasted even longer. The paper thus fills an important research gap in the empirical literature on inflation, which has so far tended to neglect the role of transport costs.

Wealth inequality dynamics in Europe and the United States: Understanding the determinants

Thomas Blanchet and Clara Martínez-Toledano

For the first time, the authors present a wealth distribution calculation for Europe and compare the results with developments in the USA. For the period from 1970 to 2020, they measured the assets, liabilities and investment flows of European households as well as the distribution of wealth. In comparison with the USA, it becomes clear that the ratio of wealth to income has increased in a similar way in both regions since the 1970s. However, wealth concentration has grown less rapidly in Europe. Using a decomposition of wealth accumulation and counterfactual simulations, Blanchet and Martínez-Toledano show that the weaker increase in inequality in labour income and the stronger increase in real estate prices compared to financial assets in Europe seem to explain why wealth concentration has increased less here than in the US since the mid-1980s.

Die Funktionsbedingungen einer resilienten Wirtschaft

Elke Muchlinski

As a central condition for Europe’s economic resilience, the author formulates a redefinition of Germany in the sense of an economic and societal turning of ages. Both the pandemic and the Ukraine war have shown that Germany’s habitual patterns of action need to be redefined in the context of the European Monetary Union and Europe. In her contribution, she argues that both society’s will to shape the future and productive and effective planning and cooperation between the market, the state, and central banks are necessary for a resilient economy.