The New Paradigm Papers of the Month of February
Once a month the Forum New Economy is showcasing a handful of selected research papers that lead the way towards a new economic paradigm.
PUBLISHED3. FEBRUARY 2023
READING TIME5 MIN.
The Tale of the German Gas Price Brake: Why We Need Economic Disaster Preparedness in Times of Overlapping Emergencies
Isabella M. Weber, Thore Beckmann and Jan-Erik Thie
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.
A paradigm shift from the reactive crisis management of the past years towards emergency preparedness and a mission-oriented, market-shaping state is necessary to turn the crisis into an opportunity.
RRF 2.0: A Permanent EU Investment Fund in the Context of the Energy Crisis, Climate Change and EU Fiscal Rules
Philipp Heimberger; Andreas Lichtenberger
New data suggest that official targets for a European net-zero economy largely underestimate investment needs. This is why Lukas Heimberger and Andreas Lichtenberger argue in favor of a new fiscal capacity as a continuation of the Recovery and Resilience Facility (or “RRF 2.0”). According to their assessment, the commission’s current reform proposal falls short of meeting Europe’s public investment needs for climate and energy. Apart from providing the necessary fiscal space to maneuver the current energy and climate crisis, the fiscal capacity could also strengthen European sovereignty and empower the EU to seek a common forward-looking and geostrategic investment approach.
Shipping costs and inflation
Yan Carrière-Swallow, Pragyan Deb, Davide Furceri, Daniel Jiménez, Jonathan D. Ostry
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
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.
The resilient economy is characterised by the courage to try out new options for action in order to react flexibly to economic shocks.