The New Paradigm Papers of the Month of July

Local Decline and Populism

Thiemo Fetzer, Jacob Edenhofer, Prashant Garg

Do citizens in neglected regions tend to vote for right-wing populist parties more than elsewhere? This new study suggests so, based on empirical analysis for the UK. The vacancy rate in shopping streets in England and Wales between 2009 and 2019 is recorded as a characteristic of local decline. During this time, support for the right-wing populist UKIP has risen particularly sharply in those communities where the living conditions of citizens have deteriorated due to the economic decline of their communities. This is particularly true in the North East of England. Using the vacancy indicator, the authors find a statistically significant and robust relationship between local decline and support for UKIP across different model specifications. If there is local economic hardship, this appears to strongly encourage the tendency to vote for populist parties.

To the full study

Carbon Prices and Inflation in a World of Shocks

Isabella M. Weber, Jan-Erik Thie, Jesus Lara Jauregui, Lucas Teixeira 

Will inflation be higher in the future simply because climate change and climate policy will lead to repeated price spikes? Isabella Weber and her colleagues have calculated climate-induced inflation risks for individual sectors of the German economy using an input-output model. They assume that both climate shocks and geopolitical tensions will repeatedly lead to ‘shock inflation’, such as after the start of the war against Ukraine. The pricing of CO2 is also likely to increase inflation (‘carbonflation’). The majority of price increases affect everyday consumer goods such as basic foodstuffs, energy and transportation. Both risks should be mitigated by suitable policy instruments such as green industrial policy. The authors also suggest developing new approaches, such as price brakes, to prevent and contain price spikes in sectors that are crucial for system-wide price stability.

To the full study

The Welfare Costs of Job Loss and Decarbonization: Evidence from Germany’s Coal Phaseout

Luke Haywood, Markus Janser, Nicolas Koch

Do climate targets need to be weakened in order to avoid unnecessarily risking jobs in the fossil fuel industries, for example? The study addresses this concern by providing new empirical evidence that welfare losses on the path to climate neutrality can be avoided through appropriate labor market measures. Using employment biographies in the German coal mining industry over the past four decades, the authors calculate the economic effects of various labor market policies. In a nutshell, a career change supported by wage insurance schemes can be a good solution both for the former mining regions and for the climate.

To the full study

Do Disinflation Policies Ravage Central Bank Finances?

Theodore Humann, Kris Mitchener, Eric Monnet

In the course of the latest inflation crisis from 2022, historical comparisons have often been drawn with the oil price shock of the 1970s. For the first time, an empirical analysis now compares the central bank balance sheets of the ten most important economies in both inflationary periods and identifies striking differences. In the early 1980s (‘Volcker shock’), central bank profits rose, partly because income from the lending business increased as a result of the interest rate hikes at the time. In the most recent crisis, however, important central banks such as the US Federal Reserve and the Bank of England recorded high losses. The authors attribute this on the one hand to the fact that the central banks had to pay interest on the enormous reserves that banks held with them during the crisis. On the other hand, the monetary authorities bought large amounts of bonds to stabilize the financial markets. According to the authors, the combination of these two effects makes the current situation of the central banks unique and not directly comparable with the other inflation era.

To the full study

Beyond Neoliberalism and Neo-illiberalism – Economic Policies and Performance for Sustainable Democracy 

Markus Gabriel, Anna Katsman, Thomas Liess, William Milberg

This collection of essays recently published by The New Institute looks at the economic, cultural and political reasons for the global rise of authoritarian politicians. Dani Rodrik, for example, identifies the disappearance of good jobs in the course of ‘hyperglobalization’ as the main cause of ‘neo-illiberalism’. The Harvard economist recommends measures to strengthen the middle class worldwide. For Nobel Prize winner Joseph Stiglitz, a ‘post-neoliberal’ paradigm should be characterized by collective action in all areas of economic policy, be it through trade union organization, stronger consumer protection or macroeconomic framework conditions that promote inclusive economic growth. Further contributions come from Moritz Schularick, Daniela Gabor and David Autor. They deal with case studies on economic policy in the UK, the USA, Brazil, the Philippines, Hungary and Poland. The essays are based on contributions to a conference at the New School for Social Research in March 2023.

To the full publication