The New Paradigm Papers of the Month of May

Die GRW neu denken: Proaktive Industriepolitik für Deutschlands Regionen

Jens Südekum, Daniel Posch

For many economists, regional policy was long viewed as a distortion of efficient market outcomes. Yet from the outset, Germany’s Basic Law committed the state to ensuring equivalent living conditions across the country. Nevertheless, regional disparities in income, employment, and infrastructure remain significant—and may widen further as climate policy impacts regions unequally. In a recent policy brief, Jens Südekum and Daniel Posch propose reforming the federal GRW program (Joint Task for the Improvement of Regional Economic Structures), so that support can begin proactively—before regions fall behind economically and socially.

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Decoding China’s Industrial Policies

Hanming Fang, Ming Li, Guangli Lu

While the revival of industrial policy is a global trend, China stands out as a key player. As Dani Rodrik argues, the question is not whether to practice industrial policy, but how. A new study by Fang, Li, and Lu uses AI-driven text analysis to examine China’s industrial policies from 2000 to 2022. Drawing on over 3 million documents from central to local governments, they classify each policy’s goals, targeted industries, and tools (such as subsidies or regulation). Their analysis—combined with firm-level data—reveals how these policies influenced firm behavior, exposed regional mismatches, and sometimes resulted in inefficiencies like overcapacity.

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Culture and Contemporary Political Preferences

Vasiliki Fouka, Marco Tabellini

Political views differ—as do cultural norms. But how do they interact? In a new review article, Fouka and Tabellini show that individuals inherit not only party loyalties but also deeper cultural beliefs—like norms of fairness or social hierarchy—that shape political preferences. They identify three strands in the literature: (1) direct intergenerational transmission of partisanship, (2) persistence of political attitudes without a known mechanism, and (3) cultural values that affect preferences across policy areas. Their framework helps clarify the complex role culture plays in shaping political behavior.

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The governance and funding of European rearmament

Armin Steinbach, Guntram Wolff, Jeromin Zettelmeyer

Europe’s security challenge is growing urgent. With the U.S. stepping back and Russia rearming, European defence remains fragmented—undermined by domestically-biased procurement and duplication. In a new Bruegel policy brief, Steinbach, Wolff, and Zettelmeyer propose two institutional reforms. First, the EU could strengthen the mandate of its Defence Agency and introduce a funding mechanism akin to the SURE program. Alternatively, a new European Defence Mechanism (EDM), modeled on the ESM, could coordinate joint procurement and own key military assets. Such reforms, they argue, would reduce costs, deepen cooperation, and better align defence planning across the continent.

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Geoeconomic Pressure

Christopher Clayton, Antonio Coppola, Matteo Maggiori, Jesse Schreger

Economic coercion as a geopolitical tool is gaining prominence—not just since Trump’s trade wars. But how can it be systematically measured? A new paper introduces a method using large language models (LLMs) to extract signals of geoeconomic pressure from large textual datasets. The authors capture not only enacted policies but also the off-path threats that influence behavior without formal implementation. They show that firms respond differently to tariffs, sanctions, and export controls—and also to whether the pressure is real or merely anticipated.

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