The New Paradigm Papers of the Month of September

The role of wages in the Eurozone

Lucio Baccaro & Tobias Tober

Two views have dominated the debates around the causes for the Eurozone crisis from a political economy perspective. The first view identifies the asymmetric development of wage levels across the Eurozone as the crisis’ root cause. The second argues that imbalances in wage levels and hence competitiveness are a direct consequence of the flow of capital movements from the Eurozone center to its periphery. These capital flows boosted investment and hence led to domestic demand overheat, resulting in wage increases and price inflation in the periphery. In a new paper, Lucio Baccaro and Tobias Tober follow up on these two strands of arguments and for the first time, assess them jointly. Controlling for financial flows, they examine the extent to which nominal wage developments can be explained through wage bargaining institutions. Contrary to the first view, they find that financial flows are a better predictor of nominal wage inflation than bargaining structure and conclude that the labor market view has exaggerated the impact of wage bargaining institutions. However, they also find that wage developments did matter when it came to trade performance and the level of bilateral exports within the Eurozone. This was the case for Germany, but not so much other countries with coordinated wage bargaining systems. Their findings contradict the thesis that countries from the periphery could have prevented their plight if only they had moderated wage growth and imposed stricter labor market reforms. In contrast, stimulating wage growth in Germany might have reduced the German account surplus and hence contributed to rebalancing the Eurozone.

Beyond outsourcing: Re-embedding the State in public value production

Mariana Mazzucato & Rosie Collington

What does the modern state look like and what is its role in the management of economic activities? Should it play an active role in the production process? In their recent paper, Mariana Mazzucato and Rosie Collington from UCL argue that the state should in fact not only be considered essential for the creation of public value, but that disembedding it from the production process undermines its capacity to learn and adapt to changing demands and needs. In light of the ever-changing challenges posed by the socio-economic crisis, this could hamper countries’ ability to counteract the crisis and its dreadful consequences. The two economists illuminate how decades of policy driven by the neoliberal paradigm have led to a growing outsourcing of public sector activities to private actors, for example in the welfare services area. While public opinions about what is legitimately created and sustained by government on behalf of the public change over time, it is only consistent to enable the state to reconfigure the resources and capabilities necessary for public value creation as demands change. This, however, is not possible if the production of goods and services that create public value are outsourced, undermining the state’s capacity to learn, adapt, and innovate. Hence, Mazzucato and Collington argue the state should re-assume its role as productive actor in the economy and be re-embedded in the process of public value production.

“Because the state matters to legitimate governance and public value creation, and the state’s capacity is contingent on adapting the means of producing goods and services to respond to changing demands, state organizations must be embedded not only in processes of agenda-setting and bureaucratic management, but also production.”

Looking for growth imperatives under capitalism: money, wage labour, and market exchange

Louison Cahen-Fourot

The dispute about the compatibility of economic growth and climate protection keeps on smoldering. While the array of growth-critical, post-growth and growth-agnostic literature is rapidly growing, a parallel discussion is ongoing on the origins of the need for growth in capitalism. Proponents of economic growth argue that it is indispensable for the smooth and stable functioning of the economy, to foster social cohesion, and for individual and collective wellbeing. Growth-critics in contrast routinely point out the evidence for the incompatibility of continuous growth with planetary boundaries and finite resources. But where does the need for economic growth (aka the growth imperative) come from? In a recent contribution, economist Louison Cahen-Fourot breaks with the prominent argument that the growth imperative is rooted in the monetary system, i.e. in interest bearing debt money, and instead argues that the need for growth emerges from the social relations of capitalism, market exchange and wage labor. Whereas debates around the monetary growth imperative argument often abstract from the institutional arrangements and the social relations into which money creation is embedded, the argument made by Cahen-Fourot focuses on social relations as the key driver behind the need to grow in capitalist economies. The paper explains the controversy around the monetary growth imperative debate, discusses arguments contradicting it, and derives policy considerations that take into consideration the intersection of growth and the ecology from this newly developed social relations standpoint.

Do corporate tax cuts boost economic growth?

Sebastian Gechert & Philipp Heimberger

The narrative that a reduction in corporate taxes results in higher economic growth is still widespread and has stirred significant debate in policymaking circles. Falling for this narrative, governments around the globe in recent decades have reduced statutory corporate income tax rates. The empirical literature on the topic however is ambiguous: the findings range from corporate tax cuts increasing, reducing, or not significantly impacting growth at all. A new study by Sebastian Gechert & Philipp Heimberger analyzes a data set of 42 primary studies using meta-regression methods to identify which factors can help explain the drastic variation in reported effects of corporate taxes on economic growth, as well as to better understand the econometric evidence about the average effect size, when assembling the results of the primary literature into a larger statistical picture. Doing so, the authors find evidence for a publication bias that favors studies reporting growth-enhancing effects of corporate tax cuts. When correcting for the bias, a much more diffuse picture emerges, supporting the hypothesis that corporate taxes do not in fact have an effect on growth.

Among the factors that influence the differences in the reported estimates, Heimberger and Gechert find that researchers diverged on the measurement of growth and corporate taxes, as well as other budgetary components. They also find that more recent empirical studies on the topic find less growth-enhancing effects of corporate tax cuts. This may also be a result of a more differentiated and honest debate on the topic, as the dominant neoliberal narrative is crumbling.

The three phases of financial power: Leverage, infrastructure, and enforcement

Benjamin Braun & Kai Koddenbrock

Over the past decades, the economy has been highly financialized. This process of financialization has impacted economies all across the world and financial instruments today extend their reach far beyond the economic into the social and political spheres. This process is well researched. However, large gaps remain in our understanding of capitalism’s ability to reproduce itself, despite its highly unstable nature, and despite it causing massive inequalities. How was the financial sector able to quickly and intactly emerge from the Global Financial crisis? A new research compilation sets out to answer this question. The introductory chapter, written by Benjamin Braun & Kai Koddenbrock, has been published recently. In it, the authors develop a framework for the analysis of the political economy of global finance that, in contrast to typical analyses focusing on deregulation and the breaking down of borders to international capital flows, takes the ability of global finance to create and trade financial claims, to keep them alive, and to enforce them vis-à-vis debtors, as its starting point. Herein, capital claims refer to the process in which capital and capitalists lay claim on society and make it work for them. Financial claims can exist in the form of financial instruments, be held on financial institutions’ balance sheets, or be coded into law, fortifying finance’s power against the rest of the world. According to Braun and Koddenbrock, capitalists are able to enforce their claims because they hold three distinct forms of power: leverage power, infrastructural power and enforcement power. Through its emphasis of hierarchy and power, the volume is able to highlight also the distributional implications of financial claims.