New Economy in Progress

The challenges of our time require us to rethink the role of the state and the need for a more active fiscal policy.

 

In recent studies on fiscal policy researchers have primarily focused on finding more differentiated and empirically founded reasons to determine in which cases government activities make sense and in which cases they do not make sense from an economic point of view.

Part of this research is focusing on the multipliers of fiscal policy – with the result that, on the one hand, amplification mechanisms have proven to be more powerful than had been believed for a long time. On the other hand, the efficiency of economic policy measures obviously is heavily dependent on time factors and circumstances.

Other researchers have attempted to categorize the efficiency of government investment by estimating the expected economic and fiscal returns of these investments in the future. Ultimately, the objective is to determine how much additional revenue the finance minister can expect in the future by investing in a better infrastructure and thus in a better competitiveness or improved innovative capacity of the economy. If these returns are higher than the initial costs, this will then be a strong economic and financial argument in favor of the relevant investment – and vice versa (Krebs and Scheffel, 2016).

A third strand of research focuses on the question which role the state institutions play in the innovation process of the private sector. Oft-quoted preliminary work in this field has been carried out by Mariana Mazzucato. According to her analyses, public authorities, such as military agencies, have already played a major role in the development of digital technologies (the Iphone for example). According to Mazzucato (2015), such a diagnosis leads to a model in which in the future government and private actors should cooperate much closer to engage in joint long-term missions.  Such a mission was the 1960s project of taking man to the moon for the first time. Today the battle against climate change should be tackled in a similarly strategical approach.

Likewise, government agencies could play a significant role in providing support to a major sector like the auto industry in their move forward towards the forthcoming shift in the transport technology.

Another question that begs to be answered addresses the interplay of governments and central banks in times of persistently low inflation and deflationary tendencies that give reason for concern. Since the onset of the financial crisis the major central banks have responded to these problems at varying paces and to varying degrees by initiating an unconventional policy and by responding in the markets, for example, with the purchase of (government) bonds. These attempts, however, are only partially effective, because the money that was made available does not necessarily lead to more real spending. Instead it has, as standard estimates suggest, led to an increase in purchases of assets such as shares.

Thus, an alternative that has long been highly controversial is now being discussed as a viable option. The idea is that money should be made available directly to the citizens who in turn will actually consume a much larger share of it (“helicopter money”). One of the advocates of this concept is the British economist Adair Turner (2015).

References

  • Alesina, A., & Ardagna, S. (1998). Tales of fiscal adjustment. Economic policy, 13(27), 488-545.
  • Alesina, A., & Ardagna, S. (2010). Large changes in fiscal policy: taxes versus spending. Tax policy and the economy, 24(1), 35-68.
  • Barro, Robert J. (1979). "On the Determination of the Public Debt". Journal of Political Economy. 87 (5): 940–971.
  • Krebs, T., & Scheffel, M. (2016). Quantifizierung der gesamtwirtschaftlichen und fiskalischen Effekte ausgewählter Infrastruktur-und Bildungsinvestitionen in Deutschland (No. 16-13). Working Paper Series.
  • Krone, E., & Scheller, H. (2018). KfW-Kommunalpanel 2018. Hg. v. KfW Bankengruppe. KfW Bankengruppe. Frankfurt am Main.
  • Mazzucato, M. (2015). The entrepreneurial state: Debunking public vs. private sector myths (Vol. 1). Anthem Press.
  • ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT. (2017). Government at a Glance 2017. OECD.
  • Reagan, R. (1981). Inaugural Address. Available at https://www.reaganfoundation.org/ronald-reagan/reagan-quotes-speeches/inaugural-address-2/
  • Statistisches Bundesamt. (2019). Volkswirtschaftliche Gesamtrechnungen – Arbeitsunterlage Investitionen. Wiesbaden.
  • Thatcher, M. (1987). Interview for Woman's Own ("no such thing as society"). Available at https://www.margaretthatcher.org/document/106689
  • Turner, A. (2015, November). The case for monetary finance–An essentially political issue. In 16th Jacques Polak Annual Research Conference (pp. 5-6).

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