Young Economists Comment on the ‘Post-Truth’ Era

The economic consensus on such matters as the benefits of trade, technology and global integration has taken a political battering recently. We asked young economists of #LiNoEcon about their perspectives on what is often referred to as a ‘post-truth’ era, and what they think economists could or should do to combat it.


67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyI think it is hubris to think that the economic consensus has ever played a role in influencing the man on the street. While the effects of trade nationalism may be catastrophic in economic dimensions I feel that in other research disciplines (e.g., climate research) the stakes are much higher. Consequently, we should stay resilient, persistent and join our fellow researchers from other fields speaking up in the name of truth.

        Chris Flath from Germany







        Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           



67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyEconomists and other academic researchers are often wary of over representing their findings, which does not make it easy to communicate the complexities of these problems to the public.

Sarah Quincy from the US











           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings



67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyI think that this fact is mainly the outcome of the financial crisis and, more importantly, of the growing inequality in our societies.

        Dimitris Papadimitriou from Greece











Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           



HelenaPolitical instability worldwide associated with migration flows and the financial crisis of 2008 (and thus rising income inequality) might be responsible for the development of extreme political and economic attitudes across society, especially in Europe.

Helena Chytilova from the Czech Republic








           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings



6th Lindau MeetingI don’t think that this ‘post-truth’ phenomenon is a reaction against truth or science, but against ideology-based opinions disguised as facts.

        Pedro Degiovanni from Argentina












           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           



6th Lindau Meeting on Economic SciencesCommunicate, communicate, communicate. We need to better explain our work and results, and actively engage in a discussion with the greater public.

Sofie R. Waltl from Austria










           Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings           



6th Lindau MeetingI believe we as economists need to do a much better job of communicating ideas, basic economic concepts and research findings in a manner conducive to being easily understood by lay persons.

        Farooq Pasha from Pakistan












           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings          



67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyThe tackling of anti-intellectualism should follow from building a consensus that is capable of better foreseeing the consequences of the policies justified by it. Additionally, economists would be in a much better position to address anti-intellectualism if we embraced natural sciences, and built the profession as a natural offspring of other major disciplines.

Benjamin Leiva from the US









           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           




6th Lindau MeetingIn my opinion, the dissemination of information is the best way to combat the ‘post-truth’ mentality. Economists and researcher in various fields of study should try to connect their work with people; the debate should come out of closed circles, be more interactive and open to the dialogue in various areas of society using simple and easily accessible communication tools.

        Giovanna Zeny from Brazil








           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           



67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyWhile I believe it is important to speak in terms everyone can understand when explaining economic ideas, economists should not simplify so much as to say ‘trade is always good’ when we know that trade creates winners and losers.

Andrew Jonelis from the US




           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           



67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyOur policies should have in mind the poorest, neediest, and least educated citizens in our societies. We need a Europe that takes care first of all of those citizens who do not travel abroad and do not speak any other idiom than their native language. Once we’ll have that Europe, we will be dramatically closer to a truly united Europe.

        Alessandro del Ponte from Italy










           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           

Blockchain Technology: ‘Proof-Of-Work’ Versus ‘Proof-Of-Stake’

Bitcoins. Photo/Credit: skodonnell/

Bitcoins. Photo/Credit: skodonnell/


Cryptocurrencies like Bitcoin and the blockchain technology that underpins them are gradually becoming household words. Although peer-reviewed research is only just beginning to develop on the topic, the cryptocurrency ecosystem is growing at an exponential rate. Everyday, new businesses, investors and researchers enter this dynamic space.

At the University of Liechtenstein, I have been working on an experimental blockchain project with Professor Dr Martin Angerer and Jonas Gehrlein, MSc from the University of Bern. Our research on blockchain technology has been an educational, demanding and exciting journey.

The terms ‘blockchain technology’ and ‘distributed ledger technology’ refer to a variety of different technologies that attempt to solve different problems. Cryptocurrencies and blockchain technology emerged after the 2007/08 global financial crisis. The most popular example of these technologies is Bitcoin.

Bitcoin is a decentralised and open-source digital currency that stores transactional data in a distributed database that is maintained by computers all around the world. The creator of Bitcoin, who is still unknown but goes by the pseudonym Satoshi Nakamoto, wanted to provide a decentralised, private and secure means of transferring value online that did not rely on trusting sovereign entities, central banks or financial intermediaries.

A major discussion in the cryptocurrency realm relates to the optimal algorithm for achieving a collective agreement on which transactions are valid and which are invalid within a distributed network. Currently, the two most popular methods are known as ‘proof-of-work’ and ‘proof-of-stake’.

Bitcoin’s proof-of-work algorithm uses large quantities of energy and hardware equipment, which have been estimated to cost approximately $400 million per year. Proof-of-stake is a newer invention that has not been rigorously tested in the market.

When my colleagues and I began our research project, we wanted to investigate the differences between these two consensus mechanisms in a laboratory environment. Our motivation was simple: if both systems achieve the same outcome but one system (proof-of-work) incurs a negative externality on the environment, then why are people still using it?

Despite the seeming superiority of proof-of-stake, market participants prefer proof-of-work. Using market capitalisation as a proxy for demand, the highest market capitalisation coins all rely on proof-of-work. But proof-of-stake is gaining popularity: Ethereum, the second largest market capitalisation coin, is expected to switch from proof-of-work to proof-of-stake during the next year.

Our research uses game theory and behavioural economics to study the strengths and weaknesses of these two competing systems in a lab environment with students.

Our first step was to boil down the complex nature of these consensus mechanisms into abstract concepts that could be easily modelled in a lab. We spent months reviewing the research literature and brainstorming possible set-ups for the experiment.

The lab setup for proof-of-work was relatively straightforward. We planned to draw from the public goods literature on network externalities. Students would be given the option to use a medium of exchange that incurred an internal personal cost or a medium of exchange that incurred an external cost for the environment.

Essentially, this represented the current fiat system versus the energy-guzzling Bitcoin. At this point, we were very excited about the direction of our research and about the contribution that it could make to the fields of economics and information science.

Unfortunately, our research hit an insurmountable obstacle when we tried to model proof-of-stake: we could not find a way to do it easily in a lab. We discussed potential drawbacks of the proof-of-stake system such as 51% attacks, deflationary spirals and uncertainty stemming from ambiguity. But we came to the conclusion that Bitcoin’s proof-of-work suffered from the same drawbacks, albeit to a lesser degree.

During my own reflection on the differences between proof-of-work and proof-of-stake, I came to the conclusion that these systems resemble our transition from a gold standard to a fiat standard. Like gold, Bitcoin uses electricity and capital equipment to mine new coins. The probability of randomly being chosen to create a block and receive a reward is equal to each miner’s amount of mining power divided by the total amount of mining power on the network.

On the other hand, proof-of-stake allows the users with the largest holdings to create coins out of thin air. In a proof-of-stake system, the probability of receiving a reward is equal to the fraction of coins held by the user divided by the total number of coins in circulation.

Following this logic, proof-of-stake would appear to be superior to proof-of-work because economic theory argues that the fiat system is superior to the gold standard due to deflationary spirals caused by hoarding. (Note, however, that my late uncle, the American economist Larry Sechrest, argued in his 1993 book, Free Banking: Theory, History, and a Laissez-Faire Model that the problems associated with the gold standard actually stemmed from regulation and not from the scarcity of gold.)

To date, my reflections have not helped us find a suitable set-up for the lab experiment: we have been unable to find a major setback of the proof-of-stake consensus mechanism. The only problem that I could find was quite philosophical in nature and too complicated to be easily modelled in a lab.

The twentieth-century Austrian logician, Kurt Gödel, argued that no system can prove its own correctness from within itself. In reference to proof-of-work and proof-of-stake, the former appears to solve Gödel’s incompleteness theorem while the latter relies on external truth to achieve consensus.

In a proof-of-work system, anyone can join the system and immediately determine the correct history of transactions in the blockchain because the correct chain is the longest chain by default. In comparison, proof-of-stake has not developed a method for ensuring that every computer in the network comes to the same conclusion on the correct history of transactions from within the system.

Instead, proof-of-stake relies on an external third party or host of third parties to establish agreement on the history of transactions. In plain terms: proof-of-stake establishes truth by appealing to an external anchor while proof-of-work establishes proof from within. Although the introduction of counterparties may not be a problem in every case, the original goal of the blockchain technology was to create consensus without intermediaries.

In the end, we could not find a suitable way to model proof-of-stake in a lab with humans. In our own analysis of this problem, we realised that there was a fundamental problem with the premise of our study: we were trying to model a lab experiment with humans based on a technology that was designed to minimise human interaction.

Although we have encountered this major setback in our study, we have learned a tremendous amount about blockchain technology and about our own strengths and weaknesses as researchers. Instead of giving up, we are going in a new direction with our blockchain research. After all, the journey for pioneers is never paved.

Is Economic Policy Ready for the Next Crisis?

The economics profession took a big hit in the wake of the global financial crisis. Why did macroeconomists with their fancy models not see it coming? Should governments inject money into the economy to boost demand or cut spending to reduce record public deficits? And why have zero interest rates and ‘quantitative easing’ not done more to improve anaemic rates of growth?

These questions and many more were up for debate at a panel of three Nobel Laureates and a young economist at the 6th Lindau Meeting on Economic Sciences on Friday 25 August. The participants considered the new conditions for monetary policy – cutting interest rates and rescuing banks – and fiscal policy – changing taxes and spending public money.

They also asked why, before the crisis, policy-makers seemed to have paid insufficient attention to financial markets in their models. Mario Draghi, the President of the European Central Bank, used his keynote speech [link to video on LindauNobel site that I can’t access] that launched the Lindau meeting on 22 August to admit that there was a ‘notable absence’ of a role for banking and finance in these models.


Panel discussion during the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Panel discussion during the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings


Martin Hellwig, the panel chair and director of the Max Planck Institute for Research on Collective Goods, started the discussion by highlighting that a debate over the effectiveness of fiscal stimulus policies in the US had been matched by one over austerity policies in Europe that involved doing the exact opposite.

Peter Diamond, co-recipient of the Nobel Prize in 2010, said that the decision by the US government to pursue an active fiscal policy, which lessened the depth of the recession, helped to explain the gap between growth rates in North America and Europe since the crisis.

But he acknowledged that the time lag involved in passing the legislation to push through fiscal measures, as well as concerns over what the money was spent on, had undermined people’s faith in the policies.

‘The depth and length of the Great Recession put both tax cuts and spending back on the US agenda although they were insufficiently used’, he said. ‘As the recession went on, the political will to do more was gone. The failure to follow up reflected a lack of appreciation by politicians and the general public of the value of suitable stimulus policies.’

Edward Prescott, co-recipient of the Nobel Prize in 2004, took a different view in a presentation with the title ‘The Unimportance of Monetary Policy and Financial Crises on Output and Unemployment’. He cited financial crises that saw countries experiencing contrasting outcomes at the same time: the US and Asia in the 2008 crisis; Chile and Mexico in 1980; and Scandinavia and Japan in 1992.

‘Financial crises do not impede development,’ he claimed. While the 2008 financial crisis was localised in North America and the euro area, there was a short recession and quick recovery in Japan, Taiwan and South Korea and no recession in Scandinavia and Australia. ‘Countries where fiscal policy was irresponsible had problems’, he maintained. ‘Fiscal responsibility is crucial: to spend is to tax and to tax is to depress. That’s what happens every time.’

Christopher Sims, co-recipient of the Nobel Prize in 2011, agreed that responsible fiscal policies were always required. But he went on to say that a responsible fiscal policy in the face of a major recession, in which inflation is falling below target, is ‘to expand and convince people that the expansion, via either additional spending or tax cuts, does not imply future taxes or spending cuts.’

‘You are doing this because you want inflation to go up,’ he added, referring to the struggle that central banks have had to drive inflation up from current levels of close to zero.

Sims urged young economists to fill in the ‘gaps’ in the major directions of monetary and fiscal policy research. But he also warned that many current research projects that simply seek to add extra elements to the standard ‘dynamic stochastic general equilibrium’ (DGSE) models, which were seen as having failed to spot the 2008 crisis, were just ‘fighting the last war’.

‘Right now, the biggest confusion that policy-makers have is that we have had low inflation below target for years despite the drastic measures that independent central banks have taken,’ he said. ‘We don’t have models that explain how we got stuck at this point for so long.’

Sims acknowledged that this was a new area where the paths have not been laid out and that empirical work that connected fiscal policies with the paradoxes of inflation was a ‘risky project’ for a PhD. But he concluded: ‘Precisely because of that, it might earn you the Nobel Prize.’

The Myth of the Independent Central Bank

In today’s fiat money world, money has no ‘intrinsic’ value. People value fiat money because other people value it. As long as everyone agrees that fiat money has value, then it does have value: but if enough people suddenly decide that fiat money has no value, it becomes worthless.

In hyperinflationary episodes, confidence in a fiat currency evaporates and people dump it in favour of assets, commodities and even other fiat currencies. Printing more of it only makes matters worse.

Macroeconomic models involving (fiat) money are thus inherently models with multiple equilibria. In one equilibrium, the value of money is stable: but in another, inflationary dynamics become explosive and money becomes either worthless (hyperinflation) or infinitely valuable (Fisherian ‘debt deflation’).

In such models, the economy can suddenly jump to an explosively inflationary equilibrium without any change in policy. In effect, they imply that there can be a ‘run on the central bank’.

Central banks can, of course, always meet demand for their own currency, since they can create it ex nihilo. But if there is always the risk of a sudden switch to an explosively inflationary or deflationary equilibrium, they can’t guarantee its value.

Nobel Laureate Professor Christopher Sims argues that it is fiscal policy that guarantees the value of fiat money. Central banks thus can never be independent of government. The ‘independent central bank’ is a myth.

But what about the European Central Bank (ECB), whose independence from government is guaranteed by treaty? The original concept of the Eurosystem assumes that there is a sharp distinction between monetary and fiscal policy, and that monetary policy does not give rise to fiscal transfers.

We now know that all monetary policy actions have fiscal consequences: for example, interest rate rises shift wealth from countries with more debt towards countries with less. Buying government bonds according to a ‘capital key’ reduces the borrowing costs of larger and richer countries.


Laureate Christopher Sims during his lecture at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

Nobel Laureate Christopher Sims during his lecture at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings


The euro’s very existence was threatened by fiscal distress in Eurozone countries, to which the ECB was forced to respond. Thus, even the ECB is entwined with government.

Not only are central banks not independent of government, but they are also dependent on governments running appropriate and plausible countercyclical fiscal policy. As Professor Sims says, ‘if people understand that fiscal policy will try to slow the expansion of deficits in periods of high inflation, and will expand deficits when interest rates are at or near the effective lower bound, sunspots and multiple equilibria are eliminated’.

The ‘fiscal theory of the price level’ says that to keep the value of fiat money stable and prevent switching to an unstable inflationary dynamic, fiscal policy must actively maintain the real value of government debt over the long term. The fiat money ‘confidence trick’, in which – like Tinkerbell – it has value as long as people believe in it, thus depends on the credibility of fiscal policy as much as monetary policy.

Central banks’ ability to act as lenders of last resort in a crisis depends on their fiscal backing. When a central bank is actively buying assets, it can become technically insolvent if those assets fall in value. Several central banks around the world currently have negative net worth at market prices: some of them (such as the Chilean central bank) have had negative net worth for a long time.

There has been a considerable debate about whether the solvency of central banks makes any difference to their credibility as lenders of last resort or their ability to control inflation. Arguably, it does not – provided fiscal authorities can support them.

Often, the net present value of future seigniorage receipts is sufficient to cover any asset and liability mismatches at market prices. But if seigniorage is insufficient, then tax receipts will be needed to plug any gaps. In practice, this implies that the net present value of projected future primary surpluses must be sufficient to recapitalise the central bank without increasing government debt.

What happens if the fiscal authority is unwilling to recapitalise its central bank? This would be unthinkable in countries such as the US, where the currency is backed by the ‘full faith’ of the US government.

But in the Eurozone, the central bank is not only fully independent of government, but there are also 19 governments of varying degrees of fiscal credibility. Maintaining the stability of the euro depends on the willingness of all these governments to recapitalise the ECB.

To be sure, their willingness has already been tested. Since the ‘whatever it takes’ remarks of ECB president Mario Draghi at the height of the Eurozone crisis in 2012, the ECB has been to some extent cast in the role of fiscal institution, actively buying the government debt of Eurozone countries to keep bond yields down.

Had it not done so, some of those countries would undoubtedly have been forced out of the euro. It has arguably done this at the price of its own solvency – yet there has been no ‘run on the ECB’, as might be expected if markets thought fiscal support for the ECB would be found wanting.

But the ECB could still be forced to buy the government debt of countries with ‘irresponsible’ fiscal policies, if not doing so meant partial unravelling of the euro. Some Eurozone countries might balk at recapitalising a central bank that in their view was actively supporting governments that were breaking fiscal rules, especially as the ECB lacks the democratic legitimacy to make such decisions.

The Eurozone thus still lives in a world of multiple equilibria, even though the likelihood of a sudden switch to explosive inflationary dynamics appears remote at present.

Professor Sims says it would be better if there were a democratically accountable, Eurozone-wide fiscal institution with the power to raise taxes, which could take over the buying and selling (or issuing) of government debt. ‘But I don’t know how you organise that,’ he concluded.

The US knows how you organise it. They call such an institution a ‘federal government’. Sadly, we seem to be some distance from introducing such an institution in the Eurozone. Multiple equilibria and sunspots seem likely to remain the order of the day for many years to come.


The Puzzle of Global Inequality

During a Science Breakfast at #LiNoEcon moderated by Romesh Vaitilingam (left) laureate Eric Maskin, young economist Devaki Ghose and Howard-Yana Shapiro, Chief Agricultural Officer, Mars, Incorporated, discussed how to address global inequality.

During the Mars Science Breakfast moderated by Romesh Vaitilingam (left) laureate Eric Maskin, young economist Devaki Ghose and Howard-Yana Shapiro, Chief Agricultural Officer, Mars, Incorporated, discussed how to address global inequality.


New policies are needed to tackle the surprising rise in inequality within developing countries, even as they have become more integrated into the global economy. That was the core message of a panel of researchers speaking at a science breakfast sponsored by Mars, Inc., on Thursday, 24 August at the 6th Lindau Meeting on Economic Sciences.

The fact that the dramatic growth in average income in large developing countries like China and India has led to increased inequality is ‘deeply troubling’, according to the opening speaker, Nobel Laureate Eric Maskin.

This seems to contradict the long-established theory of comparative advantage, which predicts that relative wages of unskilled labour should rise as their trade increases. It also contrasts with what happened in previous periods of globalisation, for example, in the late 19th century.

Professor Maskin explained that what has changed is that the production process has been internationalised. Communications technologies now allow companies to establish just-in-time global supply chains, and to employ skilled workers around the world, so that the gains of trade are no longer distributed on a countrywide level.

Domestic migration is also fuelling inequality, he added. There is a growing gap between the city and the countryside in developing countries. Those who move to the cities have improved opportunities for education, jobs and income, while the countryside is increasingly impoverished.

Panel member Devaki Ghose, of the University of Virginia, one of the young economists attending the Lindau meeting, drew on her experience of research in India to reinforce these points.

She noted that India’s high-tech sectors, such as its IT outsourcing business, which has been a huge international success, employ only a small percentage of the Indian workforce. It is only open to a small proportion of the population – under 6% – who are both computer-literate and English speakers. She also said that these high-tech firms are concentrated in just a few states in India where they have close links to universities.

In contrast, 60% of the Indian population works in agriculture, where they face problems of low productivity, poverty and lack of investment in modern production techniques.

Dr Ghose cited a personal example, where a large family she knew from a tribal area was unable to farm all the land they owned, but were too poor either to hire extra labour or to buy expensive inputs like fertiliser to improve crop yields. What’s more, the legal system in India, which seeks to protect poor farmers’ land ownership rights, prevented them from selling part of their landholdings to others who could make more productive use of it.

Genetic scientist Dr Howard-Yana Shapiro, chief agricultural officer at Mars, Inc, argued that now was the time for action. What we need, he said, is ‘a change of theory, not a theory of change.’

He pointed out that 37% of the population in rural Africa is malnourished at birth, as are 43% of Indian children. There is a moral obligation to tackle the problem of chronic malnutrition in countries where farmers cannot produce enough food to feed themselves. He said that only an inclusive approach, which could both discover solutions and scale them up would work, using the skills of industry, universities, NGOs and governments alike.

Mars is committed to developing new crop varieties with increased yields that can be freely distributed to farmers. Dr Shapiro said that although the yields on the ten major food crops may have reached their natural limits, there are great gains to be made by genetic modification of 100 less widely grown food crops in Africa.

In India, Mars is working with farmers to improve the yields of chick peas, one of its major food crops yet a commodity for which continuing low yields means it still has to be imported from abroad. Mars has also mapped the genetic sequence of cacao to breed a higher yielding, disease resistant tree, which can also produce tastier chocolate. The company has made the genome data freely available to growers in developing countries.

Professor Maskin suggested that higher crop yields alone would not be enough to tackle rural inequality, as early adopters would gain at the expense of those who could not or would not take up the new crop varieties.

There was considerable discussion about the incentives that might motivate companies to take actions that tackle poverty and inequality, including improving human capital through training. Professor Maskin expressed scepticism that many companies would do so on their own initiative without government incentives such as tax breaks.

Dr Shapiro commented that although Mars had an advantage as it is a privately held company that is not subject to short-term pressure from shareholders, other companies, such as rivals Nestle and Unilever, were following in its footsteps, in their own long-term self-interest.

He added that tackling climate change was another area where companies, such as Mars, were increasingly willing to act on their own to develop a zero carbon footprint, independent of government actions such as the US decision to withdraw from the Paris agreement on climate change.




Elderly Europe

Picture/Credit: JodiJacobson/

Picture/Credit: JodiJacobson/


Europe is growing old. We tend to regard Japan’s old age dependency problem as exceptional: but populations are also ageing rapidly across the whole of Europe. Persistently low birth rates in many countries, coupled with rising longevity due to improvements in healthcare and nutrition, is increasing the proportion of elderly to working-age people. In some countries, this is exacerbated by emigration of the young.

Germany’s population is already the second oldest in the OECD. In 2015, there were about 35 people aged 65 and older for every 100 working-age adults: the OECD predicts that by 2060, this proportion will have doubled. Portugal’s population is ageing even faster: the ratio of over-65s to working-age adults is projected to rise from about 32% at present to over 75% by 2075.

Nor is population ageing limited to Eurozone countries. Poland, currently a comparatively young country, is ageing faster than Germany or Portugal: the OECD forecasts that its old age dependency ratio will hit 57% by 2075.


OECD (2015), Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Population ageing is slowest in Scandinavian countries and France, where birth rates are higher than in Germany. But even in these countries, the birth rate is below the OECD replacement rate of 2.1 children per woman and the old age dependency ratio will reach nearly 50% by 2075.

Europe is slowly recovering from the crises of recent years. GDP growth is resuming, though at a glacial pace, and unemployment is gradually falling. But the rapid demographic shift raises serious questions about future prosperity. State pension ages are rising across Europe, to 67 and beyond, and many people are choosing to work on beyond their state pension age. The OECD’s definition of ‘old age’, which presumes complete withdrawal from the workforce at 65, may already be out of date.

But raising the age at which people can claim their state and occupational pensions is extremely unpopular with voters, and it is often fiercely resisted. Many older people have a deeply entrenched belief that they have paid for these pensions, so raising the age at which they can take them is a form of theft.

The dependency of those who are not working on those who are is not widely understood, and governments have made little attempt to explain it. The likelihood is, therefore, that pension ages will not rise as much as increases in longevity suggest that they should.

Poland has even reduced its state pension age recently and reintroduced an early pension for women, for which it may face a legal challenge by the EU. Whether these changes are affordable does not concern those who expect to receive their pensions at the age ‘promised’ when they started work half a century ago.


Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

It is already clear, however, that affordability will be a problem. Germany, for example, is projected to spend 12.5% of GDP on pensions by 2050. Elderly people also make high demands on health and social care services: as the proportion of elderly in the population grows, the cost of these services for working-age adults will inevitably rise. The picture is one of a growing tax burden on a shrinking workforce.

Even if people accept the need to work for much longer, there will be structural changes to the economy from the demographic shift. Older people tend not to be as productive as younger: to some extent, this is offset by greater knowledge and experience, but as cognitive faculties start to decline, this effect diminishes.

Older people are also more likely to work part-time, to eschew work that takes them away from home, and to have health problems or caring responsibilities that restrict the types of work they can undertake. As the proportion of older people in the economy grows, therefore, we might expect poorer productivity, which if not addressed would result in persistently lower GDP growth. Countries need to invest in technology that raises productivity, particularly among those who have physical and mental limitations.

But from the point of view of Germany’s ageing population, ensuring their futures should be the top priority of their government, even if it means pursuing policies that, by stealing demand from other countries, make it more difficult for them to provide for their own people. This is understandable, but it is not sustainable. For it is not just Europe that is ageing: it is three quarters of the world.

If only a few countries were experiencing rapid population ageing, and the rest had young and growing populations, then for those countries to pursue policies aimed at maintaining a high saving ratio and a large current account surplus would make sense.

After all, young and growing populations tend to have excess demand, so an ageing population can siphon off some of it with impunity – indeed, this might help younger countries to control inflation. But when most of the countries in the world are ageing rapidly, policies that rely on demand from other countries are beggar-my-neighbour policies.

The IMF recently expressed concern that the US, and to a lesser extent the UK, are acting as ‘consumers of last resort’, running large current account deficits to mop up their excess savings. ‘While the rotation of excess imbalances toward advanced economies – with deficits increasingly concentrated in the United States and United Kingdom – likely entails lower deficit-financing risks in the near term,’ the IMF said, ‘the increased concentration of deficits in a few economies carries greater risks of disruptive trade policy actions.’ It called on countries with ‘fiscal space’ to rely less on monetary stimulus and to spend more.

Understanding and planning for the challenges of an ageing population requires international cooperation, not competition. We need to have an adult conversation about how the needs of the old can be made affordable for the children and the unborn who have no voice in this debate but will bear the consequences of our decisions in years to come.


Frances Coppola was speaking on a panel with Nobel Laureates and young economists during a press talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting

Frances Coppola was speaking on a panel on the future of the European economy with Nobel Laureates and young economists during a press talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Good Pension Design

Photo/Credit: laflor/

Photo/Credit: laflor/


Ask anyone under the age of 25 about pensions and – unless they are young economists – they will probably yawn, raise their eyes heavenwards and change the subject. This is despite the fact that the provision of an adequate income in retirement is one of the most important obligations on any government wishing to prevent their senior citizens falling into poverty.

As the British economist (Lord) Nicholas Stern put it: ‘A key test of a decent society is the living standards of its older people, particularly the poorer among them.’ Yet many societies in both the developed and developing world fail that test.

For this reason, Professor Peter Diamond, the recipient of the 2010 Nobel Prize in Economic Sciences, has devoted much of the last decade to analysing the differences between different pensions systems.

According to Professor Diamond, economics recognises the multiple objectives of pension plans: smoothing spending across a lifetime; providing financial insurance; poverty relief; and redistribution.

‘It starts with a simple framing: what are we trying to do with a pensions system? It’s economic security in old age and it has multiple objectives and calls for multiple policies’, he told the audience of young economists in Lindau, adding that basic economics has its limitations when applied to pensions.

The reality is that most people do not save enough for their retirement. This creates what Professor Diamond calls ‘a paternalistic need’ to use policy measures to encourage people to save more during their working lives.

Finding that solution has proved hard because governments naturally seek to find a unified solution that will meet the needs of a highly diversified population, with different needs for different groups of people, most notably the different needs of male and female workers. The downward trend in workers’ earnings and increasingly ageing populations only add to that need.

Policy-makers have trouble when it comes to pensions design because of a number of limitations. Chief among these are high levels of financial illiteracy. For example, a survey found that four of five people (78%) in the US do not understand compound interest, while Arthur Levitt, the head of the Securities and Exchange Commission in the 1990s, famously warned that more than half of Americans do not know the difference between a stock and a bond.


Peter Diamond during his lecture at the 6th Lindau Meeting on Economic. Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

Peter Diamond during his lecture at the 6th Lindau Meeting on Economic Sciences. Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings


Professor Diamond said that the products designed by some financial firms are based on that low level of understanding. ‘There are signs that financial firms use complexity to hide financial risk. Obfuscation is something that is often highly profitable.’ This has perhaps enabled firms to claw back a lot of money through annual charges, where a 1% management fee that might look miniscule on paper in fact ends up taking almost 20% of the value of the funds after 40 years.

This is important given that increasing pressure on public finances means that governments are keen to lower the costs of direct state provision and increase the role of the private sector. The most commonly used plan is the defined contribution pensions where employers and/or employees pay money into pension funds, the value of which the workers only discover when they retire and convert their pension pots into an annuity.

Professor Diamond highlighted some countries that have worked to improve the retirement outcomes of their citizens. Chile, for example, scrapped a poor existing pensions system and replaced it with individual savings accounts.

But the Chilean policy-makers discovered that private sector competition was insufficient to deliver the best outcome. Confidence in the system was undermined by the fact that it was put in place by an unelected military dictatorship; and the fact that many people worked on the black market and did not contribute. In 2008, the government added a scheme that was aimed at people who were getting little out of the current system.

Sweden also scrapped its system in the 1980s and replaced it with a contributory system in which the government collected the payments and handled the record system, but around 850 companies were allowed to offer products. When it became clear that many people would not or could not choose, the government set up a default system that ultimately became an option which half of Swedes choose because it is well designed, carries a low cost and includes an asset allocation strategy that reduces risk as workers near retirement.

Professor Diamond’s final example was the US Thrift Savings Plan for more than three million civil servants, which has low costs because it is dealing with a single employer that processes all salary transactions electronically. More significantly, it was set up with five mutual funds that each carries out a regular bidding process for private firms to run them, which also reduces the management cost.

Perhaps the main takeaway from Professor Diamond’s lecture was that countries with a good system are the ones that have kept working at it. As he concluded: ‘This is the reason why I find working on pensions very satisfying and very important.’

Europe: Dangers Ahead?

The Eurozone recovery is fragile, with Europe still facing many economic challenges, according to Nobel Laureate Sir Christopher Pissarides speaking at a press briefing at the 6th Lindau Meeting on Economic Sciences on Wednesday 23 August.

The refusal of Germany to spend more – despite large budget and trade surpluses – is inhibiting growth in other Eurozone countries, he argued. Germany’s policy, he suggested, is driven purely by political decisions that relate to the German economy, not the Eurozone. Austerity is still overshadowing the recovery.

Other dangers lie ahead, Professor Pissarides added. They include the risk to the financial sector, due to the failure of the Eurozone to complete banking reform, and the fact that Europe is lagging behind its rivals in the United States and the Far East in terms of productivity growth.


Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Press Talk at the 6th Lindau Meeting on Economic Sciences: Veronika Stolbova, Lenka Fiala, Eric Maskin, Romesh Vaitilingam, Chris Pissarides and Frances Coppola (from left). Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings


In banking, despite the introduction of a new resolution mechanism, it remains unclear who would bear the burden of bailing out a major bank that was about to fail. And there are still worries about the fragility of the banking system as a whole, leading to excessive regulation.

Professor Pissarides said that the long-term growth of Europe will depend on supply-side reforms that encourage investment in infrastructure – not just roads and ports but also digital technologies to encourage innovation. He was more optimistic about changes in labour markets in some countries, which he thought would have the long-term effect of reducing unemployment though it would take a number of years before the reforms worked through.

Nobel Laureate Eric Maskin had a radical suggestion for a structural change to address the disconnect between European monetary policy, which is determined for the Eurozone as a whole, and fiscal policy, which is determined at a national level. He said that politicians could be taken out of the equation by the creation of an independent fiscal board modelled on the structure of the European Central Bank.


Eric Maskin during the Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting

Laureate Eric Maskin during the Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting


Under such an arrangement, experts, appointed by European governments but not subject to their control, would draw up targets for budget surpluses or deficits for each country, using an agreed set of rules. Countries would be free to decide how to meet those targets, and what balance of taxation and spending they wanted to adopt. Professor Maskin conceded that convincing Germany to adopt such measures would be a considerable challenge.

Financial journalist Frances Coppola suggested that Germany’s action was also driven by another of the big challenges facing Europe: the rapid ageing of its population and the need to make provision for an economy where there would be fewer workers relative to dependents. She suggested that Germany’s response to its budget surplus is rational when this is taken into account.

Veronika Stolbova, one of the young economists participating in the Lindau Meeting, pointed out another long-term danger for the Eurozone: the financial effects of climate change. Her research suggests that it is institutional investors – such as mutual funds and pension funds, whose income could be damaged by investing in industries – that could be negatively affected by climate change.

The question of political leadership loomed large in a discussion of the way forward for the Eurozone. Professor Pissarides argued that there was no high-level political forum at the European level that could look at long-term economic issues. The Eurogroup, he said, is focused only on short-term crisis resolution measures.

Professors Maskin and Pissarides agreed that change could only come about if there were leaders prepared to step up with a big vision that transcended national boundaries – such as the founder of the EU, Jean Monnet, or General George Marshall, whose Marshall plan led to Europe’s economic recovery after World War II. But with no such leaders in the sight, the long-term structural problems of the European economy will not be resolved any time soon.


This post is also available in German.

On the Future of the Euro Area

The euro area crisis has laid bare institutional, political and economic weaknesses in the set-up of Europe’s monetary union. In the following, I outline some of these weaknesses and sketch possible solutions – or at least improvements.


Euro sculpture, Frankfurt, Germany. Photo/Credit: instamatics/

Euro sculpture, Frankfurt, Germany. Photo/Credit: instamatics/

First, fiscal oversight of the members is as toothless as it can be. Once Germany and France had violated the Stability and Growth Pact without being sanctioned in the early 2000s, monitoring of national budgets has not been credible – a problem of enforcement. There is also a problem of reporting, as evidenced by Greece’s use of dodgy numbers to gain access to the euro in 2000.

In my view, national budgets that violate the Maastricht criteria for the soundness and sustainability of public finances (which may need some updating) should require approval by a European Union body – probably the European Commission as the ‘guardian of the treaties’, but preferably the European Parliament given its stronger democratic mandate.

The question is whether such fiscal oversight is compatible with the treaties and with the constitutions of the members, as it means nothing less than a partial loss of national budgetary sovereignty. Maybe Germany and other (perhaps overzealous) supporters of fiscal prudence can trade such oversight for some degree of debt mutualisation, which sounds like a typical European idea.

Second, political interaction is too weak. The euro area is a very diverse construct with the ageing economic giants of Germany and France at the centre, young developing economies such as Slovenia and the Baltic states, and countries that have been unfortunately plagued by political gridlock and institutional inadequacy, notably Italy and Greece. Naturally, these countries have different aims for economic policy, and finding a compromise will always be difficult.

I like the idea of officials of the European Central Bank (ECB) being invited to address all the national parliaments as well as the European Parliament. Similarly, heads of state and government could be invited to speak to the parliaments of other members. This would be a further step towards a common European identity, explaining to one another why the economic policy of a government is the way it is – and of course listening to the explanations by others – not behind the closed doors of the European Council, but in public.

Third, ECB officials should realise that it is beyond the institution’s powers to create economic recovery on its own. Neither of its unconventional policies – from full allotment to quantitative easing – has lifted European inflation or expectations of inflation. In most of the euro area, inflation rates are well below the target of close to but below 2% in the medium run. In addition, business activity is weak, with the notable exception of Germany.

We can learn from this that a central bank’s powers are limited to managing the business cycle – which of course it must do. ECB policy in the early days and weeks of the crisis was a flawless execution of a central bank’s textbook role of ‘lender of last resort’. More recently though, all it has done is buy time for fiscal policy to act, at the expense of bank stability – as full allotment saved zombie banks that dragged economies down (notably Italy’s) while rock-bottom interest rates threatened the business model of healthy banks.

The ECB needs to phase out its unconventional policies for three reasons:

  • First, they prevent consolidation of the European banking market and threaten the stability of healthy banks.
  • Second, preparations need to be made for the next downswing of the business cycle, as the very modest recovery in Europe should be close to its end, judging from past lengths of the cycle.
  • Finally, governments need to face greater pressure to get their act together and implement reforms that improve growth, foster competition and increase employment.

The reasons why the members are still struggling to recover are quite different, so there is no ‘one-size-fits-all’ economic policy. For example:

  • Germany needs more investment in (digital) infrastructure and childcare, as well efforts to foster its start-up culture. The country also needs to clean up the mess of the government-car industry nexus that seems to be at the centre of the ‘Dieselgate’ scandal.
  • France is taking the first steps towards reforming its labour market and needs to continue on this path.
  • Spain, too, must reform its two-tier labour market in order to reduce unemployment, particularly among young people.
  • Italy needs to sort out its pile of debt (a task that is likely to require the assistance of the ECB) and fix its institutional set-up in a way that gives the country more stable governments.

Whatever the weaknesses of the members, Europe’s mess is hardly the fault of the euro per se, although it did play a decisive role. Without the possibility of devaluing your own currency, a country’s adjustment after years, sometimes decades, of bad policy has to come strictly from ‘internal devaluation’ – a fancy term for falling prices, subdued demand, stalling investment and unemployment. The euro did not cause the problems, but it has prevented the usual adjustment, and policy-makers have been unable – or worse, unwilling – to adapt.

The lesson is that in a monetary union, sane and sustainable economic policy becomes ever more important both for a country’s own economy and for the other members. Burden-sharing of one kind or another may help, but it is no substitute for economic prudence. While this lesson is clear, it remains uncertain how Europe will react to the lesson in terms of both institutions and policy.

Smart Resettlement: A Refugee Success Story From Rural Australia

The town of Nhill in rural Australia is an unlikely setting for a refugee success story. A farming community 400 kilometres inland from Melbourne, Nhill’s 2,500 inhabitants are largely made up of white, conservative Christians. Yet over the course of the current decade, the town has seen a remarkable transformation.

Seven years ago, Nhill struggled with a steadily decreasing population coupled with a lack of workers, as is symptomatic of many Australian country towns. To fill its employment needs, the town’s main producer invited a handful of refugees from Myanmar to resettle in Nhill and work at the local factory. Today, over 200 refugees call Nhill home and are credited with having revived the town, with an estimated net gain of more than AU$42 million (€28 million) over a four-year period.


The town of Nhill in Victoria, Australia. Photo/Credit: Mattinbgn CC BY-SA 3.0

The town of Nhill in western Victoria, Australia. Photo/Credit: Mattinbgn, CC BY-SA 3.0, Wikimedia Commons


Stories like Nhill’s rarely make the headlines during the world’s largest refugee crisis since the Second World War. Given the wave of recent terrorist attacks on European soil, the focus of the media and public discourse has understandably been on security.

But there remain many questions about how best to integrate refugees once they have been approved for resettlement in a host country. Randomly allocating new arrivals to Western cities with few employment prospects and expecting a smooth assimilation is unlikely to be a successful long-term strategy. And given that there are 65 million forcibly displaced people worldwide in need of resettlement, with another 30,000 more displaced every day, it is clear that the issue of resettlement will not go away soon.

We should thus start to learn from positive examples like Nhill. Most academic research to date suggests that the main channel by which newly resettled refugees produce an economic cost to society (if they do at all) is through the labour market. Increased competition for jobs (particularly among lower-skilled workers) may put pressure on employment and wages.

But not all parts of host countries face the same economic conditions – and so it is logical to investigate resettling new arrivals in geographical areas that actually need to increase their population and workforce.

Done correctly, hosting refugees can be less about minimising burdens and more about cultivating benefits. In addition to filling employment and skills gaps, refugees and migrants are more likely to start new businesses that create wealth, employ local residents and stimulate investment.

Other rural towns in Australia have followed Nhill’s lead in using refugee resettlement to combat population ageing. Several fading Italian towns in Sicily and Sardinia have been rejuvenated by the successful integration of Syrian refugees. And a small town outside Atlanta, Georgia, has been proudly labelled the ‘Ellis Island of the South’.


Refugees Welcome Banner in Dortmund, Germany. Photo/Credit: Michael Luhrenberg/

Refugees Welcome Banner in Dortmund, Germany. Photo/Credit: Michael Luhrenberg/


These are not isolated examples. But ultimately, the reasons for the reluctance to accept and resettle asylum-seekers may be less about economics and more about psychology. Fear of cultural contamination and consequent frictions have cultivated a popular view that resettling refugees places a strain on the social fabric of communities.

Are these fears justified? Social scientists have debated this issue for decades, as what appears to be a social impact may in fact be confounded with symptoms of economic stress. Cases like Nhill, however, can help to shed light on this issue.

In recent research, we find strong evidence that resettlement has had surprisingly positive social effects on the community, even after taking account of economic benefits. Nhill locals trust refugees more; they also hold more positive attitudes towards resettlement in general.

And the benefits don’t just accrue to the locals. Under carefully targeted rural resettlement policies, refugees receive crucial employment security and a visible role in their new community, which can ease the process of integration. In Nhill, the refugees report feeling safer and more positive about resettlement than fellow refugees in the cities.

In principle, there is little reason why such policies can’t be ‘win-win’. Overall, the message coming out of our research is that ‘smarter’ resettlement programmes in small towns may be able to harness economic and social benefits for locals and migrants alike.

While the evidence does suggest that small, rural communities are good candidates for successful resettlement, of course this is not a panacea by itself. When unplanned and unmanaged, refugee resettlement can overstretch communities’ resources and potentially lead to social tensions.

But our research begins to identify other common elements from successful towns. A gradual, transparent process, strong community leadership and well-established communication channels are key components of an effective policy. One thing is clear: given the extent of the challenges facing policy-makers in the area of resettlement, lessons from models of success are too important to ignore.

Meanwhile, in Nhill, the locals aren’t thinking in terms of trade-offs. The refugees have been a success – both economically and culturally – and the town’s focus has remained on participating in and embracing their community as a whole. This includes some new additions to the community calendar, such as the colourful celebration of Burmese New Year, hosted by the refugees themselves. The new arrivals haven’t turned out to be a burden at all.