How policymakers can help us address future economic challenges
![Protest sign held up about climate change.](https://assets.weforum.org/article/image/mx7TTAdkUY3POpZHzQ7rzx_UQS_mdhJFtaYCk49-EaA.jpg)
Hard policy choices are needed to fight global warming. Image: UNSPLASH/ Markus Spiske
Jean Tirole
Director and CEPR Research Fellow., Toulouse School of Economics and the Jean-Jacques Laffont Foundation.![A hand holding a looking glass by a lake](/uplink.jpg)
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France
- At the request of President Macron, a commission has investigated the main challenges facing the current global economy, and suggested solutions for its future.
- Climate change, inequality and demographic change were established as the three greatest challenges.
- Policy recommendations include effective carbon pricing, taxation aimed to reduce inequality and flexible pension 'points'.
In January 2020, President Macron asked us to organise and head a commission to address the structural challenges for the global economy. At that time, we didn't know that Covid-19 would create an immediate global crisis (see the Vox section on economics in the time of Covid-19 here) but, as the acute impact of Covid-19 fades, the problems we were tasked to investigate are still with us. The need for creative and effective policy solutions is even more urgent.
We had free rein in choosing the commission’s members and full independence in stating our conclusions, which were published in Blanchard and Tirole (2021). Our report is divided into three sections, representing the three most pressing challenges that we identified. Our colleagues Christian Gollier and Mar Reguant were lead authors for the section on Climate change; Dani Rodrik and Stefanie Stantcheva had the same role for the section on Economic inequality and insecurity; and Axel Börsch-Supan, Claudia Diehl, and Carol Propper acted as leads for the section on Demographic change. A further 17 distinguished economists from around the world contributed to the final report, meaning the team was one third French, one third American, and one third non-French European. This brought a broad set of opinions and evidence to bear.
Our conclusions and recommendations apply particularly to France – but also to Europe and the world economy. These are global challenges, and we can learn from local or regional successes. Also, many of our policy prescriptions will require international cooperation and support, particularly for the policy solutions to the challenge of climate change.
There is not space to explore all our conclusions in detail. Below, a summary that we hope will inspire you to read the full text. The report can be downloaded here in full.
Climate change
Here we can clearly see the causes and the impact of procrastination. There is a general disconnect between the acceptance that global warming is happening, and the consequential need to make hard policy choices to fight it. A lack of transparency about the costs of these measures has led many people to focus on the costs that are visible – such as carbon taxes – rather than on those costs which may be larger, but are harder to see.
The commission made three recommendations:
- Carbon pricing done well. Though unpopular with many people (economists are a notable exception), carbon pricing is essential because it incentivises households to change behaviour, researchers to innovate green technologies, and firms to adopt those innovations. But carbon pricing is currently done badly: the price has been too low, and there are too many exemptions and subsidies. Effective pricing will need both a border adjustment mechanism to avoid carbon shifting by emitters, and policy to mitigate the distributional implications of a higher carbon price.
- R&D subsidies, standards, and bans. Carbon pricing alone cannot sufficiently accelerate green R&D and carbon abatement, and so targeted subsidies and bans are justified. At the European level, two new agencies could improve governance: one to fund high-risk R&D, the other to inform citizens and officials about the costs of alternative methods to achieve the reductions in emissions that we require.
- The role of France and Europe. One nation acting alone has little direct impact on this challenge. But committed leadership can affect regional and global climate policy, both by leading abatement and innovation and highlighting a comparative lack of achievement in other countries. While it is the duty of all to behave in a socially responsible way, governments should lead by example and fully assume its responsibility rather than passing the buck to the private sector or public agencies, which have neither the tools nor the legitimacy to fix the market failure.
Inequality
In France (and elsewhere), research shows that the public does not believe there are equal educational and job opportunities, or adequate social mobility to mitigate the problems of inequality. Sadly, these perceptions are broadly correct.
The traditional remedy for inequality has been to double down on redistribution and protection, policies that focus on mitigating the distributional effects of production. Our report argues instead that policy should focus more on what happens before production occurs (creating more equal life chances or improving education). It can also influence the nature of production, creating more good jobs and more equal access to good jobs.
The commission made four recommendations:
- Equal opportunities. Policy prescriptions in this area are hardly original but are not currently given sufficient weight. We know much about how to reduce educational inequality. Inheritance tax is poorly designed and badly explained, and so it suffers from too many loopholes and lukewarm public support. To make its goal clearer and increase support, inheritance tax revenues could be explicitly allocated to financial redistribution that fosters equal opportunity.
- Fairer taxation. Rather than imposing a higher tax burden, taxation that has the goal of reducing inequality should be enforced better – for example, using artificial intelligence, better information exchange (third-party reporting, international cooperation), and international agreements.
- Prepare workers for better jobs. We can do much more to improve the design of training – for example, through better interactions between educators and private-sector employers.
- Stimulate the creation of good jobs. We should not assume that the organisation of firms and the nature of technological progress or trade rules is given. There is a role for the state to intervene to influence the nature of production, either through traditional methods (training, capital-labour taxation, experience rating) or through more targeted subsidies.
Demographic change
On average we live longer, healthier lives. This is good news. But this also requires we maintain the right balance between work and retirement. If more people live longer after they retire, this implies a decrease in the benefits they receive in retirement, an increase in contributions while they are working, or that they work for longer before they retire to maintain financial balance, now and in the future. This looming crisis has been particularly controversial in France, which has a very low activity rate among 55- to 64-year-olds.
Ideal pension reform implies a unified, transparent, and fair system that delivers flexibility in the choice of retirement age versus the level of retirement benefits. It should also increase supply and demand for senior workers. It should recognise the large differences in life history and life expectancy among the population. But public perception is that current reform proposals are technocratic and lack transparency.
Our report makes a series of more detailed recommendations for this challenge – partly because, for these problems, painful reforms have been attempted with limited success. Among those ideas:
- Individual flexibility with transparency. Workers would accumulate points on an individual account over their entire work life, claiming a pension at the earliest eligibility age or later, and could continue to accumulate those points if they continued to work.
- Redistribution towards low earners. Low-income workers, or those who for some unavoidable reason have a chequered work history would receive ‘bonus points’ when they retire. But the incentive to work needs to be preserved and so, even for low incomes, pensions would increase with points earned.
- A consistent dependency ratio to maintain economic balance. Imagine a transparent rule that maintained a 2:1 ratio of work compared to retirement years – so if the average life expectancy increased by three years, the retirement age would rise by two years, funding an extra year of retirement (of course, public opinion may demand a smaller increase in the retirement age). An independent governance structure designed to balance societal preferences with financial stability would manage this trade-off.
- A treatment of penibility that is decentralised at the industry or firm level, so as to incentivize better job condition and to avoid cross-subsidies among industries.
- Work at advanced ages. For many older people, work is stressful and painful. Better healthcare for chronic diseases, better continuous training, and more flexible working practices for seniors would make it more attractive for older people to continue to work, reducing the burden on the pension system and enhancing their incomes.
Conclusion
All three of our challenges are potentially imminent. Their immediate effects are much weaker than their long-term ones, and so decision-makers procrastinate over policies that could mitigate the worst effects. They are also complex problems, meaning that if policymakers are to make those hard decisions, they must do this under uncertainty and often in the face of public resistance. Nevertheless, our commission found that many potential solutions to these problems, though sometimes expensive or unpalatable, exist.
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