Globalization, innovation and the aging of society are driving economic change. The rise of China is plowing up the global economy, and digitization is changing the world of work. What are the new challenges for economic policy? How can politics improve the conditions for sustainable growth in a rapidly changing economy? Who are the winners and losers? What can politics do so that not just a few but as many as possible benefit from economic change?
Science is not an end in itself. The gains in knowledge should generate benefits. In medicine and pharmaceuticals, for example, these are new therapies and drugs. Mathematics and physics lay the foundations for designing spectacular buildings and developing powerful computers. The practical use of economics is to help families, businesses and the government find better choices that enable greater welfare. That requires theoretical and empirical foundations.
Tasks of economic policy
If the economy changes significantly, economic policy must also change and take on new challenges. Firstly, it should create the conditions for economic change to actually lead to sustainable growth and greater prosperity. This requires investment in education and research, as well as flexible labor and capital markets, so that workers and capital move from shrinking to expanding industries. Only a state capable of acting is able to fulfill these investment tasks.
Second, economic policy should ensure that as many as possible can participate in the opportunities presented by change. It must adequately compensate the losers and also offer the disadvantaged a perspective of social advancement so that inequality remains moderate and growth remains inclusive.
Education’s role
Most innovations, such as new technologies and products, use knowledge derived from basic research. At the same time, innovative companies need a well-trained workforce. That is why a well-functioning education system and, in particular, universities with their research and teaching pillars are a central prerequisite for innovation. To accelerate the innovation-driven growth and strengthen international competitiveness, there are some requirements that must be fulfilled such as supporting private research and development by companies and accordingly tax incentives. The empirical evidence shows that regions with tax incentives have more startups than others. These accelerate innovation-driven growth and strengthen international competitiveness.
Inequality and social mobility
Economic change affects the distribution of income and thus social inequality, since innovation and globalization create winners and losers. Successful entrepreneurs and their employees benefit from multiplying the production of new and innovative goods and services through global sales. On the other hand, those who are involved in industries that are struggling with increasing import competition have to accept a loss of income. The challenges are to give more of those affected a new perspective on opportunities for advancement and to prevent an excessive concentration of incomes with high inequality.
The superstars of the companies are extremely innovative and achieve above-average profits. With a lot of know-how and a highly qualified but very small workforce, they dominate the industries and secure the lion's share of the added value for their founders and owners. The share of employees in income, the wage share, falls when the added value shifts from the other companies to the superstars with a particularly low wage share.
The decline in the wage share is particularly pronounced in the most innovative industries. Competition policy is therefore called upon to prevent excessive profits by exploiting market power to the detriment of employees and consumers and to facilitate the entry of new providers.
In fact, the empirical evidence shows that competition from new, innovative companies prevents undeserved retirement income in the long term. Removing barriers to entry and competition can therefore promote inclusive growth and reduce inequality. Excessive inequality endangers social cohesion. Politicians can react to this by redistributing taxes and transfers retrospectively. Better access to education improves the chances of advancement. How these are perceived influences citizens' attitudes towards redistribution. Those who start from a humble background at a young age may be among the top earners after a successful career. And those who believe that they will soon be among the rich themselves may have less of a desire to make their own ascent more difficult with progressive taxes and more redistribution.
Security and health
Demographic change and the increasing aging of our society pose difficult challenges for social and health policy. One of the main tasks is to sustainably secure the financial stability of pension systems in view of increasing life expectancy and to slow down the rise in costs in the health system. That is why many European countries are gradually increasing the retirement age in order to relieve the pension system. However, this effect should not be viewed in isolation: late retirement also affects the health of those who the policies target.
In fact, empirical evidence shows that the perception of one's own health improves when retiring. The proportion of respondents who report poor to average health declines by up to 35%. If people retire later, follow-up health care costs are to be expected. It would be important to avoid such follow-up costs as much as possible with accompanying and preventive measures. One way to limit the rise in health care costs is to use deductibles. Health insurance offers protection against high costs and loss of income in the event of illness. If the insured have to pay part of the treatment costs themselves, they use the services more sparingly.
Empirical estimates show that the insured do take deductibles into account. Accordingly, deductibles reduce the risk of overuse of health services. But what would be gained if the savings came at the expense of health care quality? Further research shows that the costs are falling, among other things, because insured persons sometimes forego medically sensible services with a deductible.
Information as the basis of politics
Economic research provides valuable foundations for an evidence-based economic policy. It provides information about interdependencies and the quantitative effects of various reforms and programs. Admittedly, it cannot offer absolute security either. After all, relationships that have once been determined must be constantly re-examined and better understood under changing framework conditions.
Only one thing is certain: evidence-based policy is impossible without empirical research. All that remains is speculation about the possible effects of economic policy measures. The effectiveness of politics cannot be left to chance.
Likewise, the knowledge of economics should help voters to form an independent and informed opinion about the economic context and the consequences of economic policy measures. It is therefore important that complex findings are simplified to the essentials and communicated in a generally understandable manner. That is the important contribution made by the students in the "Next Generation." With this second anthology, which offers a small but hopefully important selection of new research results, young economists can share their knowledge from their studies with the interested public.