Figure 5 - uploaded by Philipp Heimberger
Content may be subject to copyright.
Source publication
This paper is concerned with the impact of economic ideas on political processes and decision-making. We argue that economic models can serve as a transmission device between economic paradigms and policy programs, which allows actors drawing on the model to exercise power in decision-making. We illustrate this argument by focusing on the European...
Contexts in source publication
Context 1
... the background of the theoretical framework introduced in section 2, Figure 5 provides an extended causal map, which summarizes a series of observations made throughout the paper. First, the PO-model is characterized by neoclassical paradigmatic priors, which enter the model by definition. ...
Context 2
... empirical findings presented below allow us to substantiate the claims about how the PO-model serves as a transmission device between economic paradigms and policy programs (see section 2) and, thereby, is activated by representatives of the European Commission and of national governments to wield power over fiscal policy. In addition, Figure 5 indicates that the supply-side focus in political outcomes induced by the model creates novel political demands that aim for changes or revisions of the model-based policies implemented by the Commission. Political demands 'Throughput'-legitimacy (+) ...
Context 3
... illustrate how the model highlights certain explanatory factors while it hides others (see Figure 6). In doing so, the causal mechanism of "deciding" by applying the PO-model (see Figure 5) brings about a supply-side focus in policy-making. ...
Context 4
... 2015; Helgadottir 2016; Ban and Patenaude 2019). As it seems clear from the outset that the impact of models is unlikely to solely determine some outcome, our theoretical framework explicitly allows for other factors to also affect those outcomes (see Figure 2 and Figure 5). ...
Context 5
... the 'technical' agreement on model modifications could only be reached in 2013 under the condition that each member state would still be allowed (for some time) to decide on its preferred NAWRU estimation method. The example of Spain indicates that when it comes to negotiating fiscal policy in the existing fiscal regulation framework, some parties may be unsatisfied with the model's political outcomes, and in such cases the technical aspects of the model become the target of political demands (see also Figure 5). 16 ...
Similar publications
While a large number of studies have focused on the nonequilibrium dynamics of a system when it is quenched instantaneously from a disordered phase to an ordered phase, such dynamics have been relatively less explored when the quench occurs at a finite rate. Here we study the slow quench dynamics in two paradigmatic models of classical phase transi...
Citations
... Policy makers agreed on a reform of EU fiscal rules in three steps over the 2011-2013 period, thereby introducing more restrictive fiscal targets as well as intensified monitoring and corrective actions (e.g. Heimberger et al. 2020). ...
This paper is about fiscal consolidation measures (i.e. tax hikes and government spending cuts motivated by a desire to reduce the fiscal deficit and public debt) in euro area (EA) countries. The focus is on analysing the growth effects of fiscal adjustments as well as their implications for debt sustainability assessments. I discuss the size and composition of fiscal consolidation by distinguishing three periods: the run-up to the EA, when governments faced the Maastricht criteria for joining the monetary union (1992-1998); before and during the recession triggered by the global financial crisis (1999-2009); and the euro crisis (with a specific focus on the 2011-2013 period). The empirical evidence on the growth effects of fiscal consolidation shows that while fiscal adjustments are contractionary, the negative growth effects were particularly strong and persistent during the euro crisis. With regard to the austerity outlook, I show that, beginning in 2025, EA countries are set to implement fiscal consolidations over multiple years so as to meet reformed EU fiscal rules. The adjustment requirements for some member countries are large in historical comparison. The paper argues that the framework for debt sustainability analysis at the heart of the reformed EU fiscal rules downplays the domestic growth impacts of fiscal adjustments and ignores crosscountry spill-overs that magnify domestic growth effects. In all likelihood, the reformed framework underestimates the negative growth effects of fiscal consolidation. I conclude that implementing the multi-year fiscal adjustments required to meet EU fiscal rules may not reduce public debt ratios across the EA's member countries, as the European Commission expects, and that the economic and political implications of austerity may complicate the governance of a fragile EA.
... This strengthening of the power of the ministry of finance, and its economists, have come about both through a general centralisation of government policy making (Raudla et al, 2015;Kristiansen, 2018) and through the introduction of policy instruments such as fiscal rules (Roberts, 2010) or new economic models (Fuglsang, 2023). Studies have shown how this has infused government policy making with certain logics (Maron, 2021;Garritzmann and Siderius, 2024) or styles of reasoning (Heimberger et al, 2020;Berman, 2022) focused on efficiency and frugality. Our article draws on such findings to elucidate the way in which the economic thinking of the ministry of finance is inscribed within the evaluation system of the central administration and thus affects the way evaluations of current and prior policies are structured and used. ...
Background
Despite increasing scholarly interest in the organisation of evaluations within different countries’ political-administrative landscapes, not much attention has hitherto been paid to the consequences of a specific institutional set-up for the function of evaluations within government.
Aims and objectives
This article investigates how the organisational anchorage of policy evaluations within central administration shapes the function those evaluations primarily serve.
Methods
We focus on the role of ministries of finance for coordinating countries’ evaluation systems, and study its influence in Denmark and the Netherlands through a combination of document analysis and interviews with centrally placed civil servants.
Findings
Our analysis shows how the ministries of finance come to influence the evaluation activities of the whole central administration by constituting a specific economic outlook on evaluation, which (1) narrows down the applied evaluation methods and criteria; (2) inserts the ministry of finance as primary evaluation user; and hereby (3) furthers accountability rather than learning as the main function of evaluations within central administration. In both countries, the result is that the ministry of finance’s main role in the evaluation systems favours somewhat defensive qualities, where evaluations are primarily used for control and piecemeal changes in policies, rather than fundamental revisions or reflections on the appropriateness of specific policies.
Discussion and conclusions
Our findings indicate that the influence of evaluation systems is not only dependent on the degree of institutional anchorage of evaluation activities, but also very much a matter of whom the evaluation systems is centred around.
... Studying this contestation offers a new angle to the analysis of the post-crisis scenario in Italy, one that goes beyond the description of structural dynamics but looks at the effect that a specific idea of handling fiscal policy through strict and technical rules has generated. Moreover, the output gap itself represents a crucial element in the renewed European fiscal framework, since it provides a foundation to the whole new architecture of fiscal monitoring (Heimberger, Huber, and Kapeller 2019). Having been the center of widespread criticism and discussion, the output gap reveals the complexity of making a very political side of policymaking technical. ...
... In the European context, the methodology for estimating output gap is decided within the Output Gap Working Group (OGWG), a permanent working group of DG ECFIN, where delegates -technocrats -from each country's finance ministry discuss technical aspects of the model and reach the so-called "commonly agreed methodology. " This methodological agreement represents a set of rules and parameters that should be able to accommodate all countries' needs and specific economic structures in the making of this indicator (Heimberger et al. 2019). The group has existed since the early 2000s and has focused on improving the calculation of this indicator, even before it became central for fiscal monitoring. ...
... On top of this technical issue, the Commission relates the trend component of the NAWRU to the concept of the natural rate of unemployment -at which wage inflation does not accelerate -taking a somewhat debatable approach to economic theory. As, according to theory, the natural rate should only reflect labor market rigidities, the actual approach of the Commission, using the Kalman filtered NAWRU as a proxy, estimates it as a mix of structural and cyclical factors (Heimberger, Huber, and Kapeller 2019). Moreover, using the NAWRU as a policy target is in and of itself a disputable exercise that has received many critiques in recent years: the extreme uncertainty that comes with the estimates (very sensitive to the forecasts horizon and other technical aspects) as well as the empirical evidence that shows rather an insensitivity of wage inflation to the actual unemployment rate, has cast serious doubts on the possibility of using such a measure for structural unemployment (Fioramanti et al. 2020;Stirati 2016). ...
The sovereign debt crisis triggered a process of reforms in European economic governance
that pushed for technocratic handling of budget decisions following standardized procedures, target measures, and indicators for fiscal monitoring. This shift, aimed at producing
more stability and less conflict in budget decision-making, transformed fiscal policy, producing a new type of technocratic fiscal politics. These new technocratic instruments impact
on national policymaking, yet little is known about the processes and actors behind their
constitution. Scholarship on the policy response to the euro area crisis has highlighted the
role of national interests but neglected the role of expertise in negotiating highly technical
fiscal policies. A key measure in this new technical apparatus, the output gap, has been at
the center of a heated contestation between Italian and European institutions over the 2014–
2019 period. Taking the case of the Italian output gap, this paper traces the unfolding of the
dispute around the methodology for estimating potential output and clearly reveals the new
centrality of expertise. The paper argues that rather than producing a less conflictual policy
environment and a depoliticizing of fiscal decisions, technocratic fiscal politics has reshaped
discussions around budgetary politics. This reshaping extends and transforms actor constellations and venues of fiscal decisions, giving a larger role to technocratic experts.
... For a critical discussion of the EC's potential output model, see Fatas (2019) andHeimberger et al. (2020). ...
... For a critical discussion of the EC's potential output model, see Fatas (2019) andHeimberger et al. (2020). ...
This paper analyses how fiscal consolidation affects economic growth and public debt ratios in the Debt Sustainability Analysis (DSA) framework of reformed EU fiscal rules. DSA relies on macroeconomic and fiscal policy assumptions; it plays an essential role in providing an anchor for bilateral negotiations and surveillance in the context of reformed EU fiscal rules. While the European Commission assumes a constant short-run fiscal multiplier of 0.75, the existing literature highlights that there is no single fiscal multiplier for all countries and all times. Furthermore, the European Commission’s DSA framework assumes a fast dissipation of the output effect of fiscal adjustment, and that fiscal consolidation efforts by trading partners do not spill over into domestic economic activity. Motivated by findings from the literature on fiscal multipliers and cross-country spillovers, we present DSA simulations that relax the official assumptions by focusing on the four largest euro area economies: Germany, France, Italy and Spain. Our results suggest that the debt sustainability framework in reformed EU fiscal rules is sensitive to changes in assumptions and may underestimate the negative growth effects of fiscal adjustment. Hence, public debt ratios may turn out higher than expected.
... The book also forces us to think critically about how the model world is translated into 'actionable knowledge' in the real world that it claims to represent (Watson 2014). This includes the implications of using deductive reasoning to determine economic priorities (Abdelal et al. 2010), and how abstract models reproduce meanings, understandings and discourse about the economy (Heimberger et al. 2020). These debates could not be timelier. ...
This contribution to the symposium situates Clift’s (The office of budget responsibility and the politics of technocratic economic governance, Oxford University Press, Oxford, 2023a) book in wider scholarship on ‘epistemic politics’ in comparative and international political economy. I argue that the book serves to foreground the power and politics of economic knowledge and technocratic expertise in three ways: (1) by unpacking the ‘everyday’ life of ideas as grounded in material processes of knowledge production; (2) lifting the veil on the ‘model world’ of economic policy by analysing the epistemological foundations of technocracy; and (3) deconstructing the politics of crisis by revealing the OBR’s critical role in interpreting and narrating developments like Brexit and Covid. The rest of the paper is devoted to reflecting on the core theme of the book—technocratic economic governance—focussed on three related issues: problematising technocracy and technocratic expertise; the dynamics of learning and accountability; and the importance of historicising economic governance since 2010.
... Additionally, the NAIRU serves as a proxy for structural unemployment when estimating potential output and cyclically-adjusted budget balances (e.g. Heimberger et al. 2020). Hence, the NAIRU is a key benchmark when it comes to monitoring whether the labour market is so tight that it will put upward pressure on inflation. ...
The concept of full employment is associated with diverse economic, political and social aspects. We provide a survey of theory, empirics and policy issues related to full employment. We make a novel contribution by tying together multi-dimensional aspects of full employment regarding definitions, theoretical perspectives, empirical measurements, policy debates and real-world policy programs. We distinguish: concepts of full employment that provide systematic links to price stability; minimum unemployment and maximum employment approaches; and the unfilled vacancies perspective. Furthermore, we provide and discuss different empirical measures of full employment for selected economies, and we propose a new full employment typology. Based on our survey findings, we argue that conceptualising and measuring full employment is not merely a technical task, but inevitably involves normative judgments. Finally, we discuss avenues for future research.
... There is a large literature (summarised for instance in Palumbo, 2013;Heimberger and Kapeller 2017;Heimberger, Huber, and Kapeller 2020) that questions the results of the European Commission estimates for the monitoring of national fiscal policies. The estimates from different institutions such as the European Commission, the IMF and the OECD provide very different results, are subject to frequent and large revisions and present a pro-cyclical bias. ...
The estimation of potential output is at the heart of the ongoing debate on the reformulation of fiscal rules in the European Union as it is an essential variable for their application. Spain constitutes a striking case, with a small and even positive output gap along with one of the highest unemployment rates in the European Union. To resolve this contradiction, in this article we estimate the potential output of the Spanish economy for the period 1987Q2–2022Q4 by means of the Updated Okun Method. Our results indicate that both the output gap and the cyclically adjusted balance are much higher than what European institutions estimate. Consequently, Spain has much more fiscal space to implement expansionary fiscal policies.
... The fiscal analysis described here applies human capital theory, which translates changes in eBC morbidity and mortality into changes in expected tax revenues and transfer costs, i.e., social benefits payments, based on the impact of the condition on current and future employment activity per person. The fiscal analytic framework is based on accepted modeling practices used by central governments for evaluating the financial effects of different government policies [24,25]. In the context of health, the fiscal analytic framework described here can demonstrate how resource allocation decisions and access to medical treatments for eBC can influence cross-sectorial governmental fiscal accounts [15]. ...
Cancer diagnosis influences the choices that patients make regarding current and future labor market activity. These choices have implications for governments based on resulting changes in taxes paid and benefits received. In this analysis we explore how human growth receptor 2 (HER2)-positive residual invasive breast cancer and different treatments influence government accounts excluding health costs.
HER2-positive early breast cancer (eBC) health states from a published disease model were used to establish likelihood of working and wage impact at different stages of disease. The indirect productivity losses for an average woman aged 49 years were translated into fiscal consequences to government by applying an established government perspective-modeling framework. The fiscal projections (discounted) include gross tax revenue by disease stage, government transfer costs related to time off work and early retirement ,and net fiscal balance (e.g., gross taxes—transfers) in three countries Canada, Portugal, and Brazil.
The net fiscal balance in Canada for a healthy woman was C69,767) or trastuzumab (C$62,971). A similar pattern was observed in the three countries but reflecting the overall tax burden in each country, labor force activity, and available public benefits. Age at diagnosis was an important determinant of the likely net fiscal balance, as this influences the remaining working years.
Women diagnosed with HER2-positive eBC were estimated to pay less lifetime gross taxes and receive more in sickness benefits compared with healthy women. Treatments that improve outcomes are likely to offer fiscal gains for government from improved work force participation.
... The output gap is defined as the difference between actual and potential output (typically expressed as percentage of potential output), where the latter represents what the economy should be able to produce in the absence of higher inflationary pressures (e.g.Havik et al. 2014). Potential output is routinely estimated by using statistical filtering methods (e.g.Coibion et al. 2018;Heimberger et al. 2020), where the trend component of actual output excludes the cyclical component of GDP and is ...
This paper analyses (age-adjusted) employment rates by gender and education. We find that male female gender gaps and high-low education gaps in employment vary markedly across European Union (EU) countries and regions, with larger gaps existing in Eastern and Southern Europe than in Nordic and Continental EU countries. We estimate that closing existing education gaps in employment between high and lower education levels would raise the employment rate in the EU for the year 2022 by 10.6 percentage points, whereas closing the gender gaps between men and women would lead to an increase of 2.5 percentage points. At the same time, closing both the gender and education gaps would raise the EU employment rate from 76% to 89% of the population. Furthermore, we provide new evidence on the cyclical behaviour of employment gaps, finding that gender gaps are procyclical. While female employment rates tend to be more resilient than male employment rates during economic downturns, male employment rates tend to grow at a faster pace than female employment rates during upswings. In contrast, education gaps are more countercyclical, as employment risks are more strongly concentrated where education is low.
