Revue Européenne du Droit
Forging a new economic system
Issue #4


Issue #4


Joseph E. Stiglitz , Maarten Verwey , Olivier Blanchard , Hélène Rey , Jean Tirole

Revue européenne du droit, Summer 2022, n°4

Olivier Blanchard is the Solow Professor Emeritus at the Massachusetts Institute of Technology, Bergsten Senior Fellow at the Perterson Institute for International Economics – Former Chief Economist of the International Monetary Fund. Hélène Rey is the Lord Bagri Professor of Economics at London Business School. Joseph E. Stiglitz is University Professor at Columbia University, 2001 recipient of the Nobel Memorial Prize in Economic Sciences and Former Chief Economist at The World Bank. Maarten Verwey is the Director-General for Economic and Financial Affairs at the European Commission. Jean Tirole is the Honorary President of Toulouse School of Economics, 2014 recipient of the Nobel Memorial Prize in Economic Sciences.

This article is an edited version of the transcript of the discussion between Olivier Blanchard, Joseph Stiglitz, Hélène Rey, Maarten Verwey and Jean Tirole at a GEG Weekly Seminar organized by Groupe d’études géopolitiques on September 23, 2021 and moderated by Sébastien Lumet

Olivier Blanchard: 

While preparing the report on ‘The major future economic challenges’, commissioned by the French President and published in June 2021 1 , we were asked to think about major future challenges, and we chose three. We left out COVID because we started working before the pandemic, and even afterwards we were not sure how to assess how it should be handled. So, we chose to work on climate change, economic inequality, and demographic change. 

I will quickly cover some of the conclusions of the report. Climate change is an existential challenge, which has to be thought of as a war. It is maybe not surprising that the conclusion of the panel is that it needs to be fought on many fronts. There are many issues around green R&D, and at this stage we do not have the technology that would allow us to win the war on climate change. We will need standards; we will need bans. But the point I want to insist on is that we are going to need carbon pricing done well. The reason is that this is the only way to minimize the costs of responsible action, which will be high. Without a yardstick like a carbon price, many decisions lowering the carbon footprint will be very costly for the decision-maker, when they shouldn’t be. 

There are billions of decisions that need to be made both by consumers — whether to buy an electric car or not for example — and people in the R&D process, by firms, and by governments in terms of what to ban or not. In the absence of a yardstick, the cost of fighting the war against climate change will be gigantic. We have examples in the report that show for example that the cost of saving 1 ton of CO2 can vary from €30 to €1,000 or more. While we insist on adopting a universal carbon price system, it is only a part of the set of measures which needs to be taken, and it raises the issue of the distribution of losses. The essence of a carbon price is that it is regressive. The share of the budget for energy in low budget households is larger, and we have to take this into account. For this reason, we tried to think about compensation schemes which would need to be put in place. States shouldn’t enact a carbon pricing system and then think about compensation, but should address both concerns at the same time: when a carbon pricing system is proposed, it should be accompanied by a compensation scheme good enough to convince a sufficient portion of citizens that carbon pricing should be enacted. 

I insist on this because the Biden administration, for example, has decided not to have a carbon price in its infrastructure program, and I think they are very scared of the opposition to it. That seems like the wrong way to go: carbon pricing is actually necessary. The same is true of the French President, who must also decide to accept the recommendations issued in Brussels on this issue.

The second topic we took on is economic inequality, which is not as bad in France as it is in the US, by a long shot. This being said, we conducted a survey and it is clear that inequality is very high on the list of what people worry about in France, and when pressed to share the things they dislike, the lack of access to good jobs and careers appears to be the biggest concern. We decided to focus on access to good jobs and careers, as well as other dimensions of economic inequality. Here you need a holistic approach, and we followed something that Dani Rodrik had put in place, namely to think about this issue in three dimensions: you can intervene pre-production (equalize chances as much as possible), post-production (redistribute to compensate at least partially the losers), or during production (changing the process in some way). Much of the current discussion surrounds post-production (redistribution), so we focused on the other two.

In terms of pre-production stage measures, there are two relevant dimensions. One is obviously education, and the other is financial. On the education front, France—along with many other countries—has very unequal education. The good news, though, is that if governments are willing to spend money, they can decrease inequality and France has been active on this front in the recent past, with good results. The policy will be very costly, but we think that it is essential, and nearly non-controversial.

What was more controversial was the agreement in the commission that we need to think about the inheritance tax. Much inequality across generations goes through the channel of inheritance. It seemed to us that, rather than thinking of inheritance tax as a way of taxing the rich —which is the typical idea—we should think of it as a transfer program from rich kids to poor kids. When one thinks of it this way, one is led to design the system rather differently than it currently is. First, one can focus on the beneficiaries — the kids — and not on people who contribute. Second, one no longer focuses on what a parent gives when they die, but rather on what kids receive throughout their life, all the donations along the way. Third, as can be imagined, the inheritance tax is very unpopular. People want to be able to give something to their kids so there needs to be a fairly high threshold. We have suggested that this is a discussion that has to take place: it is rather unpopular, but absolutely necessary.  

Concerning production-stage policies, the question is whether one can increase good jobs and access to good jobs beyond education and beyond professional training. Can firms be incentivized to help and create more good jobs and give better careers, in particular to low skilled people? We didn’t come up with solutions in this matter but pointed to possibilities and questions. Can we create incentives, such as financial incentives to promote and keep people? A question we dealt with, but which does not have a good answer, is whether one can also bend technological progress and subsidize R&D to create new technologies that complement rather than substitute for human skills. The question is clear, but the answer is difficult, and we are not ready to make a policy recommendation yet.

On demographic change, some issues are common. With the increase in life expectancy — which is the major demographic change in France and many other countries — you need an increase in the retirement age. This is arithmetic. But there is a choice: you can increase retirement age and keep benefits the same, or some combination of both raising the retirement age less and lowering benefits compared to what they would be otherwise. We think that this should be subject to democratic decision-making. One of the problems in France is that it is a very mechanical decision, and not a clear one, and people feel that technocrats are deciding for them. 

The other point is holistic. If the age of retirement is increased, but nothing is done to increase both the supply and the demand for senior workers, then people will want to continue to retire early and there will tend to be tremendous political opposition to the reform. There are all sorts of measures on the supply side and the demand side which can be taken. Dealing with chronic illnesses is a very important issue on the supply side. On the demand side, pushing or allowing firms to be more flexible are good ways to go. But one needs to do all three: increase supply, increase demand, and then only increase the retirement age. 

Joseph Stiglitz: 

Regarding climate change, I agree strongly that there needs to be a comprehensive approach which includes regulations, but I would have emphasized more public investments like public transportations systems, or public investment in R&D. We have managed to lower the cost of renewable energy enormously with little encouragement from the government, and we could have done even better with more of it.

I also note a theme that is also relevant for the second point of economic inequalities. I believe there is a lot of room for steering innovation. So much innovation is directed at replacing labor when we already have too high of an unemployment rate among unskilled labor. And too little innovation is directed at saving the planet. One of the advantages of a carbon pricing system is that it encourages more green innovation. 

I do think we have underemphasized the importance of regulations. Regulations are a nonlinear price system, and they can have low burdens while being very effective. A simple regulation is to ban all coal-fired power plants. It’s not hard to administer or write down and if we had had that regulation 10-20 years ago, we would be in better shape today.

I think that economists using overly simple models invoke what you might call the Pigou theorem: that market failures are associated with a gap between marginal social benefits and marginal private benefits, and marginal social cost and marginal private cost, and that an incentivized intervention can get you to a first best allocation. But in the presence of other market failures, like an incomplete set of risk markets, imperfect and asymmetric information, and distributive consequences which cannot be fully undone, a single price intervention is not, in general, optimal. One wants to use a broad array of instruments including nonlinear prices and regulations. So, I agree with what Mr. Blanchard is saying, but I want to put a little more emphasis on regulations. The broader point is that if we have good public investment and good regulations, the price of carbon that we need to get to will be much lower. Therefore, the adverse distributive effects may be more easily managed. We need to think carefully about these types of packages including thinking about distributive consequences so you don’t have the kinds of problems France had with the Yellow Vests.

I would like to highlight the long history of tax avoidance on either inheritance or request taxes, and the importance of including lifetime donations— in the States we call it a lifetime tax. But by doing that, the tax system becomes more difficult to administer and in terms of transferring money to help with education, very hard to monitor. We should be aware of abilities to avoid and evade these taxes, and that means there is a need to complement that with very strong progressive wealth and capital gains taxes.

We should recognize that the first step is finding the holes we have in our existing inheritance taxes. If this could be done in the U.S. and most other countries, there would be less inequality. There are particular gaps, especially in the U.S., that we have in the step-up basis at death; for instance, the basis of the capital gains when you subsequently sell it is higher. 

The other thing I would like to highlight is that education is very important to prevent inherited inequalities of opportunity. But getting equal access to education is really hard and we don’t put enough effort into it. In the U.S. right now, there is a big effort at the kindergarten level, reflecting the realization that inequality starts before kids get to school. It will take a great effort to get true equality of educational opportunity.

The final two remarks I would like to make focus on sources of inequality. This may be a very American view, but a big source of inequality is corporate market power — the exploitation of consumers — on the one hand, and on the other hand a lack of worker market power which results in wages being lower than they should be. We need better worker protection and better antitrust laws. I view those as an important ingredient that I didn’t see emphasized in the report. I also think there is lots of potential for steering innovation in ways that will lead to better distribution of income. 

On the issue of demographic change, one of the concerns of those of us who have been trying to get a more progressive retirement program concerns the distinction between blue collar workers and white-collar workers. The problem lies in the fact that for blue-collar workers, life expectancy at 65 is not as great as that of a white-collar worker. The question then is what is an equitable system and how do we implement it? We have an intuitive grasp of what the scope of the notions of blue- and white-collar workers: one involves people who do Zoom and the other involves people who work physically, with a high toll on their life expectancy. So, when it comes to the age of 65, there are indeed very big differences! I do not know a good way to implement a fair system that reflects these differences, but I do think it is important to embrace progressivity and I like the idea of partially indexing on wages and not prices. The U.S. social security system is partially indexed on wages, it has elements of both. People have to adjust to changes in prices, but their relative position will be affected by how wages are changing, so both elements should appear in indexing. 

Hélène Rey: 

On the climate part, both Olivier and Joseph embrace the idea of carbon pricing and emphasize the need to compensate the losers, and the need for green R&D, as well as complementary measures such as bans and regulations. I agree with all these proposals. But I would like to point out that our profession has not been very good in the past at thinking about implementation, and in particular about the functioning of such compensation schemes. If we go back to the consensus on international trade — economists have more or less embraced the idea of free trade — we have put forward arguments on efficiency and the need to compensate the losers of free trade, but not such scheme was implemented. There is a clear danger that something similar would happen with carbon pricing, because the scheme is regressive: we need to think about the necessary complementary policies, and make them really work this time. 

Regarding the compensation of losers, there are three big issues. First, redistribution is actually quite hard. Think about coal miners, a category of workers which will be hurt; think about low-income households: they have high energy share in consumption, relatively inelastic demand, and their real income is affected directly by carbon price increase. But there are also some possible important equilibrium effects. Low-income households tend to work in more cyclical sectors which tend to be more affected by carbon pricing via lower demand, and so their income will decline as a result of this equilibrium effect. Their employment, their income will be affected, and these effects could be quite large. Redistribution policy would have to take this into account, and this already poses a high degree of complexity.

Second, redistribution is insufficient. Demand for some carbon intensive products — such as transportation — is very inelastic: no substitution is available for car transportation outside of cities. It is not enough to say that public transport infrastructure will be developed, because this policy is too expensive: the cost/benefit analysis of carbon reduction versus infrastructure-building has to be done almost on a case-by-case basis; more serious thought should be given to this issue.

Third, carbon pricing helps only if it brings about structural changes. Under current estimates, we would need a much higher carbon price to reach the EU’s net-zero target in 2050, but by the same estimates, this would be fatal for the economy if its structure does not change. So, this is not a sustainable path, and net-zero can only be brought about through changes in production. How can these changes happen? Some redistribution policies will go against structural changes: we are not going to subsidize inelastic demand for carbon intensive products. That may slow down structural changes and we must think carefully about this as a set of complementary policies. 

The report underlines that France is a small part of Europe, which is the right scale of action, and that Europe itself is small in the world and accounts for only about 9% of carbon emissions. This raises a big question: how to incentivize the others? The carbon tax adjustment mechanism can act as a bit of an incentive given the size of the European market, but how can this be negotiated and put in place? Good European policy is just not enough.

On inequality, I agree with Joseph that attention should be paid to the evasion from existing inheritance tax. Historically, we have not been very successful, so how can this be dealt with? Authors suggest that we are maybe getting better at taxing multinational corporations but again, what about the implementation of these policies? It is far from clear that the global multinational tax will be implemented without many loopholes, so how can collaboration be generated on this? 

Finally, regarding demographic change, there are many useful proposals, particularly the democratic clarification made by Olivier. I will point out that the debate on public finances in France is really not well informed, and not very present. It’s quite symptomatic that when we look at the public institutions dealing with finance in France, they usually do projections for five years whereas Canada projects for 75 years, the U.K for 50 years, and the U.S. for 30 years, and there is no independent council in France with any teeth which can discuss these issues. In the context of a commission on the future of French public finances to which I collaborated, we conducted a survey of French people on debt, and I think some of their answers are very relevant to this issue. When asked, 37% of people did not know how much French public debt there is, and when asked about expenditures to cut in priority, very few — about 13% — thought about cutting social spending or pensions. A number of important issues would need to be if we want an informed, democratic debate. 

Maarten Verwey: 

When it comes to the big questions — and the discussion so far has born this out — the biggest challenges may not be finding the perfect technical solutions to these problems but how to convince policy makers and the general population to opt for the proposed solution.

Regarding climate change mitigation, the report sees an important role for carbon pricing: this is not the only possible policy, but an indispensable one. I share this conviction, and the European approach with the ‘Fit for 55’ legislative package also plays a central role.

I subscribe to the observation in the paper that measures with a visible impact are much less popular than measures whose impacts are invisible. This is apparent from the discussions currently taking place in the EU against the backdrop of the increase in energy prices. Some are already calling for replacing measures related to the extension of the ETS by more invisible measures, even though they are probably less efficient. But given the scale of the challenges, we really need to look for cost efficient solutions and carbon pricing is really a part of that.

That brings me to the issue of cost. It is crystal clear that there will be big costs for certain sectors, but when it comes to the aggregates, the picture is less clear. Consulting the impact assessment that the Commission has done for the ‘Fit for 55’ package, aggregate impacts are relatively modest in 2030, but there are major differences across sectors. Saying that there is an aggregate cost —whether it is true or false — seems to imply that there is an alternative which is less costly. This is my question: admittedly, by postponing certain measures that may help in the short-term, we could find ourselves in a few years with an economy that is obsolete with all the technologies developed elsewhere. So, the issue of cost is important, but I think it probably merits further exploration. 

The economic cost of transition will depend on the speed of development and application of new technologies: the real issue is how to make sure we get technological development going on a faster scale than we have seen so far. Public investment can be part of it — and the EU is contributing through budget resources — but the way in which regulations are structured will impact this as well. 

We must also deal with the challenges of redistribution. If we do not get this right, there will be no transition because people simply won’t approve it. For this purpose, the EU commission proposed as a part of the ‘Fit for 55’ package that a special fund be created. But this is not just a question of money: one also needs to determine how to shape redistribution in a good way.

On the international dimension, I have no easy solution. Cooperation with like-minded countries is very important: if a critical mass is prepared to move in a certain direction, it will be easier to bring others along. As much as we would like to, Europe alone will not solve this issue. It can only be done in cooperation with others. Europe — but also the U.S. and others — must live up to the pledges made to developing countries to help in the transition. There is a long-standing commitment to provide finance for €100 billion per year: this is critical, but not enough. 

Jean Tirole: 

I will focus first on climate change. Talking about green R&D, we have two kinds. There is the more rocket science kind, the kind that makes us succeed in the future, and we have a proposal for EU-style projects where specific projects could be selected for investment. But, crucially, this needs right governance structures. One of the chapters of the report describes this in detail, and in particular the proposed creation of two independent agencies, if possible at the European level: one to fund high risk/high reward R&D projects; another to inform citizens and public officials of the cost of alternative ways of achieving the same environmental impact.

Then there is learning by doing, ie the important technical progress that comes from experience with new technologies. This is challenging. What we have done with wind and solar technologies has been extraordinary, but we are still on a learning curve. If you ask me today whether we should have taken on that learning curve for nuclear, I don’t know. Sometimes the effects of the learning curve are small, sometimes they are huge, and we cannot always know in advance.

On appropriate regulatory interventions, coal is not a good example because everyone agrees that it should go. Sure, we could just ban it, but a price of €40 per ton will achieve the same result. The issue is political reluctance, not regulation versus prices, and in the end,  compensation. 

I would like to focus more on identifying instances of asymmetric information. Joseph argued that the price of regulation would be lower if we had good regulation. But we should not forget that these regulations are very expensive and very regressive. People who have solar panels on their roofs and drive electric cars are not destitute, so these regulations are regressive as well. We should not forget that the price per ton is very high.

I completely agree with earmarking and with the issue of redistribution, which is very difficult to do. Compensation doesn’t happen for two reasons. The first is that sometimes people forget about it, as was the case with the Yellow Vests. We had the carbon price go up without thinking about compensation, and there is a little bit of that in the Green Deal. The Green Deal is very ambitious, much more ambitious than what is happening in the U.S., and this is wonderful, we should all be in favor. Except that the compensation package is not there, or at least not present enough. In the report we propose something that economists don’t like to do, which is earmarking as a commitment to actually compensate the losers, but the structure of compensation is very hard to design. 

Tax avoidance is also an important subject, but we didn’t have enough time to get estimates of long-term elasticities, which are very hard to compute. People don’t move across countries for a year or two. It’s a long-term decision so it makes it very difficult economically to measure.

Lastly, the issue of education. In my view education — at least in Europe and in France — is the biggest factor driving economic inequality. France does very poorly in terms of redistribution on the education dimension. We are the penultimate country in the developed world on that. There are some interesting reforms in that regard, though. We see some of the same trends toward younger pre-kindergarten and primary school, but we need to do much more. 

Joseph Stiglitz: 

I used the example of coal regulation just to illustrate that you can have simple regulations that are not hard to enforce and implement and to make a general point that one needs to implement nonlinear price systems, and not just a carbon price. One can think of regulations as a way of approximating certain types of nonlinear interventions, as a simple way of implementing those regulations. It seems to me that one wants to have a comprehensive package and take into account all the distributive effects. 

Hélène Rey: 

I want to emphasize and build on what Joseph said. Education is key for many reasons, and I think one of the practical issues we have in the EU is that when we think about investment in education — or other types of investments that are tremendously important — we are not able to account for these investments, according to the public finance and accounting rules that we have, as investments that will decrease our indebtedness later on. Because they increase our potential for economic activity, we should be able to take them out of budget rules, but we cannot do that. Regarding the investments that are used — and they always have to do with investment in buildings or roads for example — we cannot have workable rules where we say we’re not going to count this investment in education in the deficit right now because that is building our potential growth and that will help with climate, inequality, etc.  So, there are some practical issues like that that we don’t usually discuss in our theories but really get in the way when we talk about policy implementation.

Maarten Verwey: 

To react to the last point, let me say that at the current juncture the rules are not overly restrictive because at the moment the general escape clause is activated and continues to be active. The fiscal space is also enlarged quite a bit in a number of countries with the Next Gen EU package, which provides a lot of financing for green investment. That said, we were against relaunching the debate on fiscal rules that has been announced by Ursula von der Leyen, and there are questions around how to deal with investments. This will certainly be on the table. 

Olivier Blanchard: 

Joseph raised the important issue of life expectancy. There is an 8-year difference in terms of life expectancy at 60 between the top and bottom decile of income. That is an enormous inequality. The EU commission couldn’t decide on how to deal with it, but it is a central issue that needs to be dealt with. 

Jean mentioned the need for earmarking, but I think it is more general than that. Earmarking can help get reforms through. In the case of inheritance tax, if you know that some of what is taken from you will be given to poor kids you might be more open. If citizens know that if they give €100 to their children, they will have to pay €10 to a fund which will help disadvantaged children, it may be one way to decrease opposition to the inheritance tax. 

The last point I would like to make is about professional training, which we didn’t talk about, but is covered a lot in our report. To me, it is just as important as standard education and here we have a long way to go before we have a good professional training system. If you take people close to the retirement age, there is no professional training for middle aged and older workers, and there should be because this is the only way they will be able to continue to work and be productive. This is a major issue that governments need to think about and invest in. 


  1. In January 2020, the French President Emmanuel Macron asked Olivier Blanchard and Jean Tirole to chair a commission of renowned international experts, supported by France Stratégie, to address the major future economic challenges, granting them free rein in choosing the commission’s members and full independence in stating the panel’s conclusions. The report was submitted in June 2021, and can be consulted online (see in English, For a synthesis of the report drafted by Olivier Blanchard and Jean Tirole for Le Grand Continent, see in English
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Joseph E. Stiglitz, Maarten Verwey, Olivier Blanchard, Hélène Rey, Jean Tirole, Forging a new economic system, Aug 2022, 201-206.

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