This document discusses the need to update economic models to better analyze the long-term effects of large-scale recovery packages and the transition to a green economy. It notes that while current models can assess climate change impacts, they are not well-suited to model the circular economy or information services sector. The document recommends that models incorporate more accurate representations of production functions, wealth creation, capital mobility, recycling processes, and material flow accounting in order to provide useful analysis and policy advice on a sustainable recovery.

1. Questions Way Forward Conclusion
Models for a Great Reset
Reyer Gerlagh
Tilburg University
”Brainstorming ideas on modelling”, OECD, 13+14 Apr 2021
Reyer Gerlagh (TiU) Models for a Great Reset OECD expert workshop 1 / 7

2. Questions Way Forward Conclusion
Questions by Organizers 1: Green recovery
Q. Which elements in the recovery packages will have the biggest
effect on the environment?
A. Those stimulating green innovation
Those that force GHG reduction, force use of recycled material in
manufacturing, force reduced use of materials that damage the
environment (pesticides, microplastics, ...)
Just paying the companies not to fire their employees delays the green
transition.
Reyer Gerlagh (TiU) Models for a Great Reset OECD expert workshop 2 / 7

3. Questions Way Forward Conclusion
Questions by Organizers 2: Instruments matter
Q. How important [...are] policy instruments embedded in the
packages rather than their effects on economic activity?
A. Representing instruments is essential. Change in VA per sector has
less effect compared to within-firm changes (production technology).
The typical 2-stage model analysis fails: Stage 1. Economics
calculations. Stage 2. Material IO. Will not reveal the fundamental
long-run consequences of the recovery packages
Reyer Gerlagh (TiU) Models for a Great Reset OECD expert workshop 3 / 7

4. Questions Way Forward Conclusion
Questions by Organizers 3: Modeling choices
Q. How to model the long-run effects of large-scale recovery packages;
which elements should be included in modelling analysis with priority?
Q. Where is the low-hanging fruit, and which simplifying assumptions
are reasonable to get results quickly?
A1. Climate change is the low-hanging fruit. GHG are associated to
fossil fuels; our models (CGE/Econometric/IAM) describe these well.
A2. Our models are not capable to describe the circular economy.
They are of no use to simulate a green recovery beyond CC. (come
back to this)
Reyer Gerlagh (TiU) Models for a Great Reset OECD expert workshop 4 / 7

5. Questions Way Forward Conclusion
Modeling Needs 1: Information Services
Our (CGE) models are not prepared for the 2050 information-cum-circular
economy.
The new information services sector is different from the old industries
The CGE production function (CRS) is not fit reality.
‘Information services’ have global+dynamic IRS.
They have very large mark-up (sales value over costs) that are not
attributed to new investments (debt) but to insiders (creator/equity).
The CGE savings market does not fit reality.
Recent wealth is not created as returns on savings (as in our economic
models). ‘New wealth’ is created differently.
The CGE production factor ‘capital’ does not fit reality.
When we talk capital mobility, we describe freedom to invest
internationally. Our models treat capital as a geographically fixed
factor.
IT ‘capital’ is truly mobile: for fiscal purposes it can be moved instantly.
Reyer Gerlagh (TiU) Models for a Great Reset OECD expert workshop 5 / 7

6. Questions Way Forward Conclusion
Modeling Needs 2: Recycling
Our (CGE) models are not prepared for the 2050 information-cum-circular
economy.
The recycling process is unknown territory
Calibrating the ‘circular economy’ is impossible: a ‘non-existent’
sector that needs rapid expansion.
Circular production is about design and within-firm substitution
between materials (product LCA), not between inputs from different
sectors; we need Economic Models 3.0 to capture that.
Describing ‘deep’ recycling needs internal+consistent physical
stock-flow accounting
Reyer Gerlagh (TiU) Models for a Great Reset OECD expert workshop 6 / 7

7. Questions Way Forward Conclusion
Main points
COVID19 can be a trigger for public acceptance of green growth
replacing material-intensive growth.
Our models can assess and advise policy makers on a climate-neutral
recovery.
We need to add true material flow elements to our economic models
to be able to describe a ‘Green Deal Recovery’ (circular economy).
Reyer Gerlagh (TiU) Models for a Great Reset OECD expert workshop 7 / 7