Social Europe Journal http://www.social-europe.eu debating progressive politics in Europe and beyond Mon, 01 Sep 2014 17:33:51 +0000 hourly 1 http://wordpress.org/?v=3.9.2 "Democracy In The Twenty-First Century" by Joseph Stiglitz http://www.social-europe.eu/2014/09/democracy/ http://www.social-europe.eu/2014/09/democracy/#comments Mon, 01 Sep 2014 13:03:20 +0000 Joseph Stiglitz http://www.social-europe.eu/?p=34998
Joseph Stiglitz, Democracy

Joseph Stiglitz

The reception in the United States, and in other advanced economies, of Thomas Piketty’s recent book Capital in the Twenty-First Century attests to growing concern about rising inequality. His book lends further weight to the already overwhelming body of evidence concerning the soaring share of income and wealth at the very top.

Piketty’s book, moreover, provides a different perspective on the 30 or so years that followed the Great Depression and World War II, viewing this period as a historical anomaly, perhaps caused by the unusual social cohesion that cataclysmic events can stimulate. In that era of rapid economic growth, prosperity was widely shared, with all groups advancing, but with those at the bottom seeing larger percentage gains.

Piketty also sheds new light on the “reforms” sold by Ronald Reagan and Margaret Thatcher in the 1980s as growth enhancers from which all would benefit. Their reforms were followed by slower growth and heightened global instability, and what growth did occur benefited mostly those at the top.

But Piketty’s work raises fundamental issues concerning both economic theory and the future of capitalism. He documents large increases in the wealth/output ratio. In standard theory, such increases would be associated with a fall in the return to capital and an increase in wages. But today the return to capital does not seem to have diminished, though wages have. (In the US, for example, average wages are down some 7% over the past four decades.)

Sometimes an increase in measured financial wealth corresponds to little more than a shift from “unmeasured” wealth to measured wealth – shifts that can actually reflect deterioration in overall economic performance.

The most obvious explanation is that the increase in measured wealth does not correspond to an increase in productive capital – and the data seem consistent with this interpretation. Much of the increase in wealth stemmed from an increase in the value of real estate. Before the 2008 financial crisis, a real-estate bubble was evident in many countries; even now, there may not have been a full “correction.” The rise in value also can represent competition among the rich for “positional” goods – a house on the beach or an apartment on New York City’s Fifth Avenue.

Sometimes an increase in measured financial wealth corresponds to little more than a shift from “unmeasured” wealth to measured wealth – shifts that can actually reflect deterioration in overall economic performance. If monopoly power increases, or firms (like banks) develop better methods of exploiting ordinary consumers, it will show up as higher profits and, when capitalized, as an increase in financial wealth.

Democracy

According to Joseph Stiglitz, the issue is not capitalism but democracy in the 21st century.

But when this happens, of course, societal wellbeing and economic efficiency fall, even as officially measured wealth rises. We simply do not take into account the corresponding diminution of the value of human capital – the wealth of workers.

Moreover, if banks succeed in using their political influence to socialize losses and retain more and more of their ill-gotten gains, the measured wealth in the financial sector increases. We do not measure the corresponding diminution of taxpayers’ wealth. Likewise, if corporations convince the government to overpay for their products (as the major drug companies have succeeded in doing), or are given access to public resources at below-market prices (as mining companies have succeeded in doing), reported financial wealth increases, though the wealth of ordinary citizens does not.

What we have been observing – wage stagnation and rising inequality, even as wealth increases – does not reflect the workings of a normal market economy, but of what I call “ersatz capitalism.” The problem may not be with how markets should or do work, but with our political system, which has failed to ensure that markets are competitive, and has designed rules that sustain distorted markets in which corporations and the rich can (and unfortunately do) exploit everyone else.

What we have been observing – wage stagnation and rising inequality, even as wealth increases – does not reflect the workings of a normal market economy, but of what I call “ersatz capitalism.”

Markets, of course, do not exist in a vacuum. There have to be rules of the game, and these are established through political processes. High levels of economic inequality in countries like the US and, increasingly, those that have followed its economic model, lead to political inequality. In such a system, opportunities for economic advancement become unequal as well, reinforcing low levels of social mobility.

Thus, Piketty’s forecast of still higher levels of inequality does not reflect the inexorable laws of economics. Simple changes – including higher capital-gains and inheritance taxes, greater spending to broaden access to education, rigorous enforcement of anti-trust laws, corporate-governance reforms that circumscribe executive pay, and financial regulations that rein in banks’ ability to exploit the rest of society – would reduce inequality and increase equality of opportunity markedly.

If we get the rules of the game right, we might even be able to restore the rapid and shared economic growth that characterized the middle-class societies of the mid-twentieth century. The main question confronting us today is not really about capital in the twenty-first century. It is about democracy in the twenty-first century.

© Project Syndicate

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http://www.social-europe.eu/2014/09/democracy/feed/rss2/ 3 stiglitz Joseph Stiglitz Wall Street According to Joseph Stiglitz, the issue is not capitalism but democracy in the 21st century.
"Labour’s Austerity Problem" by Simon Wren-Lewis http://www.social-europe.eu/2014/09/labours-austerity-problem/ http://www.social-europe.eu/2014/09/labours-austerity-problem/#respond Mon, 01 Sep 2014 12:18:21 +0000 Simon Wren-Lewis http://www.social-europe.eu/?p=34992
Simon Wren-Lewis, Labour's Austerity Problem

Simon Wren-Lewis

One of the political/economic soap operas over the last year has been the UK Labour Party’s agonising over the perception of its economic competence. The story always starts with current polling data: either Miliband’s personal ratings or Labour’s rating for economic competence. It then often seeks to find the answer to these problems in the past: either the last years of the Labour government, or the first year of opposition when Labour was preoccupied with electing a new leader.

The latest example can be found in an article today by the Guardian’s chief political correspondent, Nicholas Watt. Here Gordon Brown’s call to invest rather than cut in 2009 is blamed, and this is contrasted with an alternative that would acknowledge the need to cut, but focus on the idea that cuts would have been fairer under Labour.

I know nothing about internal Labour politics, but it seems to me that what is going on here is confusion over what the right policy should have been, rather than how to frame it. I also suspect that what really puts the electorate off is when a political party appears confused or divided about a key aspect of policy. The taboo in Labour circles over mentioning the word borrowing is a case in point, which made fun of before Ed Miliband fell into the same trap.

So what should Labour’s line have been? As it does not have a hidden agenda to reduce the size of the state, its line should have been based on sensible macroeconomics. As my paper with Jonathan Portes suggests, the policy should have been to avoid cuts and to invest while interest rates were stuck at ‘zero’. In other words, the recovery takes priority, and the deficit should be dealt with after the recovery has been assured. Sometimes translating good macroeconomics into simple messages can be difficult, but not in this case.

This blogpost was first published on Mainly Macro

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"Europe According To Mario Draghi" by Jean Pisani-Ferry http://www.social-europe.eu/2014/09/mario-draghi/ http://www.social-europe.eu/2014/09/mario-draghi/#comments Mon, 01 Sep 2014 12:00:22 +0000 Jean Pisani-Ferry http://www.social-europe.eu/?p=34987
Jean Pisani-Ferry, Mario Draghi

Jean Pisani-Ferry

Central bankers are often proud to be boring. Not Mario Draghi. Two years ago, in July 2012, Draghi, the president of the European Central Bank, took everyone by surprise by announcing that he would do “whatever it takes” to save the euro. The effect was dramatic. This August, he used the annual gathering of top central bankers in Jackson Hole, Wyoming, to drop another bomb.

Draghi’s speech this time was more analytical but no less bold. First, he took a side in the ongoing debate about the appropriate policy response to the eurozone’s current stagnation. He emphasized that, along with structural reforms, support for aggregate demand is needed, and that the risk of doing too little in this respect clearly exceeded the risk of doing too much.

Second, he confirmed that the ECB was ready to do its part to boost aggregate demand, and mentioned asset purchases, or quantitative easing, as a necessary tool in a context in which inflation expectations have declined below the official 2% target.

Third, and to the surprise of most, Draghi added that there was scope for a more expansionary fiscal stance in the eurozone as a whole. For the first time, he expressed the view that the eurozone had suffered from the lower availability and effectiveness of fiscal policy relative to the United States, the United Kingdom, and Japan. He attributed this not to pre-existing high public debts, but to the fact that the ECB could not act as a backstop for government funding and spare fiscal authorities the loss of market confidence. Moreover, he called for a discussion among euro members of the eurozone’s overall fiscal stance.

For the first time, [Draghi] expressed the view that the eurozone had suffered from the lower availability and effectiveness of fiscal policy relative to the United States, the United Kingdom, and Japan.

Draghi broke three taboos at once. First, he based his reasoning on the heterodox notion of a policy mix combining monetary and fiscal measures. Second, he explicitly mentioned the aggregate fiscal stance, whereas Europe has always looked at the fiscal situation exclusively on a country-by-country basis. Third, his claim that preventing the ECB from acting as a lender of last resort imposes a high price – making governments vulnerable and reducing their fiscal space – contradicts the tenet that the central bank must not provide support to government borrowing.

The fact that Draghi chose to confront the orthodoxy at a moment when the ECB needs support for its own initiatives is indicative of his concern over the economic situation in the eurozone. His message is that the policy system as it currently works is not suited to the challenges that Europe faces, and that further policy and institutional changes are necessary.

ECB President Mario Draghi, Mario Draghi

ECB President Mario Draghi

The issue now is whether – and, if so, how – conceptual boldness will translate into policy action. There is less and less doubt regarding the benefits of outright asset purchases by the ECB. What was long regarded as too unconventional to be contemplated has gradually become a matter of consensus. It will be operationally difficult, because the ECB, unlike the Federal Reserve, cannot rely on a unified, liquid bond market, and its effectiveness remains uncertain. But it will most likely take place.

At the same time, there is little doubt that fiscal policy will fall short of Draghi’s wishes. There is no agreement in Europe on the concept of a common fiscal stance, and the backstop that the ECB could provide to sovereigns can be offered only to countries that commit themselves to a negotiated set of policies. Even this conditional support within the framework of the ECB’s so-called outright monetary transactions (OMT) program has been opposed by Germany’s Bundesbank and constitutional court.

Draghi’s initiative on this front should thus be interpreted not only as a call for action, but also – and perhaps even more so – as a call for reflection on the future approach to eurozone policymaking. The question is this: How can the eurozone define and implement a common fiscal policy without having a common budget?

Draghi’s initiative on this front should thus be interpreted not only as a call for action, but also – and perhaps even more so – as a call for reflection on the future approach to eurozone policymaking.

International experience shows that voluntary coordination is of little help. What happened in 2009 was a rare exception; shocks like that which followed the Lehman Brothers bankruptcy – sudden, strongly adverse, and highly symmetric – come once in decades. At the time, all countries faced essentially the same issue, and all shared the same concern that the global economy could slide into a depression.

Europe’s problem today, though serious, is different: a significant subset of countries does not have fiscal space to act and would therefore be unable to support demand. And, though Germany is doing much better than anyone else and has fiscal space, it does not wish to use it to benefit its neighbours.

If joint fiscal action is to be undertaken, a specific mechanism would be needed to trigger it. One could think of a joint decision procedure that would, under certain conditions, require budget laws to be approved by the national parliament and a majority of partner countries (or the European Parliament).

Or one could think of a mechanism inspired by the “tradable deficits permits” imagined by Alessandra Casella of Columbia University. In this scenario, countries would be allocated a deficit permit consistent with the desired aggregate stance, but would be free to trade them; a country willing to post a lower deficit thus could cede its permit to another one willing to post a higher deficit. In this way, the aggregate stance could be achieved while accommodating national preferences.

Any mechanism of this sort raises a host of questions. But the fact that the official in charge of the euro is raising the issue indicates that the common currency’s architecture remains in flux.

A few months ago, the consensus was that the time for redesigning the euro had passed, and that the eurozone would have to live with the architecture inherited from its crisis-driven reforms. Not anymore. It may take time before agreement is reached and decisions are made, but the discussion is bound to resume. That is good news.

© Project Syndicate

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"Why European Progressives Stick To Austerity" by Henning Meyer http://www.social-europe.eu/2014/09/european-progressives/ http://www.social-europe.eu/2014/09/european-progressives/#comments Mon, 01 Sep 2014 11:00:02 +0000 Henning Meyer http://www.social-europe.eu/?p=34977
Henning Meyer, European Progressives

Henning Meyer

Writing about the recent French government crisis in the New York Times, Paul Krugman raised some uncomfortable questions. He worried about the ongoing dominance of austerity illogic on this side of the Atlantic and what this says about public discourse and the effectiveness of progressive forces. He criticised the UK Labour Party for its unwillingness to challenge the Cameron/Osborne core premise of austerity and there is no shortage of other European examples he could have quoted. So why are European progressives not breaking out of the austerity framework, even though there is so much evidence by now that it simply does not work?

Krugman puts forward two hypotheses:

One is that the US intellectual ecology seems much more flexible: here, serious economists with celebrated research can also be public intellectuals with large followings, and even serve as public officials; and they can provide at least some counterweight to the Very Serious People. (…) 

Another hypothesis is that American liberals have been toughened up by the craziness of our right, and in particular by the experience of the Bush years. After seeing the Very Serious People lionize W, a fundamentally ludicrous figure, and cheer on a war that was obviously cooked up on false pretenses, US liberals are more ready than European Social Democrats to believe that the men in good suits have no idea what they’re talking about. Oh, and America does have a network of progressive think tanks that is vastly bigger and more effective than anything in Europe.

European Progressives

Why do European progressives find it so hard to break out of the austerity illogic despite widespread protests and evidence that it simply does not work?

The first point may have some merit but fails to explain why Europe is stuck with austerity. Sure, there might be more serious economists in important positions in the US than over here but there is no real lack of eminent voices against austerity in and outside high office (think Mario Draghi, Martin Wolf, George Soros and the likes).

Krugman’s second argument starts to get to the real issue: European progressives are simply not united on the case against austerity and Europe’s progressive think tanks are not as numerous and effective as in the US. We could speculate a lot on why our institutions over here seem to be more think and less tank with the resulting lack of firepower but let me add two hypotheses of my own which could help to explain what is going on. I think there are two important structural differences between the US and Europe.

First, in the US we have one public discourse. In the European Union, we still have 28 connected national discourses. The division in Eurozone debtor and creditor countries for instance has soured the political mood considerably and has put national progressive parties (and that is what we are talking about – not one set of European progressives) against each other. In the name of the ‘national interest’ one group of progressives claims to protect the prudent taxpayers in their country whereas the other tries to losen the grip of ‘Euro-colonialists’ on their sovereign national decision-making. In these circumstances, it is simply very, very difficult to come up with a united stance against austerity. And path dependency suggests that the longer progressives are stuck in this conflict, the harder it is to break out.

Second, too many progressive politicians are trying to play to short-term public opinion even though this is not in the best medium to long-term interest. They are stuck in what I like to call transactional politics and don’t dare to move towards more transformational politics. The difference is simple: a transactional politician tries to supply the policies that are demanded by the population at any given time. A transformational politician’s first aim is to move things on and implement a medium- to long-term strategy that changes society for the better (see also my paper on the Good Society).

Given the fragmentation of public discourse mentioned above, a transactional politician is unlikely to think “European” (long-term and transformational) and challenge public opinion in his/her home country, for instance on the need for fiscal transfers to stabilise the Eurozone, as it would inflict short-term pain in favour of long-term gain. A transformational politician would have long-term gain in his sight even though this might mean short-term electoral setbacks. And all this assumes that the intellectual case against austeirty is universally accepted, which unfortunately it is not in my experience.

In a nutshell, Krugman’s point about the effectiveness of Europe’s progressive political infrastructure is correct. But I think this is not a cause in itself but the result of a very fragmented public discourse. Being stuck in transactional politics does not help to break the deadlock either. I am not quite sure how this puzzle can be solved but I think these are two of the important reasons for why it hasn’t happened so far.

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http://www.social-europe.eu/2014/09/european-progressives/feed/rss2/ 10 Henning Meyer Henning Meyer austerity protest Why do European progressives find it so hard to break out of the austerity illogic despite widespread protest and evidence that it simply does not work?
"Is A Shrinking Population Always A Bad Thing?" by Adair Turner http://www.social-europe.eu/2014/08/shrinking-population-always-bad-thing/ http://www.social-europe.eu/2014/08/shrinking-population-always-bad-thing/#comments Wed, 27 Aug 2014 08:00:20 +0000 Adair Turner http://www.social-europe.eu/?p=34943
Adair Turner

Adair Turner

Is a shrinking population always a bad thing? Judging by the lamentations of some economists and policymakers in the advanced economies, where people are living longer and birth rates have fallen below replacement levels, one certainly might think so. In fact, the benefits of demographic stability – or even slight decline – outweigh any adverse effects.

To be sure, an aging population poses obvious challenges for pension systems. And, as economists like Paul Krugman have suggested, it could also mean that advanced economies face not only a slow recovery, but also the danger of “secular stagnation.”

With slower population growth, the need to invest in capital stock diminishes. Meanwhile, people planning for longer retirements may save more to ensure adequate pensions. If these savings exceed investment needs, they could lead to inadequate aggregate demand, depressing economic growth.

But the policy challenges associated with these demographic shifts are manageable. And, perhaps more important, the benefits of increased longevity and reduced fertility are considerable. Rising life expectancy is the welcome product of medical and economic progress, and additional increases are almost certain. Indeed, the average life expectancy for children born in prosperous countries could soon exceed 100.

As long as average retirement ages rise to keep stable the proportions of life spent in work and in retirement, the fact that working and retirement years are growing at equal rates has no adverse economic effect.

That implies an ever-rising ratio of those over 65 to younger cohorts. But as long as average retirement ages rise to keep stable the proportions of life spent in work and in retirement, the fact that working and retirement years are growing at equal rates has no adverse economic effect. There is, moreover, strong evidence that rising longevity can mean more years of healthy active life, not unhealthy dependency. Only bad policies, such as the recent German commitment to reduce retirement ages, can turn longer lives into an economic problem.

Declining fertility, including in some lower- and middle-income countries, such as Iran and Brazil, also reflects hugely positive social developments – particularly the empowerment of women. Wherever women have the right to an education and to choose how many children to have, fertility rates fall to or slightly below replacement levels.

Falling birth rates challenge pension systems more than rising longevity, because they imply a rising old-age dependency ratio even if retirement ages increase in line with life expectancy. But as long as birth rates are only slightly below replacement level, pension systems’ sustainability can be ensured by means of affordable increases in contribution rates. And lower birth rates deliver the offsetting benefit of lower child dependency ratios, reducing education costs or enabling increased investment in education per child.

Slower population growth might also reduce the increase in wealth-to-income ratios, and the resulting increase in inequality that Thomas Piketty recently highlighted. In many countries, the increase results primarily from the rise in real-estate prices relative to income, as more prosperous people devote a growing share of their income to purchasing property in desirable locations.

Continued population growth would intensify competition for such “positional goods,” which are not easily supplied in greater volume. A stable population, or actual decline, would reduce their importance somewhat. It would also make it easier to reduce carbon-dioxide emissions at an acceptable cost, and to preserve and enhance local environmental quality, which people increasingly value as their incomes rise.

Ageing societies

Rising life expectancy is a welcome effect of economic and medical progress.

For today’s advanced economies, a stable or slightly declining population would likely be optimal for human welfare. For the world as a whole, it is a desirable goal.

But it is also a distant goal. Indeed, population decline in the advanced countries remains far less of a problem than rapid population growth in many developing countries. The United Nations’ medium fertility scenario projects that the world’s population will rise from seven billion today to ten billion by 2050. Nigeria’s population could rise from 123 million in 2000 to 440 million by 2050, while Yemen’s could grow from 18 million to 42 million.

High fertility rates in many countries are partly a consequence of low income. But causation also runs the other way. High fertility rates stymie prospects for economic growth, because excessively rapid population growth makes it impossible to accumulate per capita stocks of physical and human capital at the pace required to drive rapid income gains.

Efforts to control population growth through measures like China’s compulsory one-child policy are both morally abhorrent and unnecessary.

That said, efforts to control population growth through measures like China’s compulsory one-child policy are both morally abhorrent and unnecessary. As examples like Iran show, even low-income countries can achieve dramatic fertility reductions simply by providing choice and education. But that does not change the fact that China’s rapid fertility decline played a major role in its extraordinary economic breakthrough.

Facile commentary often suggests the opposite: countries with high fertility rates supposedly enjoy the demographic dividend of a rapidly rising and youthful population. But, beyond some rate of population growth, jobs cannot be created fast enough to absorb the growing workforce.

Almost all countries with fertility rates well above replacement levels face economically and socially harmful youth-unemployment rates. Political instability in the Middle East has many causes, but among them is the lack of jobs for young people, especially young men.

Yes, demographic slowdown may, as Krugman and others have argued, increase the risk of deficient demand and below-potential growth. But if the problem is inadequate demand, the danger can be averted. Governments and central banks can always create additional nominal demand if they are willing to use all of the policy tools available to them, such as debt- or money-financed public investment. And if there are underused resources, additional real growth will result.

If aging populations lead to secular stagnation, the cause will be deficient policies. By contrast, the problems created by excessively rapid population growth are rooted in real and unavoidable constraints. The manageable challenges created by rising life expectancy and lower birth rates should not be allowed to obscure the huge benefits of greater longevity and population stabilization. And it certainly should not blind us to the adverse economic and social consequences of rapid population growth.

© Project Syndicate

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"The Future Of Work – Humans Need Not Apply" by Henning Meyer http://www.social-europe.eu/2014/08/future-work-humans-need-apply/ http://www.social-europe.eu/2014/08/future-work-humans-need-apply/#comments Tue, 26 Aug 2014 13:02:12 +0000 Henning Meyer http://www.social-europe.eu/?p=34937

I am currently reading a lot on the emergence of a digital society and what it means for the future of work, living and inequality. Especially Jeremy Rifkin’s Zero Marginal Cost Society and The Second Machine Age by Erik Brynjolfsson and Andrew McAfee are worth reading. Mind Change by Susan Greenfield is also on my reading list.

If you only have 15 minutes and want to get a quick impression of what the future challenges of technological development are likely to look like I recommend the Humans Need Not Apply video below. I don’t think the video editors quite get it right in all respects – creative tasks for instance cannot be easily computerised in my view – but it is a very useful introduction.

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http://www.social-europe.eu/2014/08/future-work-humans-need-apply/feed/rss2/ 3 The Future Of Work - Humans Need Not Apply I am currently reading a lot on the emergence of a digital society and what it means for the future of work, living and inequality. Especially Jeremy Rifkin's Zero Marginal Cost Society and The Second Machine Age by Erik Brynjolfsson and Andrew McAfee are worth reading. Mind Change by Susan Greenfie Humans Need Not Apply,Humans Need Not Apply
"Mario Draghi At Jackson Hole" by Simon Wren-Lewis http://www.social-europe.eu/2014/08/mario-draghi-at-jackson-hole/ http://www.social-europe.eu/2014/08/mario-draghi-at-jackson-hole/#comments Tue, 26 Aug 2014 12:44:56 +0000 Simon Wren-Lewis http://www.social-europe.eu/?p=34931
Simon Wren-Lewis

Simon Wren-Lewis

To understand the significance of yesterday’s speech (useful extract from FT Alphaville here), it is crucial to know the background. The ECB has appeared to be in the past a centre of what Paul De Grauwe calls balanced-budget fundamentalism. I defined this as a belief that we needed fiscal consolidation (austerity) even when we were in a liquidity trap (i.e. interest rates were at or very close to their zero lower bound). Traditionally ECB briefings would not be complete without a ritual call for governments to undertake structural reforms and to continue with fiscal consolidation.

An important point about these calls from the central bank for fiscal consolidation is that they predate the 2010 Eurozone crisis. As I noted in an earlier post, the ECB’s own research found that “the ECB communicates intensively on fiscal policies in both positive as well as normative terms. Other central banks more typically refer to fiscal policy when describing foreign developments relevant to domestic macroeconomic developments, when using fiscal policy as input to forecasts, or when referring to the use of government debt instruments in monetary policy operations.” The other point to note, of course, is that the ECB had in the past always called for fiscal consolidation, whatever the macroeconomic situation.

How can we explain both this obsession with fiscal consolidation, and the ECB’s lack of inhibition in its public statements? I suspect some might argue that the ECB feels especially vulnerable to fiscal dominance - the idea that fiscal profligacy will force the monetary authority to print money to cover deficits. In my earlier post I suggested this was not plausible, because in reality the ECB was lessvulnerable in this respect than other central banks. Unfortunately I think the true explanation is rather simpler, and we get an indication from the Draghi speech. There he says:

“Thus, it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this, while taking into account our specific initial conditions and legal constraints. These initial conditions include levels of government expenditure and taxation in the euro area that are, in relation to GDP, already among the highest in the world. And we are operating within a set of fiscal rules – the Stability and Growth Pact – which acts as an anchor for confidence and that would be self-defeating to break.”

The big news is the first sentence, which suggests that Draghi does not (at least now) believe in balanced-budget fundamentalism. Instead this speech follows the line taken by Ben Bernanke, who made public his view that fiscal consolidation in the US was not helping the Fed do its job (and who was quite unjustifiably criticised in some quarters for doing so). However note also the second sentence, which clearly implies that the size of the state in Euro area countries is too large. Whether you believe this to be true or not, it is an overtly political statement. I think part of the problem is that Draghi and the ECB as a whole do not see it as such – instead they believe that large states simply generate economic inefficiencies, so calling for less government spending and taxation is similar to calling for other ‘structural reforms’ designed to improve efficiency and growth.

ECB President Mario Draghi

ECB President Mario Draghi argued for a greater role of fiscal policy at Jackson Hole.

The simple explanation for the ECB’s obsession, until now, with fiscal consolidation is that its members take the neoliberal position as self evident, and that their lack of accountability to the democratic process allows them to believe this is not political.

As a result, it might be possible to argue that the ECB never believed in balanced-budget fundamentalism, but instead kept on calling for fiscal consolidation after the Great Recession through a combination of zero lower bound denial, panic after the debt funding crisis, and a belief that achieving a smaller state remained an important priority. It is hard to believe that members of the ECB, unlike other central banks, were unaware of the substantial literature confirming that fiscal policy is contractionary: there does not seem to be any difference in educational or professional backgrounds between members of the ECB and Fed, for example.

Should we celebrate the fact that Draghi is now changing the ECB’s tune, and calling for fiscal expansion? The answer is of course yes, because it may begin to break the hold of balanced-budget fundamentalism on the rest of the policy making elite in the Eurozone. However we also need to recognise its limitations and dangers. As the third sentence of the quote above indicates, Draghi is only talking about flexibility within the Stability and Growth Pact rules, and these rules are the big problem.

The danger comes from the belief that the size of the state should be reduced. Whether this is right or not, it leads Draghi later on in his speech to advocate balanced budget cuts in taxes. He says: “This strategy could have positive effects even in the short-term if taxes are lowered in those areas where the short-term fiscal multiplier is higher, and expenditures cut in unproductive areas where the multiplier is lower.” My worry is that in reality such combinations are hard to find, and that what we might get instead is the more conventional balanced budget multiplier, which will make things worse rather than better.

This post was first published on Mainly Macro

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"Fixing Europe’s Orbán Problem" by Thorsten Brenner and Wolfgang Reinicke http://www.social-europe.eu/2014/08/orban-problem/ http://www.social-europe.eu/2014/08/orban-problem/#comments Tue, 26 Aug 2014 12:29:56 +0000 Thorsten Brenner and Wolfgang Reinicke http://www.social-europe.eu/?p=34924
Thorsten Brenner (photo: gppi.net), Orbán Problem

Thorsten Brenner (photo: gppi.net)

In April, when German Chancellor Angel Merkel congratulated Hungarian Prime Minister Viktor Orbán on his reelection, she let it be known that his large majority implied a “special responsibility” to use good judgment and behave with sensitivity toward opponents. He has done exactly the opposite.

Indeed, Orbán has consistently defied the European Union’s core values and practices. Taking a page from Russian President Vladimir Putin’s playbook, Orbán has wielded his Fidesz party’s two-thirds parliamentary majority to push through a number of laws that attack what freedom remains in Hungary’s media, civil society, and academic community.

Wolfgang Reinicke (photo: ceu.hu), Orbán Problem

Wolfgang Reinicke (photo: ceu.hu)

In his latest move against the media, Orbán has implemented an additional 40% tax on advertising revenue, in order to take down RTL Klub, Hungary’s last independent-minded television station. Meanwhile, he is tightening the screws on local civil-society groups, run by what he denounces as “paid political activists who are attempting to enforce foreign interests.” For example, he has sent government auditors to harass Norwegian government-funded NGOs promoting civil liberties and human rights. And last month, the parliament passed a law mandating a government-appointed supervisor for each Hungarian university, with budgetary authority and veto power.

In a recent speech, Orbán revealed that his ultimate objective is to build an “illiberal state” on “national foundations,” citing authoritarian regimes like Putin’s Russia, Recep Tayyip Erdoğan’s Turkey, and China’s one-party state as role models. He then asserted that these plans do not conflict with his country’s EU membership.

In a recent speech, Orbán revealed that his ultimate objective is to build an “illiberal state” on “national foundations,” citing authoritarian regimes like Putin’s Russia, Recep Tayyip Erdoğan’s Turkey, and China’s one-party state as role models.

One might expect European conservatives, in particular, to react strongly to Orbán’s actions, which discredit their entire political movement. But they seem determined to continue treating Orbán with kid gloves, even as he spurns liberal democracy.

For starters, EU Commission President-designate Jean-Claude Juncker has remained silent on Orbán’s actions. Meanwhile, Merkel, the EU’s most influential politician, has expressed only moderate criticism, saying in May that she is “certainly not in agreement” with all of his policies, and often does “not quite agree with his tone” of certitude. As if these statements were not weak enough, she tempered them further by emphasizing that this failing was not exclusive to Orbán.

But the most problematic reaction has come from the European People’s Party, the center-right umbrella grouping to which Orbán’s Fidesz belongs. In April, then-EPP President Joseph Daul praised the Hungarian leader for renewing public confidence in the government with honesty and “courageous” economic reforms.

This response has convinced Orbán that behaving like a populist autocrat in the center of Europe does not pose any political risk, and has emboldened him to press his crusade against liberal democracy further. The only way to stop him – and to protect the EU’s fundamental values, not to mention its self-respect – is to offer him a clear choice: act like a democratic statesman or become a pariah.

Victor Orbán (left) at an EPP meeting in 2013.

Victor Orbán (left) at an EPP meeting in 2013.

Given that Germany is Hungary’s most important trading partner, Merkel should lead the charge, rallying Juncker and the new EPP president, Manfred Weber, behind a set of tough and credible measures. These should include, first and foremost, the exclusion of Fidesz from the EPP faction in the European Parliament, to be readmitted only if and when Orbán changes course.

Second, Merkel must make it clear that Orbán will face severe sanctions if he continues on his present path. As Sweden’s EU Affairs Minister Birgitta Ohlsson has proposed, EU funds – which Orbán distributes to his supporters – should be withheld. Moreover, Orbán should be put on notice that Hungary’s EU voting rights could be suspended, based on Article 7 of the Treaty on European Union, which spells out penalties for a “serious and persistent breach” of common values.

Third, the EU must create more effective mechanisms for monitoring the democratic health of its member countries. To this end, European leaders must flesh out the rule-of-law initiative that Denmark, Germany, Finland, and the Netherlands proposed last May. At the very least, they should task the European Agency for Fundamental Rights with providing a regular assessment of democracy and basic rights in European countries, and authorize corrective action by the European Council and the Commission against countries that perform poorly.

European countries should increase support for civil-society initiatives that are under pressure from Orbán’s government, and find innovative ways to support independent media.

Finally, following Norway’s example, European countries should increase support for civil-society initiatives that are under pressure from Orbán’s government, and find innovative ways to support independent media. With all of Hungary’s public media outlets singing Orbán’s tune, Radio Free Europe and Deutsche Welle might consider launching Hungarian-broadcasts.

If Orbán succeeds in building an illiberal state within the EU, others might be encouraged to follow suit. Fortunately, the EU and its members are far from powerless to prevent such an outcome. All that is needed is the political will to confront the clear and present danger to democracy that Orbán poses.

If Orbán were active in Germany, the Federal Office for the Protection of the Constitution would likely be pursuing him for his anti-democratic activities. It is time for Germany to promote its constitutional principle of wehrhafte Demokratie, a democracy capable of defending itself, to the entire EU.

© Project Syndicate

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"The Perils Of Economic Consensus" by Dani Rodrik http://www.social-europe.eu/2014/08/perils-economic-consensus/ http://www.social-europe.eu/2014/08/perils-economic-consensus/#comments Fri, 22 Aug 2014 11:22:30 +0000 Dani Rodrik http://www.social-europe.eu/?p=34903
Dani Rodrik

Dani Rodrik

The Initiative on Global Markets, based at the University of Chicago, periodically surveys a group of leading academic economists, of varying political persuasions, on the issues of the day. Its latest roundup asked whether President Barack Obama’s stimulus plan helped to reduce unemployment in the United States.

Officially known as the American Recovery and Reinvestment Act of 2009, the plan entailed government spending of more than $800 billion on infrastructure, education, health, and energy, tax incentives, and various social programs. Implemented in the midst of an economic crisis, it was the classic Keynesian response.

The economists were virtually unanimous. Thirty-six of the 37 top economists who responded to the survey said that the plan had been successful in its avowed objective of reducing unemployment. The University of Michigan economist Justin Wolfers cheered the consensus in his New York Times blog. The virulent public debate about whether fiscal stimulus works, he complained, has become totally disconnected from what experts know and agree on.

In fact, economists agree on many things, a number of which are politically controversial. The Harvard economist Greg Mankiw listed some of them in 2009. The following propositions garnered support from at least 90% of economists: import tariffs and quotas reduce general economic welfare; rent controls reduce the supply of housing; floating exchange rates provide an effective international monetary system; the US should not restrict employers from outsourcing work to foreign countries; and fiscal policy stimulates the economy when there is less than full employment.

Frustrated by the conflicting and hedged advice that he was receiving from his advisers, President Dwight Eisenhower is said to have asked once for a “one-handed economist.”

This consensus about so many important issues contrasts rather starkly with the general perception that economists rarely agree on anything. “If all the economists were laid end to end,” George Bernard Shaw famously quipped, “they would not reach a conclusion.” Frustrated by the conflicting and hedged advice that he was receiving from his advisers, President Dwight Eisenhower is said to have asked once for a “one-handed economist.”

No doubt, there are many public-policy questions that economists debate vigorously. What should the top income-tax rate be? Should the minimum wage be raised? Should the fiscal deficit be reduced by raising taxes or cutting spending? Do patents stimulate or impede innovation? On these and many other issues, economists tend to be good at seeing both sides of the issue, and I suspect that a survey on such questions would reveal little consensus.

A consensus among economists can arise for both good and bad reasons. Sometimes a consensus is innocuous enough, as when you hear economists argue that one ignores the role of incentives at one’s peril. Can anyone really disagree with that? Sometimes it is restricted to a particular episode and is based on evidence accumulated after the fact: Yes, the Soviet economic system was hugely inefficient; yes, the Obama fiscal stimulus of 2009 did reduce unemployment.

But when a consensus forms around the universal applicability of a specific model, the critical assumptions of which are likely to be violated in many settings, we have a problem.

economic model

Consider some of the areas of widespread agreement that I listed above. The proposition that trade restrictions reduce economic welfare is certainly not generally valid, and it is violated when certain conditions – such as externalities or increasing returns to scale – are present. Moreover, it requires that economists make value judgments on distributional effects, which are better left to the electorate itself.

Likewise, the proposition that rent controls reduce the supply of housing is violated under conditions of imperfect competition. And the proposition that floating exchange rates are an effective system relies on assumptions about the workings of the monetary and financial system that have proved problematic; I suspect a poll today would find significantly less support for it.

The problem is that economists often confuse a model for the model. When that happens, a consensus is certainly not something to cheer about.

Perhaps economists tend to agree that certain assumptions are more prevalent in the real world. Or they think that one set of models works better “on average” than another. Even so, as scientists, should they not adorn their endorsements with the appropriate caveats? Shouldn’t they worry that categorical statements such as those above may prove to be misleading in at least some settings? The problem is that economists often confuse a model for the model. When that happens, a consensus is certainly not something to cheer about.

Two kinds of mischief may then follow. First, there are errors of omission – cases in which blind spots in the consensus prevent economists from being able to see troubles looming ahead. A recent example is the failure of economists to grasp the dangerous confluence of circumstances that produced the global financial crisis. The oversight was not due to the lack of models of bubbles, asymmetric information, distorted incentives, or bank runs. It was due to the fact that such models were neglected in favor of models that stressed efficient markets.

Then there are the errors of commission – cases in which economists’ fixation on one particular model of the world makes them complicit in the administration of policies whose failure could have been predicted ahead of time. Economists’ advocacy of neoliberal “Washington Consensus” policies and of financial globalization falls into this category. What happened in both cases is that economists overlooked serious second-best complications, such as learning externalities and weak institutions, which blunted the reforms and, in some cases, caused them to backfire.

Disagreements among economists are healthy. They reflect the fact that their discipline comprises a diverse collection of models, and that matching reality to model is an imperfect science with a lot of room for error. It is better for the public to be exposed to this uncertainty than for it to be lulled into a false sense of security based on the appearance of certain knowledge.

© Project Syndicate

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"The Social Atlas Of Europe" by Dimitris Ballas, Danny Dorling and Benjamin Hennig http://www.social-europe.eu/2014/08/social-atlas-of-europe/ http://www.social-europe.eu/2014/08/social-atlas-of-europe/#respond Fri, 22 Aug 2014 10:59:49 +0000 Dimitris Ballas, Danny Dorling and Benjamin Hennig http://www.social-europe.eu/?p=34892
Dimitris Ballas, Social Atlas Of Europe

Dimitris Ballas

Should we conceive of Europe as a collection of individual states or as a group of distinct cities and regions which are part of a larger whole? Dimitris BallasDanny Dorling and Benjamin Hennig present figures from their new ‘Social Atlas of Europe’, which provides a new way of illustrating the key social and geographic features across European countries. They argue that by viewing Europe in this way it becomes apparent that most of the real social divides across the continent are within states rather than between them.

On 19 September 1946, Winston Churchill stated that: “we must re-create the European family in a regional structure, called, it may be, the United States of Europe”. This idea of a Europe of Regions and of a European People instead of a Europe of nation-states has long been at the heart of the thinking and efforts that have gradually led to the creation of the European Union. Nevertheless, the recent ascendancy of populist groups and the so-called ‘Eurosceptic earthquake’ in the recent European Parliament elections have contributed to the painting of a picture of Europe where Euroscepticism is the dominant trend and where the revival of old nationalisms and divisions is inevitable.

Danny Dorling, Social Atlas Of Europe

Danny Dorling

Yet, a closer look at the evidence reveals a much more complex picture, which is convincingly argued by Ruth Wodak in her recent blog. In fact, and despite the significant rise of the votes for Eurosceptic parties, the overwhelming majority of votes and parliament seats were won by parties that are strongly committed to the European project. Perhaps the best example is the triumph of Italy’s centre-left Democratic Party whose leader, the Italian Prime Minister Matteo Renzi, in a speech delivered at the State of the Union before the European elections vowed to push for a United States of Europe during the Italian presidency.

It is also worth noting that according to the most recent Eurobarometer survey in Spring 2014 “close to two-thirds of Europeans feel that they are citizens of the EU (65 per cent of all those polled replying ‘yes’), after a 6 point rise since autumn 2013”. In addition, there is a small but rapidly growing number of formal and informal groups of Europeans (such as New EuropeansBringing Europeans TogetherOne Europe and Eustory) who promote and celebrate the idea of a collective European identity and of a “European people” instead of a “nation-state” mentality.

A human cartographic approach to exploring European identity

Benjamin Hennig, Social Atlas Of Europe

Benjamin Hennig

As three European geographers whose first languages are Greek, English and German respectively, we feel that the best way for us to contribute to the debates about what it means to be European is to consider and visualise Europe and its economy, culture, history and human and physical geography in terms of a single large land mass. To that end we created The Social Atlas of Europe which represents an effort to use state of the art geographical information systems and new cartography techniques in order to offer an alternative way of visualising Europe and its people in a more fluid way, in many cases plotting aspects of the lives of Europeans without imposing artificial national boundaries on the patterns. The atlas includes all states that have demonstrated a strong commitment to a common European future by being closely associated with the EU, either as current members or as official candidate states (or official potential candidates for EU accession) and/or states which are signed up to any of the following agreements: the European Economic Area, the Schengen Zone, and the European Monetary Union.

The map below shows these European countries using a rainbow colour scale to determine the colour hue for each state according to the year of association with the European Union. The more recent the formal association the near to the red end of the spectrum the hue is. The map below also uses a cartographic projection which redraws geographical area on the basis of fine-level spatial information about where people live rather land mass, showing clearly where most people are concentrated. For example, Madrid, Paris, Istanbul and London are huge, while Scandinavia is small, whereas the Rhine-Ruhr metropolitan region in Western Europe, including the areas of Cologne, Dortmund and expanding towards the Netherlands, is much more prominent compared to a conventional map. In addition countries and regions that are more densely populated are more visible in the map (e.g. most of the United Kingdom, Italy, Poland, Romania) compared to rural large areas in the north of Europe.

Figure 1: Map of Europe based on population showing association of states with the European Union (click to enlarge)

Note: Basemap: Hennig Projection Gridded Population Cartogram. Source: The Social Atlas of Europe

The next map is the topographic version of the previous cartogram, with the area being drawn scaled proportionally to population but coloured by altitude. In this way physical and human geographies can be mixed up on the map. Rather like a traditional physical geography map, upon which cities are drawn, this is a new human geography map, but one upon which mountains and valleys are also depicted.

Figure 2: Map of Europe based on population and representation of topography (click to enlarge)

Note: The size of each portion of the map is representative of the number of people living in each area, while the colour represents the altitude (the lighter the colour, the higher the altitude). Basemap: Hennig Projection Gridded Population Cartogram. Source: The Social Atlas of Europe

The innovative approach to transforming the human and physical space of Europe simultaneously used to create these maps makes it more likely for Europeans – who began to look at Europe using these projections – to make more sense of both their home area’s physical and human geography and to think of Europe as one place – the place they belong to or their “homeland” (instead of just thinking so much of their nation-state). In the next map below (Figure 3) we have also included areas to the east, south and north-west of Europe in grey-shades to show how the continent, reprojected in this way, fits into a larger home. The areas shaded grey within Europe in this map have no data reported by Eurostat on the indicator shown. An area without data – on a map – might as well be off the map, but by including it grey-shaded it is hopefully clear what is missing and where.

A continent of regions and cities rather than nation-states

The mapping approach illustrated above also offers a new way of thinking about Europe as a continent of regions and cities rather than nation-states and a new way of appreciating the huge number of ways in which people living in different parts of Europe have so much in common. This can be further illustrated by shading the gridded-population cartograms according to a socio-economic theme of interest. In the map below we have coloured the resized grid cells on the basis of publicly available data from Eurostat for European statistical regions on Gross Domestic Product per inhabitant in purchasing power standard (PPS).

Figure 3: Map of Europe based on population and GDP per inhabitant (click to enlarge)

Note: The size of the territories represent the number of people living in each area, while the colour represents the GDP per inhabitant (ranging from low GDP per inhabitant in light yellow, to high GDP per inhabitant in dark blue). This is defined as Gross domestic product (GDP) per inhabitant, in PPS by NUTS 2 regions (% of the EU-27 average, EU-27 = 100), 2010 based on data from the Eurostat Regional Yearbook 2013 (Turkey at national level). Basemap: Hennig Projection Gridded Population Cartogram. Source: The Social Atlas of Europe

Looking at the data which was used to reveal these overall patterns, it is noteworthy that there are two regions in the UK, Inner London & Berkshire, and Buckinghamshire & Oxfordshire which belong to the top end of the top class of geographical areas with a GDP per inhabitant in PPS in Europe which is over 116 per cent of the EU average (Inner London has the highest value in Europe, at 328 per cent of the EU average, whereas the value for Berkshire, and Buckinghamshire & Oxfordshire is 143 per cent).

In many ways these two regions have much more in common with other very affluent regions across Europe such as Luxembourg (266 per cent of the EU average), the Belgian capital city region of Brussels (223 per cent), the German city region of Hamburg (203 per cent) and the Norwegian capital city region of Oslo og Akershus (192 per cent) rather than with the rest of the UK. In contrast, regions such as Tess Valley and Durham (77 per cent) and South Yorkshire (81 per cent) are more similar when considered by this measure to other European regions such as the island of Crete (80 per cent) and the Ionian islands in Greece (76 per cent), Leipzig in Germany (91 per cent) and Galicia in Spain (90 per cent).

Often the real differences in the quality of life and the types of challenges and problems faced by Europe’s populations are not found across national borders but between regions, villages and cities or between rich and poor quarters of a town. And the rich quarters of Europe are all more similar to each other than to the poorer areas that are nearer to them.

A country called Europe?

The maps shown above give a flavour of The Social Atlas of Europewhich contains a collection and in-depth discussion of nearly two hundred maps and other graphical illustrations painting a picture of Europe, its people and its environment in relation to a wide range of themes and using data from a variety of sources. We hope that this research can be used to further enhance the perception of European identity and solidarity and that it will be of particular use for those wishing to strengthen the feeling of affiliation and belonging to something larger than the nation-state which underlies much of the modern-day European project. Our work shows just how different the separate countries, regions and great cities of this continent are, but also how often they are – in so many parts – so similar. Indeed, looking at the maps in this atlas you may begin to believe that you are looking at the cartography of a single large group of people of a country called Europe. The real social divides within Europe are more often within states rather than between them.

Figure 4: Map of Europe at night based on population (click to enlarge)

Source: The Social Atlas of Europe

The Social Atlas of Europe, by Dimitris Ballas, Danny Dorling and Benjamin Hennig, published by Policy Press will be launched on Wednesday 27 August 2014, 6:45pm at the Royal Geographical Society. Enquiries: Kathryn King

This column was first published by EUROPP@LSE

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