Social Europe Journal http://www.social-europe.eu debating progressive politics in Europe and beyond Wed, 23 Jul 2014 17:02:26 +0000 hourly 1 http://wordpress.org/?v=3.9.1 "How Money And Credit Work" by Henning Meyer http://www.social-europe.eu/2014/07/how-money-and-credit-work/ http://www.social-europe.eu/2014/07/how-money-and-credit-work/#respond Wed, 23 Jul 2014 16:39:06 +0000 Henning Meyer http://www.social-europe.eu/?p=33458

Henning Meyer, Money And CreditDo you think that in recent years, as a result of the global economic crisis, the whole discussion about public policy has become increasingly focussed on economics? And that much of the policy discussion is based on core concepts that are quite poorly understood, including by many policy-makers? If your answer to these question is yes you are not alone.

At the root of much confusion about financial economics and how it works in reality is, in my view, the (not so) simple question of “what is money?” and closely related to this the question of “what is credit?”

Do you think that savers need to bring their money to the bank so you can take out a mortgage to buy a property? Think again. This is what you are often being told but this is not how it actually works. Do you think that banks predominately give out loans to finance productive investment? Also not true.

If you are now even more confused let me introduce you to some great new material published online that can really help you getting a grip on the subject. Some of it is not easy and some economics background certainly helps, but this should be also instructive for anybody interested in what money is, how it is created and how the credit system really works. If you work through the material it will take a few hours but it will certainly help your understanding. So here we go!

What Is Money?

The Bank of England (BoE) has recently published two papers that will help your understanding of money. The first one entitled “Money in the Modern Economy: An Introduction” does just that: it gives you an introduction to money in 10 pages. The principal author also explained some of the key arguments in a YouTube video, fittingly filmed in the BoE’s gold vault.

How Is Money Created?

If you know what money is you can move on to the second paper. Entitled “Money Creation in the Modern Economy” it shows how commercial banks do not simply act as financial intermediaries but create most money themselves in the form of credits and loans. Again, the BoE provides a video introduction from the gold vault.

Money, Credit and Prices

The final really great educational resource I would like to introduce in this post is a lecture by Lord Adair Turner, the former chairman of the UK Financial Services Authority, on the topic of money, credit and prices held at the Stockholm School of Economics (it also comes with a set of slides). The lecture gives a great overview over some of the discrepancies of theory and real life and looks at different forms of credit and what separate challenges they pose. The lecture comes in three parts:

Here are the corresponding slides. If you want, you can also download a transcript of the lecture as well as the slides.

 

There you go. This is no easy subject but if you are interested in this and want to spend some of your summer time educating yourself about money and credit you could do worse than starting here. By the way, these resources are useful wherever you live and whatever currency you use.

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"Why Global Trade Might Become Less Important" by Adair Turner http://www.social-europe.eu/2014/07/global-trade/ http://www.social-europe.eu/2014/07/global-trade/#respond Wed, 23 Jul 2014 14:02:15 +0000 Adair Turner http://www.social-europe.eu/?p=33449

Adair Turner, Future economic growth might not need increasing global trade actives, says Lord Adair Turner (photo: CC Curtis Perry on Flickr)Since 2008, global trade has grown slightly more slowly than global GDP. The Doha Round of World Trade Organization negotiations ended in failure. Transatlantic and transpacific trade negotiations are progressing slowly, held back by the resistance of special interests. But, though many experts fear that protectionism is undermining globalization, threatening to impede global economic growth, slower growth in global trade may be inevitable, and trade liberalization is decreasingly important.

To be sure, for 65 years, rapid trade growth has played a vital role in economic development, with average advanced-economy industrial tariffs plummeting from more than 30% to below 5%. The creation of Europe’s single market facilitated increased intra-European trade. Japan, South Korea, and Taiwan achieved rapid economic catch-up on the basis of export-led growth. China has followed the same path over the last 30 years. Trade grew about twice as fast as global output from 1990 to 2008.

But there is no reason why trade should grow faster than GDP forever. Indeed, even if there were no trade barriers at all, trade might grow significantly more slowly than GDP in some periods. Several factors make it possible that we are entering such a period.

Richer people spend an increasing share of their income on services that are either impossible to trade (for example, restaurant meals) or difficult to trade (such as health services).

For starters, there is the changing pattern of consumption in the advanced economies. Richer people spend an increasing share of their income on services that are either impossible to trade (for example, restaurant meals) or difficult to trade (such as health services). Non-tradable sectors tend to account for a growing share of employment and economic activity.

For several decades, that tendency has been offset by ever more intensive trading of tradable goods, often passing through many countries in complex supply chains. In the future, however, the shift to non-tradable consumption may dominate.

Indeed, trade intensity may decline even for manufactured goods. Trade is partly driven by differences in labor costs. China’s dramatic manufacturing growth reflected low wages up to now. But as real wages in China and other emerging economies grow, incentives for trade will decline. The more that global incomes converge, the less trade there may be.

In addition, as the economists Erik Brynjolfsson and Andrew McAfee of MIT have argued in their book The Second Machine Age, rapid advances in information technology may enable increasingly extensive automation. Some manufacturing activities, though few jobs, may well return to developed countries, as the advantages of proximity to customers and lower transport costs outweigh decreasingly important differences in labor costs.

Global trade as a share of GDP may therefore decline, but without adverse consequences for global economic growth. Rising productivity does not require relentlessly increasing trade intensity.

global trade

Future economic growth might not need increasing global trade actives, says Lord Adair Turner (photo: CC Curtis Perry on Flickr)

Earth, after all, does not trade with other planets, yet its economy still grows. Optimal trade intensity depends on many factors – such as relative labor costs, transport costs, productivity levels, and economy-of-scale effects. Trends in these factors might make reduced trade intensity not only inevitable but desirable.

Even if that is true, international trade will still play a vital role, and preventing any reversal of past trade liberalization is essential. But further trade liberalization is bound to be of declining importance to economic growth.

With industrial tariffs already dramatically reduced most potential benefits of trade liberalization have already been grasped. Estimates of the benefits of further trade liberalization are often surprisingly low – no more than a few percentage points of global GDP.

That is small compared to the cost of the 2008 financial crisis, which has left output in several advanced economies 10-15% below pre-crisis trend levels. It is small, too, compared to the difference in economic performance between successful catch-up countries – such as China – and other countries that have enjoyed the same access to global markets but have performed less well for other reasons.

The main reason for slow progress in trade negotiations is not increasing protectionism; it is the fact that further liberalization entails complex trade-offs no longer offset by very large potential benefits.

The main reason for slow progress in trade negotiations is not increasing protectionism; it is the fact that further liberalization entails complex trade-offs no longer offset by very large potential benefits. The Doha Round’s failure has been decried as a setback for developing countries. And some liberalization – say, of advanced economies’ cotton imports – would undoubtedly benefit some low-income economies. But full trade liberalization would have a complex impact on the least developed economies, some of which would benefit only if compensated for the loss of the preferential access to advanced-economy markets that they currently enjoy.

This implies that further progress in trade liberalization will be slow. But slow progress is a far less important challenge to growth prospects than the debt overhang in developed economies, or infrastructure and educational deficiencies in many developing economies. That reality often goes unacknowledged. The importance of past trade liberalization has left the global policy establishment with a bias toward assuming that further liberalization would bring similar benefits.

But while the potential global benefits of trade liberalization have declined, reduced trade intensity might still impede economic development in some countries. Only a handful of economies over the last 60 years have fully caught up to advanced-economy living standards, and all relied on export-led growth to drive productivity and job creation in manufacturing. Relying solely on that model will be more difficult in the future. China is so big that it must develop domestic drivers of growth at an earlier stage of development than did Japan, Taiwan, or South Korea; as a result, its exports will inevitably decline (relative to GDP).

Meanwhile, for some low-income countries, increased manufacturing and service-sector automation of the sort described by Brynjolfsson and McAfee, whether within advanced economies or within China’s established industrial clusters, will make the path to middle- and high-income status more difficult to achieve. That poses important challenges for development policy, which further trade liberalization can alleviate only marginally.

© Project Syndicate

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"Inequality is Falling Globally! (And Similar Nonsense)" by John Weeks http://www.social-europe.eu/2014/07/inequality-3/ http://www.social-europe.eu/2014/07/inequality-3/#respond Wed, 23 Jul 2014 11:58:13 +0000 John Weeks http://www.social-europe.eu/?p=33439
John Weeks, Inequality

John Weeks

I bet you think that the rich are getting richer and the poor poorer. A few well-known facts might lead you to this conclusion. For example, in the United States income after tax per household is now over 100% greater than forty years ago (1972), while average weekly earnings in the private sector are 14% lower (see chart below).

Average household income up, wage earning income down – how do you get that result? Rich households take all the increase in income, that’s how. We find similar outcomes in Europe – UK real wages falling after 2008real wages in Germany frozen since the late 1990s, and even worse news from the euro crisis countries (Greece, Italy, Portugal and Spain, among others). Falling wages amidst rising incomes for the rich appears to have been a global phenomenon over the last several decades.

p1, Inequality

Source: Economic Report of the President 2013

As I write in my new book, Economics of the 1%, I never fail to be impressed by the proclivity of members of the mainstream economics profession to deny and distort reality in the interests of the rich. The New York Times provided a platform for this prominent feature of the profession in an article titled “Income Inequality is not Rising Globally – It’s Falling“. In this for-the-rich-to-feel-good contribution, we are told by someone identifying himself as a “Professor at George Mason University” (whose economics department makes the one at the University of Chicago look left-wing):

Income inequality has surged as a political and economic issue, but the numbers don’t show that inequality is rising from a global perspective. Yes, the problem has become more acute within most individual nations, yet income inequality for the world as a whole has been falling for most of the last 20 years.

Telling us that “the problem has become more acute within most individual nations” is rather like describing an earthquake as a ground tremor. Except for a few countries in Latin America, I know of none whose income distribution has not become worse (the World Bank provides us with the relevant measures).

There are many techniques for turning fact into fiction and sense into nonsense. We find one of the least subtle in this dis-informing article in the NYT, mis-quoting and mis-representing a source. In this case the cited evidence for the alleged happy outcome of falling inequality is an article by an ex- and a current employee of the World Bank (the authors summarize it here).

Tweaking The Inequality Statistics

The authors tell us that in their empirical study, “we line up all individuals in the world, from the poorest to the richest…” To put it another way, they treat the world as one country. When they do this it is statistically possible that inequality could increase in every country, but decline when everyone from every country is thrown into the same statistical basket (inequality rising within countries is statistically outweighed by a reduction in differences in capita incomes across countries).

This perverse result is the statistical outcome that brings such delight to our George Mason Professor (and most members of my profession, I regret to report). China holds 20% of the world population (1.4 billion out of 7 billion). The Chinese economy has grown at an extraordinary rate over the last twenty years. An extraordinary increase in inequality has accompanied the notably brutal form of “trickle-down” fostered by the dictatorship that mis-governs China.

The graphic below tells the China growth story, rapidly rising national income (gross national product) and rampantly rising inequality. What that means “on the ground” is the concentration of income gains among very few Chinese households (and not a small portion linked to the “Communist” Party of this aggressively capitalist country). Yes, the number of Chinese households below the poverty line has fallen. Image how many more would have risen out of poverty if inequality in 2010 had been the same as in 2000 (hundreds of millions).

p2, Inequality

Source: http://www.kkr.com/company/insights/global-macro-trends-14, based on IMF statistics

The old cliché coined by Mark Twain, “lies, damn lies and statistics”, seems singularly “spot-on” in this case. The meagre improvement of those households at the bottom of the Chinese income distribution compared to the “making-out-like-bandits” 1% (and bandits many are) has narrowed the gap between the world’s poorest and richest. But the fact that the ratio of the income of the richest American and poorest Chinese peasant or factory worker is now less than in 1980, 1990 or 2000 is, to say the least, trivial to the point of meaningless.

The curse of inequality falls upon people at the national level. Inequality results in the degeneration of dictatorships into fascism, and democracies into oligarchies with politics derivative from wealth, not the consent of the governed. In the United States we find clear evidence of this degeneration in the notorious Citizens United decision of the Supreme Court, which formalized the principle of one dollar, one vote.

Growing inequality everywhere enhances the power of those opposed to social protection, equal access to health care and education, and eliminating discrimination. When you put these together — the economic power to control a political system, held by those opposed to public provision of social services — rising household income brings very limited benefit to the poor of the earth, in whatever country they may live.

The reduction of abject poverty in any country of the world represents good news. Achieving it as part of a process that increases inequality within the countries renders poverty reduction unsustainable and democracy a lost relic of a more egalitarian past.

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"Europe Must Escape A Savings Trap, Not A Liquidity Trap" by Andrea Terzi http://www.social-europe.eu/2014/07/savings-trap/ http://www.social-europe.eu/2014/07/savings-trap/#respond Wed, 23 Jul 2014 11:11:26 +0000 Andrea Terzi http://www.social-europe.eu/?p=33428
Andrea Terzi

Andrea Terzi

The anti-austerity vote in the European elections reflected two different kinds of discontent. One is a feeling of frustration, which is invigorating nationalism: the vote for “less Europe.” The other is a lack of confidence in current EU policies: the vote for “another Europe.” In both cases, voters  revealed that they have lost interest in blaming the crisis on U.S. bankers or on national governments (for not complying with EU rules) and instead are pleading for effective job-creating policy solutions, either delivered by European institutions or, if they are unable, from national governments free of EU restrictions.

Shortly after the European vote, the ECB Governing Council unanimously approved a package that supposedly should inflate the Eurozone economy and get it out of a liquidity trap condition. If the move succeeds, it would reduce some anti-austerity pressure. If the ECB again fails to revive the economy, it will become increasingly difficult to defend the existing fiscal rules in Europe. Indeed, those who fear a departure from austerity claim that the ECB could and should do more to take Europe out of the slump in which it has been languishing for almost six years. They claim that the ECB has more power and bullets with which to reflate Europe and end the liquidity trap.

The Liquidity Trap

Those who maintain the pseudo-Keynesian “liquidity trap argument” claim that spending would be revived by low real interest rates (i.e., market rates minus the expected rate of inflation). The solution thus lies in an intentionally inflationary policy on the part of the central bank which should do an about-face and convince us to tolerate a rate of inflation higher than 2 percent. If the market believes in the promise of inflation, real rates will drop and spending will grow again.

I call this notion pseudo-Keynesian because Keynes only touched on this concept briefly, and he did not even coin the phrase. It was American Keynesians (like Samuelson) who introduced the concept of “liquidity trap” in order to explain that monetary policy can be ineffective and to defend active fiscal policy. In the 1980s, the theory was fiercely criticized on the basis of two main claims: the (multiplier) effect of fiscal expansion is too small to justify the deficit; and the growth of public debt, sooner or later, will force “monetization” and inflation. In this view, the only remaining option was to rely on monetary policy. The use of fiscal policy as an anti-cyclical instrument had lost significance.

The ideas that the ECB can create inflation at will and that a lower real rate will drive more spending are two hypotheses that are unlikely to hold.

The “liquidity trap” came back to life again with a new generation of American Keynesians (like Krugman), with a twist: central banks can successfully overcome a liquidity trap condition. The idea is that stagnation is a consequence of an exceptional increase in savings that lowers the equilibrium real rate of interest to zero or below. Therefore, the task of central bankers is to reduce nominal interest rates below the inflation rate. If nominal rates have reached the zero bound, central banks (as Krugman put it) “should credibly promise to be irresponsible.”

Now, the ideas that the ECB can create inflation at will and that a lower real rate will drive more spending are two hypotheses that are unlikely to hold, especially in light of the experience of quantitative easing elsewhere in the world economy (which didn’t produce a tidbit of inflation).

Can ECB President Mario Draghi drive up inflation? (photo: CC ECB Forum Central Banking on Flickr)

Can ECB President Mario Draghi drive up inflation? (photo: CC ECB Forum Central Banking on Flickr)

The Savings Trap

A better explanation for the prolonged stagnation in Europe puts at the center of the problem European fiscal policy aimed at reducing public debt. Although there is a growing literature on this, it is not immediately obvious why cutting public debt should harm growth and jobs. In the 1980s, when fiscal retrenchment became popular as a tool to reduce public borrowing, Josef Steindl explained the situation brilliantly. This, in a nutshell, is Steindl’s argument applied to the Eurozone:

1) In every monetary economy there is a demand for savings.

2) For every euro saved, there must be a euro of debt in the system.

3) When some are attempting to increase their savings while others are attempting to deleverage and reduce debt, an inevitable inconsistency develops that drives the economy into a recession.

4) The public purpose of government policy should be that of providing the economy with sufficient funding to make the volume of debt coherent with the demand for savings.

5) This policy tool does not yet exist in the Eurozone.

There was no inconsistency in Europe between savings and debt until 2006, as long as the desired savings of some matched the desired indebtedness of others. When private debt became unsustainable, however, an accounting counterpart of Europeans’ savings evaporated, domestic demand collapsed, and unemployment rose sharply. Initially (2008-2009), public debt automatically took the place of private debt. But, when government deficits exceeded official ceilings and full austerity began, a rising demand for savings and a falling demand for private and public indebtedness were forced to collide.

When people feel they cannot save enough while at the same time private and public debt is being cut, a recession and its consequent huge waste of human and material resources simply cannot be avoided.

Effective policies for 2014

In the savings trap view, imposing an across-the-board balanced budget policy is a sure recipe for gross inefficiency in the European economy. ECB actions are unlikely to succeed. Instead, what is dramatically missing today in the Eurozone is the function of public sector net spending.

These days, there are contradictory signals that the new European Commission may move to a more flexible fiscal compact, and 2014 may be the year of change.

These days, there are contradictory signals that the new European Commission may move to a more flexible fiscal compact, and 2014 may be the year of change. Creating an effective alternative to austerity, however, requires a well-thought-out plan. Introducing negotiated exceptions with specific countries would be a dangerous path. The releasing of fiscal restrictions would be inevitably limited and the effects, after being spread across the Eurozone, would be insignificant.

A much more effective way would be to devise politically feasible solutions open to the notion of net public spending for the Eurozone as a whole. An across-the-board 50 percent cut of VATs in the Eurozone funded by the issue of Eurobonds, or Union bonds, would quickly restore domestic demand and jobs. A plan of public infrastructure investment “in the interest of Europe” allocated pro-quota to all Euro members would have a similar impact. Other solutions are possible, but the key step forward is based on the recognition that Europe must fund private savings through net public spending and the fact that this is doable even without or before true political union.

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"President Obama Is Emulating Buchanan Instead Of Lincoln" by George Tyler http://www.social-europe.eu/2014/07/president-obama/ http://www.social-europe.eu/2014/07/president-obama/#respond Mon, 21 Jul 2014 10:53:25 +0000 George Tyler http://www.social-europe.eu/?p=33396
George Tyler, President Obama

George Tyler

Obama is Leaving Economic Inequality for his Successors to Fix

President Obama is emulating former President James Buchanan. His economic agenda is to kick the can down the road, leaving his successors an America of widening economic inequality without prospect of remediation.

The Obama Presidency is facing the most toxic, polarized environment since the antebellum era. Yet, legislative gridlock is no excuse for its lack of economic vision in addressing Gilded Age-income disparities promising to extend in perpetuity.

Abraham Lincoln faced a similar challenge on the issue of slavery in 1860, likely to endure indefinitely. He is America’s greatest President because he rejected that future. Lincoln ignored the admonitions of former Presidents including his immediate predecessor James Buchanan to permit the horror of slavery to encompass all the territory (north as well as south) from the Mississippi to the Pacific. That would have avoided war, but at the calamitous cost of empowering slavery for generations to come.

Obama faces a similarly daunting economic environment without easy answers: weak private (and public) investment, job offshoring, weak unions, secular stagnation, stagnant wages and political opponents demonizing his economic performance. His remedies include higher minimum wages, more education, better training – all important but incapable of redressing the systemic roots of widening income disparities.

Oh sure, recovery will eventually tighten labor markets sufficiently for real wages to rise a bit as they did during the 1990s boom. But the seminal reality will persist: Americans have worked harder and smarter since 1980, labor productivity rising about 75 percent. Yet, inflation-adjusted wages in the U.S. have stagnated, most of the gains from higher productivity going to the famous 1 percent. That is what the widening income disparity is all about.

Real wages will continue stagnating in the decades to come, income disparities widening further. Indeed, the U.S. has settled into the default setting for most nations throughout history explored by Daron Acemoglu and James Robinson (Why Nations Fail) where political inequality begets chronic economic inequality.

Wages Have Continued Rising in Australia and Northern Europe, Unlike America

In contrast, real wages in purchase power terms are $10 an hour higher now in Australia and northern Europe, with investment higher as well. The past decades have been different for the middle class in these nations, with real wages and living standards rising steadily year in and year out to now surpass the U.S. And their future will be different as well. Families there will continue to receive a hefty share of productivity gains. And the reason is that those nations, beginning in the 1940s began importing the Australian wage system, a century-old refinement of capitalism used to widely broadcast the gains from rising productivity. It has proven to be a tremendous success.

Between 1999 and 2008, productivity rose 13 percent in the European Union, with 60 percent of the gains going into real wages, up 8 percent. Productivity growth has slowed since, but about 60 percent has nevertheless continued to flow into real wage gains year after year – gains that have averaged nearly 1 percent annually in Germany and France. And real wage gains have averaged .86 percent annually in Australia since 2002 as well. Not so in America.

With real incomes and living standards for most workers in these rich democracies rising 50 percent over a career, they have avoided the American destiny of a shrinking middle class. They offer a stark lesson should Obama be inclined to emulate Lincoln and recraft the future. The remedy this time around is more than 40 acres and a mule. He must take two steps to become a transformational President: 1) bring U.S. corporate governance into the twenty-first century, and 2) link wages nationwide to productivity growth as the American labor movement accomplished until weakened after 1980.

President Obama

In the US, real wages have not risen in a long time and labour union’s have been weakened (photo: CC Fibonacci Blue on Flickr)

Reform corporate governance

Limited liability corporations are the devices capitalist societies have evolved to create wealth, overseen by boards of directors. American boards suffer from an important deficiency that allows executive suites to practice short-termism. That syndrome is extensively lamented by economists, most recently by Clayton Christensen and Derek van Bever in the June 2014 Harvard Business Review, and in my own book What Went Wrong. Management and share speculators benefit financially from short-termism, also called managerial or quarterly capitalism. But their behavior disadvantages everyone else, with U.S. firms – in contrast to those in northern Europe – compressing wages, offshoring valuable jobs, eschewing worker upskilling, shortchanging investment and rejecting profitable longer term R&D in order to spike quarterly profits.

That explains why investment by nonfinancial firms in Australia and northern Europe has outpaced investment by American firms for decades. U.S. publicly-held firms even invest far less than privately-held U.S. firms: John Asker and Alexander Ljungqvist of NYU and Joan Farre-Mensa of Harvard found that publicly-held U.S. firms devote only 3.7 percent of assets to investment compared to 6.7 percent at privately owned firms. Foolish mergers are another element of the syndrome as examined by Jeffrey Harrison of Richmond and Derek Olin of Texas Tech. And so is under-investment in employees. That is why Australia and every nation in northern Europe now have more skilled labor forces than the United States. As recently as 1998, it wasn’t that way, but skill levels in nations like Austria, Denmark and France have since leapfrogged the U.S. level.

Firms in Germany and other northern Europe nations have avoided short-termism by adopting a system called codetermination. It puts adults with a long-term perspective in charge of corporations by stocking corporate boards of directors with employees. Employees hold one-half of the board seats of every single German nameplate firm, VW and Daimler, for instance. And shareholders will applaud codetermination because it means greater returns, as American economists Larry Fauver and Michael Fuerst concluded in 2006.

Link Wages to Productivity Growth

Under the Australian wage-determination mechanism, used there and in northern Europe, nationwide wage-setting is linked to productivity growth, ensuring that the gains from growth accrue to most rather than a few. It is how they have surpassed American living standards. And it’s a reform that America must adopt in order to begin rebuilding the middle class. A complementary approach is to reinvigorate the U.S. trade union movement, whose similar policies endorsed by both Republican and Democratic presidents built the great American middle class.

Any proposal to redirect economic flows will induce fierce opposition, these reforms especially so because they have a successful record of broadly spreading the gains from productivity growth. Once implemented, they will become a permanent feature of American capitalism just as they have become pillars of German capitalism. Their implementation will take years. But Obama’s legacy of accepting widening income disparities in perpetuity can be salvaged by a decision to place the reforms on the public agenda.

Obama Is Emulating James Buchanan When He Should Look to Lincoln

As Obama mulls that legacy, the President might consider another historical analogy. The founders crafted a Constitution with a Senate, an Electoral College and checks and balances intentionally designed to thwart abolitionists and the popular will. Historians term it the status quo bias against reform and it’s at the heart of dysfunctional Washington today. The founders sided with Edmund Burke who fretted about unanticipated consequences, rather than Thomas Paine who fretted about squandered opportunities.

In pondering his options, a cautious President Obama might erroneously believe he faces that same dilemma and continue to choose Burke. He would be wrong. The Australians and Germans have done the heavy lifting in crafting a refined capitalism of proven and seasoned performance, the outcomes knowable.

Obama’s actual choice for his economic legacy is between Lincoln and Buchanan.

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http://www.social-europe.eu/2014/07/president-obama/feed/rss2/ 0 George Tyler George Tyler Us unions In the US, real wages have not risen in a long time and labour union's have been weakened (photo: CC Fibonacci Blue on Flickr)
"European Social Policy For The Next Five Years" by Andrea Nahles http://www.social-europe.eu/2014/07/european-social-policy/ http://www.social-europe.eu/2014/07/european-social-policy/#comments Mon, 21 Jul 2014 09:07:40 +0000 Andrea Nahles http://www.social-europe.eu/?p=33388

Andrea Nahles, European Social PolicyFor generations, Europe was a project of hope. To my parents’ generation, after a time of war and hostility, Europe represented the hope of achieving economic progress together in an atmosphere of peace and friendship. To my generation, Europe symbolised a place of hope and freedom following the Cold War. We criss-crossed fading borders and took part in exchanges at school and university. It is a wonderful experience to pay for things in euros, both at home and abroad.

During the crisis, many people did not see a Europe of hope, offering them protection and opportunities. Their experience was rather characterised by unemployment and an uncertain future. In many countries people had to pay a high price to save the euro. As a result, millions of our continent’s young people in particular became disillusioned with Europe or even rejected it outright.

The European Parliamentary elections served as a wake-up call. The results showed us just how disillusioned people are with Europe. This disillusionment is something that we as committed Europeans need to fight; showing people that the European project pays. For decades, Europe has been a guarantor of peace and general prosperity. But above all Europe is a social community that unlocks opportunities and creates prospects for the future. Our key task between now and the next elections in 2019 is to make sure that people realise this once more. We want people to say yes to Europe again!

Above all Europe is a social community that unlocks opportunities and creates prospects for the future.

This requires us to focus particular attention on young people, as it is they who will determine what direction the European Union develops in. Do we want a Europe that only pursues a rigorous savings policy? Or do we want a Europe that also invests in future opportunities? For me, the answer is clear: Social peace, prosperity and equal opportunities do not just materialise out of thin air. We need to create the right conditions for these aims. This means, for instance, to invest in good education and training.

This is why we have joined our European partners in committing to the Youth Guarantee, which requires that all young people under 25 be provided with a good-quality offer within four months of them becoming unemployed or leaving formal education. This offer should be for a job, continued education, an apprenticeship or a traineeship. This guarantee now needs to be implemented swiftly.

The Youth Guarantee must now be implemented swiftly, says German Labour and Social Affairs Minister Andrea Nahles (photo: CC DG EMPL on Flickr)

The Youth Guarantee must now be implemented swiftly, says German Labour and Social Affairs Minister Andrea Nahles (photo: CC DG EMPL on Flickr)

In this context, it is the countries that have borne the brunt of the crisis that most need to be shown solidarity. The EU Youth Employment Initiative is providing these countries with EUR 6 billion for the next few years, which is an important first step. If we can work together to ensure that this funding reaches people quickly and in a targeted manner, then we can talk about additional compensatory and support measures in Europe.

A significant and symbolically important contribution to this initiative will also come from Germany: In crisis-hit countries especially, there are many young people who wish to come to Germany. With the MobiPro-EU programme, we are now providing major support to young Europeans who wish to undertake training in Germany. And every young person who comes to Germany to learn and work is a great asset for our country.

Every young person who comes to Germany to learn and work is a great asset for our country.

We know that Europe’s economic rationale must change. We need more stimuli for growth and employment. Also, we in Germany have to ask ourselves how we can contribute to reducing economic imbalances in Europe. And it is here that the new federal government is setting an example by introducing the minimum wage: we are putting a stop to wage dumping, a practice under which many millions of people in Germany, as well as our neighbours, have suffered.

We are also stimulating domestic demand in Germany; low wages in particular will rise significantly, by several billions of euros in total. This is also allowing us to tangibly reduce imbalances between ourselves and our partners in Europe. The introduction of the minimum wage was met with a great deal of relief by our neighbours. This proves that social policy in the Member States is the precondition for a Social Europe.

In the next years we want to achieve more social progress in Europe. The efforts of many Member States to introduce minimum social protection systems or labour market reforms should be encouraged and monitored by us at the European level. Consolidation requirements and the fight for modern social and education systems that are viable for the future must not be contradictory. Therefore it is also important to maintain the scope for investments and to recognize that it takes time for reforms to become effective. What is important is more coherence and balance in European policy.

This column is part of our Social Europe 2019 project.

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"Why The Super-Rich Need Governments" by Dani Rodrik http://www.social-europe.eu/2014/07/super-rich/ http://www.social-europe.eu/2014/07/super-rich/#respond Mon, 21 Jul 2014 07:30:52 +0000 Dani Rodrik http://www.social-europe.eu/?p=33381
Dani Rodrik, Super-Rich

Dani Rodrik

The very rich, F. Scott Fitzgerald famously wrote, “are different from you and me.” Their wealth makes them “cynical where we are trustful,” and makes them think “they are better than we are.” If these words ring true today, perhaps it is because when they were written, in 1926, inequality in the United States had reached heights comparable to today.

During much of the intervening period, between the end of World War II and the 1980s, inequality in the advanced countries was moderate. The gap between the super-rich and the rest of society seemed less colossal – not just in terms of income and wealth, but also in terms of attachments and social purpose. The rich had more money, of course, but they somehow still seemed part of the same society as the poor, recognizing that geography and citizenship made them share a common fate.

As the University of Michigan’s Mark Mizruchi points out in a recent book, the American corporate elite in the postwar era had “an ethic of civic responsibility and enlightened self-interest.” They cooperated with trade unions and favored a strong government role in regulating and stabilizing markets. They understood the need for taxes to pay for important public goods such as the interstate highway and safety nets for the poor and elderly.

Business elites were not any less politically powerful back then. But they used their influence to advance an agenda that was broadly in the national interest.

By contrast, today’s super-rich are “moaning moguls,” to use James Surowiecki’s evocative term. Exhibit A for Surowiecki is Stephen Schwarzman, the chairman and CEO of the private equity firm the Blackstone Group, whose wealth now exceeds $10 billion.

The venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews.

Schwarzman acts as if “he’s beset by a meddlesome, tax-happy government and a whiny, envious populace.” He has suggested that “it might be good to raise income taxes on the poor so they had ‘skin in the game,’ and that proposals to repeal the carried-interest tax loophole – from which he personally benefits – were akin to the German invasion of Poland.” Other examples from Surowiecki: “the venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews.”

Surowiecki thinks that the change in attitudes has much to do with globalization. Large American corporations and banks now roam the globe freely, and are no longer so dependent on the US consumer. The health of the American middle class is of little interest to them these days. Moreover, Surowiecki argues, socialism has gone by the wayside, and there is no need to coopt the working class anymore.

Yet if corporate moguls think that they no longer need to rely on their national governments, they are making a huge mistake. The reality is that the stability and openness of the markets that produce their wealth have never depended more on government action.

Super-Rich

The super rich are now more separated from the rest of society than ever before (photo: CC 4WheelsofLux Photography on Flickr)

In periods of relative calm, governments’ role in writing and upholding the rules by which markets function can become obscured. It may seem as if markets are on autopilot, with governments an inconvenience that is best avoided.

As former Bank of England Governor Mervyn King aptly put it in the context of finance, “global banks are global in life, but national in death.”

But when economic storm clouds gather on the horizon, everyone seeks shelter under their home government’s cover. It is then that the ties that bind large corporations to their native soil are fully revealed. As former Bank of England Governor Mervyn King aptly put it in the context of finance, “global banks are global in life, but national in death.”

Consider how the US government stepped in to ensure financial and economic stability during the global financial crisis of 2008-2009. If the government had not bailed out large banks, the insurance giant AIG, and the auto industry, and if the Federal Reserve had not flooded the economy with liquidity, the wealth of the super-rich would have taken a severe blow. Many argued that the government should have focused on rescuing homeowners; instead, the government chose to support the banks – a policy from which the financial elite benefited the most.

Even in normal times, the super-rich depend on government support and action. It is largely the government that has financed the fundamental research that produced the information-technology revolution and the firms (such as Apple and Microsoft) that it has spawned.

It is the government that enacts and enforces the copyright, patent, and trademark laws that protect intellectual property rights, guaranteeing successful innovators a steady stream of monopoly profits. It is the government that subsidizes the higher-education institutions that train the skilled work force. It is the government that negotiates trade agreements with other countries to ensure that domestic firms gain access to foreign markets.

If the super-rich believe that they are no longer part of society and have little need of government, it is not because this belief corresponds to objective reality. It is because the prevailing story line of our time portrays markets as self-standing entities that run on their own fuel. This is a narrative that afflicts all segments of society, the middle class no less than the rich.

There is no reason to expect that the super-rich will act less selfishly than any other group. But it is not so much their self-interest that stands in the way of greater equality and social inclusion. The more significant roadblock is the missing recognition that markets cannot produce prosperity for long – for anyone – unless they are backed by healthy societies and good governance.

© Project Syndicate

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"Why Everybody Should Know Some Economics" by Ha-Joon Chang http://www.social-europe.eu/2014/07/economics-2/ http://www.social-europe.eu/2014/07/economics-2/#comments Fri, 18 Jul 2014 12:25:07 +0000 Ha-Joon Chang http://www.social-europe.eu/?p=33340
Ha-Joon Chang

Ha-Joon Chang

In an interview with Joel Suss, editor of the British Politics and Policy blog, Ha-Joon Chang discusses his new book, Economics: The User’s Guide, and the need for a pluralist approach to economics. He recently gave a public lecture at the LSE, the video of which can be seen here.

In a recent article, you wrote: “the economy is too important to be left to professional economists, and that includes me.” Can you elaborate on what you mean?

I don’t mean to suggest that expertise is unimportant. You can’t run a sophisticated modern economy on Maoist lines, that says that anyone can do anything therefore we don’t need experts. No, I don’t believe in that. Experts are crucial; there are a lot of technical things that only experts can know. However, if you want to have a meaningful democracy then expertise should be harnessed by the general will, by the general public.

Unless the general public is informed by basic economic theory and by key economic facts, they’re going to make wrong decisions. Members of the general public have a duty to educate themselves in economics to an extent so that they make enlightened decisions. Then the details can be sorted out by the experts. We have instead created a system where self-appointed experts basically run the show and democracies become a kind of rubber stamp because people don’t understand what’s going on and they don’t want to understand what’s going on.

People have strong opinions on all sorts of things – gay marriage, Iraq, abortion, global warming – without having any qualifications to make informed judgments. I don’t have a degree in international relations, but I have a view on Afghanistan. How come everyone thinks that economics is too difficult, too technical? People make strong judgments on the basis of having some basic knowledge about international politics or some climate science, they are not making this judgment based on sophisticated expert knowledge, and that’s all I’m asking when it comes to economic matters as well.

Unfortunately we economists have been very successful in convincing people that what we do is very difficult and that people won’t understand it even if we explained it to them.

Unfortunately we economists have been very successful in convincing people that what we do is very difficult and that people won’t understand it even if we explained it to them. There has also been a lot of political interest in keeping economics away from democratic debate, keeping it away from the general public by making people believe that it is very difficult. There is therefore a lack of a real debate except yes, monetary policy should be run by the Bank of England or the Federal Reserve Board, or utility regulation can be done by some special committee. After a while you realise that there’s no substance to democracy because all of the important decisions have been farmed out to these expert groups. That’s what needs to change.

Should monetary policy not be completely independent of politics? Should voters have a role to play?

Not that it has been hugely effective, but at least in the US the Chair of the Federal Reserve Board has to sit in front of a Congressional Committee and get grilled once every six months. On the other hand, the European Central Bank has no accountability whatsoever. They are totally free from democracy. That’s what needs changing. Perhaps we should elect the members of the board of the Bank of England’s Monetary Policy Committee. Why not? I’m not necessarily advocating the election of board members, but there needs to be some kind of democratic accountability in these expert groups. There needs to be some balance; you don’t want things to be decided purely on political convenience without any kind of technical competence or expert opinion.

On the other hand, experts are not pure technocrats. They have their views. Central bankers may not be overtly political; they may not be a member of some political party, but they represent a particular worldview. They are usually people from the financial community and, without meaning to be biased, tend to look at the world through a specific lens. There needs to be some kind of counter to that. If you are uncomfortable with having people without any economics background then at least ask the trade unions or citizen groups or something to recommend an economist who can sit in there who can represent other interests. At the moment it is full of people either from the financial industry or purely from academic backgrounds, so monetary policy gets decided in a very particular way.

Should economics just be for experts? No, says Ha-Joon Chang (photo credit: lendingmemo.com)

Should economics just be for experts? No, says Ha-Joon Chang (photo credit: lendingmemo.com)

You’re also critical of how mainstream economic thought dominates academia…

I sometimes liken the economics profession to the Catholic clergy in the Middle Ages. Unless you knew Latin you couldn’t even read the Bible because the Pope refused to let the Bible be translated into the local languages. You had to either learn Latin or take their word for it. Economics has become completely inaccessible to many people so we need to change this in the way that some of the religious reforms back then tried to do.

In those days, religious reformers promoted the translation of the Bible into local languages and the reading of the Bible by common people. They emphasised the authority of the Bible rather than what the Vatican says is in the Bible. They, if you like, democratised the religion. Something similar to that is necessary now once again. This is not to say that we don’t need academic economists; those people are necessary. But it has to be related to what’s going on in the real world. Unfortunately a lot of my academic colleagues not only do not work on the real world, but are not even interested in the real world.

What kind of heterodox or alternative streams of economic thought would you like to see in the mainstream?

I don’t like the term heterodox because it’s relative. It already assumes that there is an orthodox position and everything else is heterodox. What is heterodox can change all the time. In the 1950s Milton Friedman was heterodox. My position is that we need a pluralist approach where no theory is superior to any other theory. In my new book I explain that there are at least nine major schools of economics, possibly another half dozen if you include some minor schools or split bigger schools into sub-schools and so on.

There are many different economic theories and they all have something to contribute. They have their weaknesses and strengths because they all make certain assumptions about ethics and politics. They all have different theories about how economies develop, different visions of what an ideal society looks like and so on. People should be exposed to as broad a range of theories as possible in order to have a more sophisticated view of the world. By looking at many theories you get to see the world in a more complicated way.

I want to teach my readers how to think not what to think. What conclusion they draw is up to them; I’m simply giving the necessary tools in terms of different theories and historical background and facts as they stand today so that they can make a more informed decision. One great example that you can use here is Singapore. If you read only The Economist or the Wall Street Journal you will only hear about the country’s free trade policy and welcoming attitude to foreign investors.

Singapore combines the features of extreme capitalism and extreme socialism, so what is it?

You will never be told that 90 per cent of the land is owned by the government, 85 per cent of housing is provided by government owned housing corporation, and a staggering 22 per cent of GDP is produced by state owned enterprise when the equivalent ratio on average worldwide is around 9 per cent. Singapore combines the features of extreme capitalism and extreme socialism, so what is it? There’s no single economic theory that can explain Singapore. Reality is very complex, therefore I’m encouraging my readers to look at the different theories and try to apply different theories in different contexts.

What are the wider implications of a dominant economics worldview which posits individuals as rational actors, as agents acting in their own self-interest and systematically weighing costs and benefits? Some people argue that the logic of the market has, as a result, become embedded in our daily, personal interactions.

Yes, that’s right. Of course it would be silly to deny that we at least try to be rational. There are rationalist aspects to what we do. Human beings are at least partly motivated by selfish interest. But this very narrow view of human nature has actually created a kind of poor society in the sense of everything being reduced to monetary value. Now people are asking why we need subjects like anthropology or history of art or sociology when all we need is making money. That makes for a very poor society.

You are seeing arguments that we should commercialise the BBC so that they can make more things that people can watch without realising that the BBC is the envy of the world for its ability to produce very high quality cultural programmes. So that kind of worldview has made societies very poor in terms of cultural diversity and things like that. But more importantly it’s created this society where being bad, if you like, is considered something good or even being clever. You are actually a sucker if you don’t cheat.

Once you begin to understand the world in this very narrow, impoverished way then you will create a society which is actually very inefficient. Then you will have to say well everyone’s out to cheat and promote their own self-interest so we have to monitor everyone all the time, and then who’s going to monitor the monitors? We have to hire monitors who can monitor the monitors and so on and so on. Society becomes very inefficient not to speak of being very unpleasant.

This interview was first published by BPP@LSE

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"Is California A Model For Europe?" by Philippe Pochet http://www.social-europe.eu/2014/07/california-a-model-for-europe/ http://www.social-europe.eu/2014/07/california-a-model-for-europe/#comments Fri, 18 Jul 2014 11:43:00 +0000 Philippe Pochet http://www.social-europe.eu/?p=33333
Philippe Pochet, California A Model For Europe

Philippe Pochet

The new European Parliament has to turn its attention to numerous pressing issues. I shall refer here to three of them: the socio-ecological transition, growing inequality, and EMU.

The socio-ecological transition will require policy action geared simultaneously to the short, the medium and the long term. This means devising an appropriate policy mix deriving from different paradigms – technology, regulatory approaches, free markets, consumer behaviour – and involving different groups of actors.

It is a question of developing and stepping up technological innovation and, above all, ensuring its implementation. Such progress must be fostered and carried out by rigorous action on the part of governments to guarantee high standards for fostering innovation while at the same time speeding up the changes in individual and collective preferences that are required to establish more sustainable behaviour patterns. Lip-service to these aims must give way to determined action. Nor can the requisite transition be tackled in the absence of a clear focus on the question of inequality.

European debates on the most appropriate policies refer to different examples, the most frequent being the Scandinavian model and, currently, the German model. I would propose that we take a look, for a change, at California, a state that has taken decisive steps – albeit fraught with contradiction – towards a green economy.

I would propose that we take a look, for a change, at California, a state that has taken decisive steps – albeit fraught with contradiction – towards a green economy.

In California we encounter a conviction that the technological innovations delivered by Silicon Valley will enable the development of clean energy at reasonable cost. While this may be to some extent naïve, it is a fact that no solution to climate problems will be found in the absence of technology and innovation. Concurrently, Governor Jerry Brown has launched some ambitious emission-reduction targets and demonstrated his commitment to use of the regulatory instruments that will be required to achieve transition – but above all to achieve leadership in the enforcement of new standards (later to be generalized).

Progress in this direction calls for new taxation to put in place the infrastructure for the future. Such ambition is in striking contrast to the cautious – not to say negative – attitude of the Commission and the employers represented by BusinessEurope which reflects the (mistaken) idea that climate targets represent a burden for the competitiveness of the EU economy. Meanwhile, in terms of consumer habits and preferences, organic – and above all local – products are making headway. Even Wal-Mart now boasts an organic range of products no more expensive than the traditional ones.

Further downstream, universities are setting an example of specific goals, for example, Berkeley’s target of zero waste by 2020 and zero emissions by 2025. Links are forming between pressure groups lobbying to improve food quality and those focusing on working conditions, or between students of environmental issues and residents of poor districts like Richmond (15 km to the north). Without over-idealizing the Californian experience, it does show that things are moving in a way that should inspire progress in Europe too.

Europe should look at how California is greening its economy with the help of Silicon Valley (CC Sudheendra Vijayakumar on Flickr), California A Model For Europe

Europe should look at how California is greening its economy with the help of Silicon Valley (CC Sudheendra Vijayakumar on Flickr)

At this point we come up against the question of inequality, my second focus here. Inequality is on the increase throughout Europe without having become the priority item on the political agenda as in the United States. In conjunction with the environmental transition, this issue becomes particularly complex. Because adoption of a middle-class-American way of life will also boost consumerism, probably in areas involving high CO2 emissions (luxury foods, private cars, travel, etc.), there is a need to consider other more collective ways of improving wellbeing for all, which means also addressing consumer practices and dramatically decreasing the ecological footprints of the richest.

The reduction of working time and development of quality public services or services of general interest are paths to be explored – but here we move even further from the traditional European agenda. Are we to believe that we can exit the crisis only through more growth? Though this may well appear to be the only solution in the short term, it amounts to a refusal to contemplate the more thorny issues vital for the medium term, including the question of unemployment and the green transition.

Social protection based on solidarity is also a means of keeping huge sums of money from the financial markets.

One interesting way forward, proposed by Eloi Laurent, would be to establish a link between green transition and social protection, seeing transition as a new form of social risk, a specific part of the social security net. Social protection based on solidarity is also a means of keeping huge sums of money from the financial markets. The alternative is, in Piketty’s stark formula, ever accumulating and explosive inequality, bringing us back to the alternative indicators – ‘beyond GDP’ – that the Commission not so long ago expressed a wish to promote.

The third and more traditional issue is the need to create a monetary union that does not make social policy its adjustment variable and destruction of the institutions of solidarity its ultimate goal. This means placing the emphasis on solidarity and complementarity rather than on competition and similarity (‘let’s all be exporters!’). It means that social insurance formulae should be put in place to mutualize the risks inherent in monetary union, asymmetric shocks and unequal globalization. This is the debate between a world that is open but also protective and a world closed in on itself, or the current model that is open but destructive.

The role of the European institutions and particularly the Commission should not be to play the punitive schoolmaster but to open up new paths into the future. The social question, while key to all three challenges discussed here, requires a new articulation entailing innovative alliances and the need to reformulate the social agenda accordingly.

This column is part of our Social Europe 2019 project.

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"The Social Investment Package And The Europe 2020 Policy Agenda" by Anton Hemerijck http://www.social-europe.eu/2014/07/social-investment-package/ http://www.social-europe.eu/2014/07/social-investment-package/#comments Thu, 17 Jul 2014 10:47:06 +0000 Anton Hemerijck http://www.social-europe.eu/?p=33316
Anton Hemerijck, Social Investment Package

Anton Hemerijck

The European welfare state and the European Union (EU) find themselves caught up in a double bind in the aftermath of the global financial crisis. On the one hand, domestically, EU members are politically bound by widely cherished national social contracts on welfare provision, which in hard economic times are especially difficult to renege upon. On the other hand, at the supranational level, the (reinforced) rules-based macroeconomic governance structure of the EU, giving priority to low inflation and budget consolidation, commits its members to a long-term project of negative market integration, which in a downturn implies intrusive austerity reform of their welfare systems.

This is especially pertinent for the so-called ‘Troika economies’— the eurozone countries of Greece, Ireland, and Portugal (and to a lesser extent Spain), which under the surveillance of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) have been forced to drastically cut minimum wages, pensions, education, health and old age care expenditure and deregulate their labour markets and wage bargaining structures. When and where stagnation prevails, mass unemployment and rising poverty and inequality are the breeding grounds for Europhobic political extremism.

Between rising anti-establishment populism and the EU’s intrusive imposition of fiscal austerity, a ‘political-institutional vacuum’ has emerged at the heart of the European integration project, between the Northern ‘core’ economies and the embattled Southern ‘periphery’ as well as within national political arenas between mainstream parties and Eurosceptic populist movements. This political vacuum, brought home with a vengeance by the results of the elections to the European Parliament, especially the victory of the far-right National Front in France, considerably jeopardises solutions to the incomplete architecture of the Economic and Monetary Union (EMU).

By 2014, as the existential economic crisis of the euro has somewhat abated, the new policy imperative for Member States and the EU more generally is to manage the social aftershocks of the global financial crisis. On average, 12% of the eurozone workforce is jobless, a quarter of economically active young Europeans are unemployed, and inequality and poverty levels are rising. Without a long-term strategic focus on improving human capital and capabilities, expanding employment opportunities, and easing labour-market and life-course transitions for individuals and families, the EU risks becoming entrapped in permanent stagnation. Deep economic crises are often moments of political truth; so the history of the 20th Century teaches us. While the social aftershocks of the euro crisis are putting grim economic and political strains on national welfare states and EU institutions, this could also engender more positive consequences, as the unsettling of beliefs sometimes inspires ground-breaking policy recalibration.

Social Policy In The Aftermath Of The Euro Crisis

The aftermath of the euro crisis has, I believe, ushered in a period of transition. Since the onslaught of the sovereign debt crisis, we have observed impressive ‘economic governance’ change, including the introduction of the Six-pack and Two-pack as well as the Euro Plus Pact, reinforcing stricter EU control of Member State public finances. A number of fiscal backstops have been introduced ad hoc under significant pressures from bond markets. In October 2011 the European Financial Stability Facility (EFSF) was ratified and its successor, the more permanent European Stability Mechanism (ESM), became fully operational in 2013. The new ‘European Semester’ feeds into Member States’ national reform programmes (NRPs) and is meant to speed up recovery. By the summer of 2012, the ECB committed itself ‘to do whatever it takes’ in the words of Mario Draghi, by announcing the purchase of eurozone government bonds in the secondary market in an attempt to stave off new speculative attacks. Coined as Outright Monetary Transactions (OMT), this instrument in effect turned the ECB into a ‘lender of last resort’. Meanwhile a Banking Union is under construction. These examples go to show that the E(M)U’s macroeconomic policy regime in recent years has undergone a major – although half-hearted, haphazard and incremental – change.

Although the new monitoring procedures charting real economic performance are welcome, to date the overriding policy recipes have remained ruggedly pro-cyclical, potentially defeating the purpose of sustainable and inclusive growth as laid down in the Europe 2020 agenda. I agree that the glass is more half-empty than half-full. But I also believe that the macro change away from a single focus on inflation targeting and deficit and debt reduction by pro-cyclical market deregulation and retrenchment, should be taken very seriously by social actors in national and EU policy-making arenas anxious to mitigate social hardship and foster long-term social and economic progress in tandem.

There are a small number – admittedly too few – ‘silver linings’ to build on for such an endeavour, more consistent with Europe 2020 strategic objectives than the current policy of permanent austerity. These are: (1) the wave of reconstructive welfare reforms under constrained macro-economic conditions over the past decade in most Member States; (2) the strong and renewed efforts by the European Commission for upholding and encouraging the shift towards productive and active welfare states, exemplified by the launch of the ‘Social Investment Package’ in February 2013; (3) the rekindling of the debate about the social dimension of EMU in recent years.

The onslaught of the euro crisis calls into question whether different varieties of welfare capitalism can really be made to operate under a single currency union.

The onslaught of the euro crisis calls into question whether different varieties of welfare capitalism can really be made to operate under a single currency union. Since the late 1980s, a majority of European governments have come to enact a wave of social reforms to make their social policy systems more efficient and employment-friendly. Alongside retrenchments, there have been deliberate attempts to rebuild social programmes and institutions and thereby accommodate welfare policy repertoires to the new economic and social realities of the knowledge-based economy. The overall extent of change has varied widely across the Member States of the European Union. With their tradition of high quality child-care and high employment rates for older workers, the Scandinavian countries performed particularly well throughout the past quarter century, both in terms of efficiency and equity. In the period leading up to the financial crisis, we also observed, however, reconstructive change in countries such as the Netherlands (social activation), Germany (dual earner family support), France (minimum income protection for labour market outsiders), the United Kingdom (fighting child poverty), Ireland (much improved education) and Spain (negotiated pension recalibration.

In the process, European welfare states did not become the sort of lean welfare states that European central bankers and fiscal policy authorities in Frankfurt and Brussels hoped EMU would deliver; instead they became ‘active welfare states’ at higher-than-before levels of employment, some even with a competitiveness bonus attached to the new policy mix! The experience in welfare recalibration in Austria, Finland, Germany, and the Netherlands, moreover, shows that a common currency can be made perfectly compatible with generous and inclusive welfare provision and balanced budgets.

What about the Southern members of the Eurozone? Alongside domestic reform failures, I associate reform fatigue in the pension-heavy and segmented welfare systems of Southern Europe with the adverse effects of the incomplete governance structure of EMU, perversely confronting Italy, Portugal and Spain with extremely low interest rates which in turn dis-incentivised the reform momentum since the late 1990s. In other words, today’s poorly performing Mediterranean welfare states are not necessarily structurally incapable of effective welfare recalibration under the umbrella of a single currency.

EU Commissioner László Andor has championed the Social Investment Package (photo: CC DG EMPL on Flickr), Social Investment Package

EU Commissioner László Andor has championed the Social Investment Package (photo: CC DG EMPL on Flickr)

The Social Investment Package Could Be A Game Changer

A second silver lining, inspired by the experience of proactive and reconstructive welfare state recalibration, has recently culminated in the launch of the ‘Social Investment Package for Growth and Social Cohesion’ by the European Commission in early 2013. An emphasis on the productive function of social policy stands out as the distinguishing feature of the social investment perspective, highlighting policies aimed at preparing individuals, families and societies to respond to the new risks linked to a competitive knowledge economy, by investing in human capital and capabilities from early childhood through to old age. The extensive background documentation of the ‘Social Investment Package’ makes a strong case for social investment no longer being dismissed as ‘fair weather’ policy when times get rough, which is what happened with the Lisbon Agenda. The overall message boils down to not allowing human capital to go to waste through semi-permanent inactivity, as was the case in the 1980s and 1990s in many continental European welfare systems.

Given the ageing predicament, European welfare states are confronted with a formidable social investment challenge. A careful reading of the package reveals a quiet paradigm revolution. On various occasions, DG Employment, Social Affairs and Inclusion explicitly distances itself from the traditional stable money, fiscal austerity and structural reform paradigm by explicitly arguing that active social policies ‘crowd in’ economic growth and competitiveness, high productivity job creation and tax revenues, thereby reducing long-term fiscal pressures. In the context especially of demographic ageing, attention should not only be paid to social expenditure and the costs of ageing populations, but also to exploring and exploiting new sources of revenue from high-quality childcare in promoting talent, reducing early school dropout, and improving employment opportunities for adult family members, especially mothers. The ‘Social Investment Package’ in effect and at long last breaks away from the negative theory of the (welfare) state by underscoring the key importance of activating social services as core providers for dual-earner families and labour markets.

A careful reading of the package reveals a quiet paradigm revolution. On various occasions, DG Employment, Social Affairs and Inclusion explicitly distances itself from the traditional stable money, fiscal austerity and structural reform paradigm.

It is important to underscore that the social investment agenda is in essence a supply-side strategy and therefore cannot serve as a real alternative to effective macro-economic policy. Under current conditions, to the eurozone member countries of the Mediterranean in dire fiscal straits and social malaise, the social investment message is entirely lost. Fiscal consolidation, prescribed by the Troika, MoUs, and the reinforced SGP, requires them to slash active labour market policies and retrench preventive health care programmes – a strategy which we know, in the long run, critically erodes job opportunities and thereby undermines the capacity of the economy to shoulder the ageing burden. This is where the third and final silver lining of the rekindling of the debate about a genuine ‘social dimension’ of the EMU, in line with the social investment prerogative, gains importance.

Over the past two years, the absence of a Eurozone-wide counter-cyclical stabilisation capacity has slowly but surely come to be recognised as a critical design flaw in the EMU architecture. To the extent that capacitating welfare provision adds to economic competitiveness and social progress, it is in the interest of European policy-makers to support domestic authorities in maximising the return on social investments. What is therefore needed is a balanced macro-economic coordination process inciting governments to pursue medium-term budgetary discipline and long-term social investment reforms by giving greater breathing space with tangible support to Member States that opt for social investment strategies based on well-defined Europe 2020 ambitions, while making maximum use of mutual learning.

A number of proposals have already been put forward, some emphasizing a structured solidarity ‘interstate insurance’ instrument using Eurobonds, protecting Member States from self-fulfilling solvency crises coupled with strong conditionality requirements to pre-empt moral hazard. Others argue for a European unemployment insurance scheme to mitigate asymmetric and symmetric business cycle shocks. I prefer a macro-economic demand stabilisation device that incentivises Member States to pursue supply side social investment reforms in sync. In the context of the European Semester, it is essential for embattled countries opting for a social investment strategy to receive the support necessary to enable them to move forward by taking on reform ownership. Conditional social investment contracts, bolstered perhaps by specially designed social investment project bonds, could be based on generous access to structural funds at low interest rates. Another strategy would be to discount social investments in national budget accounts, thereby exempting them from SGP deficit requirements.

Conclusion

The three silver linings – the recent wave of proactive and reconstructive welfare reforms, the renewed endorsement of the social investment perspective by the Commission, and the rekindling of the social dimension of EMU – surely do not constitute silver bullets for overcoming the deeper fault lines of austerity deflation, intergovernmental drift, and raging national welfare chauvinism with which the EU is confronted today. They are merely hopeful seeds of policy redirection at an early stage of gradual transformative change towards a more robust and sustainable European social market economy, as laid down in the Lisbon Treaty.

The decisive factor, ultimately, will be the political resources and institutional backing that the EU is able to muster behind a novel macroeconomic policy regime, able to make high and robust social investment returns viable for the entire eurozone. More than ever before, the eurozone is in need of a substantive political consensus on the social order that a monetary union should serve, not in the form of a precursor of a ‘European welfare state’ in the making, but rather a systemic support structure at the EU level for active welfare state sustainability at the national level, based on a strong political commitment to a ‘caring and capacitating’ European social market economy as a common purpose, on a par with the complementary prerogatives of price stability and fiscal discipline over the economic cycle and free market competition.

This column is part of our Social Europe 2019 project.

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http://www.social-europe.eu/2014/07/social-investment-package/feed/rss2/ 2 Anton Hemerijck Anton Hemerijck Laszlo Andor EU Commissioner László Andor has championed the Social Investment Package (photo: CC DG EMPL on Flickr)