Social Europe Journal debating progressive politics in Europe and beyond Thu, 31 Jul 2014 11:08:40 +0000 hourly 1 "If Minimum Wages, Why Not Maximum Wages?" by Simon Wren-Lewis Thu, 31 Jul 2014 11:08:40 +0000 Simon Wren-Lewis
Simon Wren-Lewis, Maximum Wages

Simon Wren-Lewis

I was in a gathering of academics the other day, and we were discussing minimum wages. The debate moved on to increasing inequality, and the difficulty of doing anything about it. I said why not have a maximum wage? To say that the idea was greeted with incredulity would be an understatement. So you want to bring back price controls was once response. How could you possibly decide on what a maximum wage should be was another.

So why the asymmetry? Why is the idea of setting a maximum wage considered outlandish among economists?

The problem is clear enough. All the evidence, in the US and UK, points to the income of the top 1% rising much faster than the average. Although the share of income going to the top 1% in the UK fell sharply in 2010, the more up to date evidence from the US suggests this may be a temporary blip caused by the recession. The latest report from the High Pay Centre in the UK says:

Onepercent, Maximum Wages


“Typical annual pay for a FTSE 100 CEO has risen from around £100-£200,000 in the early 1980s to just over £1 million at the turn of the 21st century to £4.3 million in 2012. This represented a leap from around 20 times the pay of the average UK worker in the 1980s to 60 times in 1998, to 160 times in 2012 (the most recent year for which full figures are available).”

I find the attempts of some economists and journalists to divert attention away from this problem very revealing. The most common tactic is to talk about some other measure of inequality, whereas what is really extraordinary and what worries many people is the rise in incomes at the very top. The suggestion that we should not worry about national inequality because global inequality has fallen is even more bizarre.

What lies behind this huge increase in inequality at the top? The problem with the argument that it just represents higher productivity of CEOs and the like is that this increase in inequality is much more noticeable in the UK and US than in other countries, yet there is no evidence that CEOs in UK and US based firms have been substantially outperforming their overseas rivals. I discussed in this post a paper by Piketty, Saez and Stantcheva which set out a bargaining model, where the CEO can put more or less effort into exploiting their monopoly power within a company. According to this model, CEOs in the UK and US have since 1980 been putting more bargaining effort than their overseas counterparts. Why? According to Piketty et al, one answer may be that top tax rates fell in the 1980s in both countries, making the returns to effort much greater.

If you believe this particular story, then one solution is to put top tax rates back up again. Even if you do not buy this story, the suspicion must be that this increase in inequality represents some form of market failure. Even David Cameron agrees. The solution the UK government has tried is to give more power to the shareholders of the firm. The High Pay Centre notes that: “Thus far, shareholders have not used their new powers to vote down executive pay proposals at a single FTSE 100 company.”, although as the FT report shareholder ‘revolts’ are becoming more common. My colleague Brian Bell and John Van Reenen do note in a recent study “that firms with a large institutional investor base provide a symmetric pay-performance schedule while those with weak institutional ownership protect pay on the downside.” However they also note that “a specific group of workers that account for the majority of the gains at the top over the last decade [are] financial sector workers .. [and] .. the financial crisis and Great Recession have left bankers largely unaffected.”

So increasing shareholder power may only have a small effect on the problem. So why not consider a maximum wage? One possibility is to cap top pay as some multiple of the lowest paid, as a recent Swiss referendum proposed.That referendum was quite draconian, suggesting a multiple of 12, yet it received a large measure of popular support (35% in favour, 65% against). The Swiss did vote to ban ‘golden hellos and goodbyes’. One neat idea is to link the maximum wage to the minimum wage, which would give CEOs an incentive to argue for higher minimum wages! Note that these proposals would have no disincentive effect on the self-employed entrepreneur.

If economists have examined these various possibilities, I have missed it. One possible reason why many economists seem to baulk at this idea is that it reminds them too much of the ‘bad old days’ of incomes policies and attempts by governments to fix ‘fair wages’. But this is an overreaction, as a maximum wage would just be the counterpart to the minimum wage. I would be interested in any other thoughts about why the idea of a maximum wage seems not to be part of economists’ Overton window.

This blogpost was first published on Mainly Macro

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]]> 0 simon wren-lewis Simon Wren-Lewis Onepercent
"The Real Raw Material Of Wealth" by Ricardo Hausmann Thu, 31 Jul 2014 10:27:55 +0000 Ricardo Hausmann
Ricardo Hausmann, Raw Material

Ricardo Hausmann

Poor countries export raw materials such as cocoa, iron ore, and raw diamonds. Rich countries export – often to those same poor countries – more complex products such as chocolate, cars, and jewels. If poor countries want to get rich, they should stop exporting their resources in raw form and concentrate on adding value to them. Otherwise, rich countries will get the lion’s share of the value and all of the good jobs.

Poor countries could follow the example of South Africa and Botswana and use their natural wealth to force industrialization by restricting the export of minerals in raw form (a policy known locally as “beneficiation”). But should they?

Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues – say, the availability of raw materials – and blinds societies to the more promising opportunities that may lie elsewhere.

Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues.

Consider Finland, a Nordic country endowed with many trees for its small population. A classical economist would argue that, given this, the country should export wood, which Finland has done. By contrast, a traditional development economist would argue that it should not export wood; instead, it should add value by transforming the wood into paper or furniture – something that Finland also does. But all wood-related products represent barely 20% of Finland’s exports.

The reason is that wood opened up a different and much richer path to development. As the Finns were chopping wood, their axes and saws would become dull and break down, and they would have to be repaired or replaced. This eventually led them to become good at producing machines that chop and cut wood.

Finnish businessmen soon realized that they could make machines that cut other materials, because not everything that can be cut is made out of wood. Next, they automated the machines that cut, because cutting everything by hand can become boring. From here, they went into other automated machines, because there is more to life than cutting, after all. From automated machines, they eventually ended up in Nokia. Today, machines of different types account for more than 40% of Finland’s goods exports.

The moral of the story is that adding value to raw materials is one path to diversification, but not necessarily a long or fruitful one. Countries are not limited by the raw materials they have. After all, Switzerland has no cocoa, and China does not make advanced memory chips. That has not prevented these countries from taking a dominant position in the market for chocolate and computers, respectively.

Having the raw material nearby is only an advantage if it is very costly to move that input around, which is more true of wood than it is of diamonds or even iron ore. Australia, despite its remoteness, is a major exporter of iron ore, but not of steel, while South Korea is an exporter of steel, though it must import iron ore.

Raw Material

The Finnish economy does not rely on chopping down the country’s plentiful trees (photo: CC BY-ND 2.0 JarkkoS)

What the Finnish story indicates is that the more promising paths to development do not involve adding value to your raw materials – but adding capabilities to your capabilities. That means mixing new capabilities (for example, automation) with ones that you already have (say, cutting machines) to enter completely different markets. To get raw materials, by contrast, you only need to travel as far as the nearest port.

Thinking about the future on the basis of the differential transport-cost advantage of one input limits countries to products that intensively use only locally available raw materials. This turns out to be enormously restrictive. Proximity to which particular raw material makes a country competitive in producing cars, printers, antibiotics, or movies? Most products require many inputs, and, in most cases, one raw material will just not make a large enough difference.

Beneficiation forces extractive industries to sell locally below their export price, thus operating as an implicit tax that serves to subsidize downstream activities. In principle, efficient taxation of extractive industries should enable societies to maximize the benefits of nature’s bounty. But there is no reason to use the capacity to tax to favor downstream industries. As my colleagues and I have shown, these activities are neither the nearest in terms of capabilities, nor the most valuable as stepping-stones to further development.

Arguably, the biggest economic impact of Britain’s coal industry in the late seventeenth century was that it encouraged the development of the steam engine as a way to pump water out of mines.

Arguably, the biggest economic impact of Britain’s coal industry in the late seventeenth century was that it encouraged the development of the steam engine as a way to pump water out of mines. But the steam engine went on to revolutionize manufacturing and transportation, changing world history and Britain’s place in it – and increasing the usefulness to Britain of having coal in the first place.

By contrast, developing petrochemical or steel plants, or moving low-wage diamond-cutting jobs from India or Vietnam to Botswana – a country that is more than four times richer – is as unimaginative as it is constricting. Much greater creativity can be found in the UAE, which has used its oil revenues to invest in infrastructure and amenities, thus transforming Dubai into a successful tourism and business hub.

There is a lesson here for the United States, which has had a major beneficiation policy since the 1973 oil embargo, when it restricted the export of crude oil and natural gas. As the US increasingly became an energy importer, its leaders never found any reason to abandon this policy. But the recent shale-energy revolution has dramatically increased the output of oil and gas in the last five years. As a result, the domestic natural-gas price is well below the export price.

This is an implicit subsidy to the industries that use oil and gas intensively and may attract some inward foreign investment. But is this the best use of the government’s capacity to tax or regulate trade? Would the US not be better off by using its capacity to tax natural gas to stimulate the development of the contemporary technological equivalent of the revolutionary engine?

© Project Syndicate

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]]> 0 Ricardo Hausmann Ricardo Hausmann finland forest The Finnish economy does not rely on chopping down the country's plentiful trees (photo: CC BY-ND 2.0 JarkkoS)
"The Increasing Irrelevance Of Corporate Nationality" by Robert Reich Tue, 29 Jul 2014 12:10:29 +0000 Robert Reich
Robert Reich, Corporate Nationality

Robert Reich

“You shouldn’t get to call yourself an American company only when you want a handout from the American taxpayers,” President Obama said Thursday. He was referring to American corporations now busily acquiring foreign companies in order to become non-American, thereby reducing their U.S. tax bill.

But the President might as well have been talking about all large American multinationals. Only about a fifth of IBM’s worldwide employees are American, for example, and only 40 percent of GE’s. Most of Caterpillar’s recent hires and investments have been made outside the US. In fact, since 2000, almost every big American multinational corporation has created more jobs outside the United States than inside. If you add in their foreign sub-contractors, the foreign total is even higher.

At the same time, though, many foreign-based companies have been creating jobs in the United States. They now employ around 6 million Americans, and account for almost 20 percent of U.S. exports. Even a household brand like Anheuser-Busch, the nation’s best-selling beer maker, employing thousands of Americans, is foreign (part of Belgian-based beer giant InBev).

Meanwhile, foreign investors are buying an increasing number of shares in American corporations, and American investors are buying up foreign stocks. Who’s us? Who’s them? Increasingly, corporate nationality is whatever a corporation decides it is. So instead of worrying about who’s American and who’s not, here’s a better idea: Create incentives for any global company to do what we’d like it to do in the United States.

For example, “American” corporations get generous tax credits and subsidies for research and development, courtesy of American taxpayers. But in reducing these corporations’ costs of R&D in the United States, those tax credits and subsidies can end up providing extra money for them to do more R&D abroad. 3M is building research centers overseas at a faster clip than it’s expanding them in America. Its CEO explained this was “in preparation for a world where the West is no longer the dominant manufacturing power.”

3M is hardly alone. Since the early 2000s, most of the growth in the number of R&D workers employed by U.S.-based multinational companies have been in their foreign operations, according to the National Science Board, the policy-making arm of the National Science Foundation. It would make more sense to limit R&D tax credits and subsidies to additional R&D done in the U.S. over and above current levels – and give them to any global corporation increasing its R&D in America, regardless of the company’s nationality.

Corporate Nationality

It becomes increasingly harder to determine the ‘nationality’ of a company and public policy should change accordingly, argues Robert Reich.

Or consider Ex-Im Bank subsidies – a topic of hot debate in Washington these days. These subsidies are intended to boost exports of American corporations from the United States. Tea Party Republicans call them “corporate welfare,” and Chamber-of-Commerce Republicans call them sensible investments. But regardless, they’re going to “American” multinationals that are making things all over the world. That means any subsidy that boosts their export earnings in the United States indirectly subsidizes their investments abroad – including, very possibly, their exports from foreign nations.

GE, a major Ex-Im Bank beneficiary, has been teaming up with China to produce a new jetliner there that will compete with Boeing for global business. (Boeing, not incidentally, is another Ex-Im beneficiary). In fact, GE is giving its Chinese partner the same leading-edge avionics technologies operating Boeing’s 787 Dreamliner. Caterpillar, another Ex-Im Bank beneficiary, is providing engine funnels and hydraulics to Chinese firms that eventually will be exporting large moving equipment from China. Presumably they’ll be competing in global markets with Caterpillar itself.

Rather than subsidize “American” exporters, it makes more sense to subsidize any global company – to the extent it’s adding to its exports from the United States. Which brings us back to American companies that are morphing into foreign companies in order to lower their U.S. tax bill. “I don’t care if it’s legal,” said the President. “It’s wrong.” It’s just as wrong for American corporations to hide their profits abroad – which many are doing simply by setting up foreign subsidiaries in low-tax jurisdictions, and then making it seem as if the foreign subsidiary is earning the money.

Caterpillar, for example, saved $2.4 billion between 2000 and 2012 by funneling its global parts business through a Swiss subsidiary (a ruse so audacious that one of its tax consultants warned Caterpillar executives to “get ready to do some dancing” when called before Congress to justify it). And what about American corporations that avoid U.S. taxes by never bringing home what they legitimately earn abroad – a sum now estimated to be in the order of $1.6 trillion?

Rather than focus on the newly-fashionable tax-avoidance strategy of changing corporate nationality, it makes more sense to tax any global corporation on all income earned in the United States (with high penalties for shifting that income abroad), and no longer tax “American” corporations on revenues earned outside America. Most other nations already follow this principle.

In other words, let’s stop worrying about whether big global corporations are “American.” We can’t win that game. Focus instead on what we want global corporations of whatever nationality to do in America, and on how we can get them to do it.

This column was first published on Robert Reich’s Blog

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]]> 2 robert reich Robert Reich NYC It becomes increasingly harder to determine the 'nationality' of a company and public policy should change accordingly, argues Robert Reich
"David Cameron’s European Migration Straw Man" by Henning Meyer Tue, 29 Jul 2014 11:23:04 +0000 Henning Meyer
Henning Meyer, European Migration

Henning Meyer

He has done it again! Today, Tory Prime Minister David Cameron, in an article published in the Daily Telegraph, put forward openly discriminatory policies against EU citizens. He announced that the UK would reduce the period of time non-British EU citizens could receive certain benefits to three months (how this can be legal under EU law is unknown to me but the UK government claims it is):

And we are announcing today that we are cutting the time people can claim [...] benefits for. It used to be that European jobseekers could claim Job Seeker’s Allowance or child benefit for a maximum of six months before their benefits would be cut off, unless they had very clear job prospects. I can tell Telegraph readers today that we will be reducing that cut-off point to three months, saying very clearly: you cannot expect to come to Britain and get something for nothing.

Maybe such a move would be understandable if there was a genuine problem with welfare tourism and benefit abuse by EU migrants (which actually is the wrong terminology; its EU citizens living in a member state different from the one that issued their passport). But this is simply not the case! David Cameron is building up a straw man just to knock it down again for pure political reasons and accepts open discrimination to pursue these political ends.

I have already written about the real issues in the migration debate and can only repeat what Jonathan Portes said about Cameron’s actions at the end of last year: “phantom policies for a phantom problem”. On SEJ, we also published a very good piece by Oxford University researchers analysing what is going on.

If you don’t believe us, see what today’s Financial Times has to say about the situation:

The UK government has been unable to produce evidence of benefit tourism and has been criticised for not collecting adequate data.

A European Commission report published last year found that when all unemployment benefits were totalled, the UK was the only EU member state where there were fewer beneficiaries among migrants – of whom 1 per cent were claiming – than among nationals, where the figure was 4 per cent.

David Cameron, European Migration

David Cameron (here with Liam Fox) wants to introduce tougher benefit restrictions for EU migrants (photo: CC BY-NC-ND 2.0 Number 10 Crown Copyright MOD)

So there is actually evidence to the contrary, namely that EU migration in the UK does not add over-proportionally to the benefit burden. The overall effects are positive as quite a few studies have shown.

There is also no evidence for David Cameron’s statement that the UK benefits system has a “magnetic pull”. If you were a benefit tourist why on earth would you come to the UK? Wouldn’t you rather go to the EU countries with significantly more generous welfare systems than the one in the UK? What exactly is this pull and where does it show in official figures?

The real reason behind this move is of course party politics. As the BBC suggests, it is not about the money but the message. The government is likely to miss its own target of bringing net immigration down to the tens of thousands and wants to send out the message: “hey, at least we are trying as hard as we can!”

With UKIP breathing down the Tory neck after their successful European election and with the UK general election less than a year away, a key political battlefield now more than ever seems to be open discrimination and thinly-veiled xenophobia.

Unfortunately, the British Labour Party is not calling this bluff. It is not focusing on the real issues either but operates on the same political territory:

[...] Yvette Cooper, the shadow Home Secretary, said: “We need less talk from the Prime Minister on immigration and more action. Behind the rhetoric the true picture of this Government on immigration is one of failure, with net migration going up, despite David Cameron’s promise to get it down to the tens of thousands.

The general election campaign has clearly started. It is the fourth for me since I moved to the UK but never before have I felt so uncomfortable about the direction it is heading. An increasingly sour political arms race on the backs of foreigners is not what I expected from politicians that otherwise pretend to be open and liberal.

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]]> 11 Henning Meyer Henning Meyer David Cameron David Cameron (here with Liam Fox) wants to introduce tougher benefit restrictions for EU migrants (photo: CC BY-NC-ND 2.0
"Do We Need A Single-Member Private Limited Liability Company (SUP)?" by Wolfgang Kowalsky Mon, 28 Jul 2014 11:49:43 +0000 Wolfgang Kowalsky
Wolfgang Kowalsky, Single-Member Private Limited Liability Company

Wolfgang Kowalsky

The European Commission has once again issued a legislative proposal which jeopardises workers’ rights. The proposal for a “single-member private limited liability company” (SUP in European jargon) would create a 29th regime in company law. It goes down the same road as those previous company law proposals (like the European Private Company) which bypass rules on employee involvement, in particular rights to information, consultation and board-level participation (“co-determination”) in the absence of European minimum standards on participation rights.

DG Internal Market presents the proposal as a tool intended for small and medium sized enterprises (SMEs) which would like to export to other countries. However, the proposal is not limited to SMEs but can be used by big companies as well. The Commission has not delivered any reliable statistic that such a proposal is really necessary. Many enterprises are already exporting to other countries and if there were problems, one would know about it.

Where Is The Evidence?

The proposal is based on counterfactual assumptions.The lack of sound evidence is particularly visible in the assumption establishing a clear correlation between the SUP and cross-border activities of SMEs. The Commission pretends it is putting the focus on SUPs since in most cases a business presence in other Member States would take this form. However, the Commission does not give any evidence to prove this statement, no facts or figures on the current state of play.

The Commission claims that this proposal is different to the European Private Company, as it

focuses on the harmonisation of national laws and thus avoids the creation of a new legal form at European level.

According to the Commission, the proposal is limited to areas which are essential to reducing the burden of setting up a company. In reality it is about harmonising some aspects of national company law, leaving out areas which were contentious, such as taxation and participation of workers.

The Commission estimates the potential savings at €230-€650 million per year depending on the number of companies opting for this new form. Such an assumption is not supported by any material evidence and can certainly be debated. The Commission has not included the negative social consequences of introducing such a new company form, in particular in relation to workers’ rights, in its impact assessment.

Do European businesses need

Do European businesses need a new company form to increase exports? Wolfgang Kowlaksy says no (photo: CC BY-SA 2.0 Sludge G)

A SUP Is Not Necessary

Presenting the new proposal as a necessary tool to support economic activity in the internal market seems out of touch with reality. Moreover, the proposal would in the end not support small enterprises but set up new problems: creating competition not between enterprises but the social and economic regulations of Member States. There is no provision on taxation or social security contributions foreseen but the proposal might well create incentives to set up letter box companies to evade taxation and social security and to bypass workers’ rights. It could thus create a vicious, self-reinforcing circle which finds its origin in a mentality of unrestricted and unfair competition.

According to the Commission, employee rights would remain covered by existing national laws, which is wrong, as the European feature will put the national provisions on the back burner. The proposal puts into competition national company law forms with the effect of allowing companies to choose the least burdensome in terms of taxation and workers’ involvement.

Traditionally, in many Member States the registered office of a company is located in the same country as its head office. The separation of registered and main seat in the SUP allows for ‘regime shopping’ which should certainly not be the intention of European legislation. The Commission does not even address this question of ‘regime shopping’ and competition between the lightest transpositions of the SUP, probably for the simple reason that it supports the trend in case law allowing for the separation of seats.

A SUP Would Create A Race To The Bottom

The Commission also ignores the fact that the SUP would introduce a new legal company form at European level, a 29th regime. It would require Member States to make a company form available in their national legislations with a number of harmonised requirements. The SUP would thus initiate a race to the bottom and would jeopardise well-established national industrial relation systems and traditions of information, consultation and participation.

In other words, the Member State with the least requirements will be the one chosen by market forces with the consequence that this minimalistic transposition establishes a de facto standard. The minimalistic transposition of one Member State will force all the other Member States to abandon or downsize national industrial relation systems and national traditions. Previous requirements on taxation, workers’ involvement etc. anchored in national systems and traditions will be eliminated and a one-size-fits-all approach will be imposed.

Is there an alternative, or is the Commission right in saying that this is the only way to go and that there is no alternative (TINA)? The framework of the Commission is simply too narrow and too focussed on the old corporate governance model based on cost reduction at any price. It is not based on a forward-looking corporate governance model of a sustainable company, with stakeholder participation as well as respect for national traditions and employee rights. It is not just shareholder value that counts. The alternative is creating a policy program with much less shareholder orientation, no social or economic dumping and no deregulation. It needs a much stronger social market economy dimension based amongst other features on social dialogue.

The authors of the proposal work at DG Internal Market and it doesn’t come as a surprise that they take a relaxed attitude towards employee rights. It’s no exaggeration to say that the proposal is a “hollowing out” of subsidiarity, in particular national discretion over industrial relations systems and taxation. We are going down the road set by the Troika and the European Court of Justice (ECJ) in its Viking-Laval rulings.

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]]> 0 Wolfgang-Kowalsky Wolfgang Kowalsky Transport Do European businesses need
"The Great Income Divide" by Kemal Dervis Mon, 28 Jul 2014 10:32:03 +0000 Kemal Dervis
Kemal Dervis, Income Divide

Kemal Dervis

Thomas Piketty’s book Capital in the Twenty-First Century has captured the world’s attention, putting the relationship between capital accumulation and inequality at the center of economic debate. What makes Piketty’s argument so special is his insistence on a fundamental trend stemming from the very nature of capitalist growth. It is an argument much in the tradition of the great economists of the nineteenth and early twentieth centuries. In an age of tweets, his bestseller falls just short of a thousand pages.

The book’s release follows more than a decade of painstaking research by Piketty and others, including Oxford University’s Tony Atkinson. There were minor problems with the treatment of the massive data set, particularly the measurement of capital incomes in the United Kingdom. But the long-term trends identified – a rise in capital owners’ share of income and the concentration of “primary income” (before taxes and transfers) at the very top of the distribution in the United States and other major economies – remain unchallenged.

A key to Piketty’s results is that in recent decades the return to capital has diminished, if at all, proportionately much less than the rate at which capital has been growing.

The law of diminishing returns leads one to expect the return on each additional unit of capital to decline. A key to Piketty’s results is that in recent decades the return to capital has diminished, if at all, proportionately much less than the rate at which capital has been growing, thereby leading to an increasing share of capital income.

Within the framework of textbook microeconomic theory, this happens when the “elasticity of substitution” in the production function is greater than one: capital can be substituted for labor, imperfectly, but with a small enough decline in the rate of return so that the share of capital increases with greater capital intensity. Larry Summers recently argued that in a dynamic context, the evidence for elasticity of substitution greater than one is weak if one measures the return net of depreciation, because depreciation increases proportionately with the growth of the capital stock.

But traditional elasticity of substitution measures the ease of substitution with a given state of technical knowledge. If there is technical change that saves on labor, the result over time looks similar to what high elasticity of substitution would produce. In fact, just a few months ago, Summers himself proposed a reformulation of the production function that distinguished between traditional capital (K1), which remains, to some degree, a complement to labor (L), and a new kind of capital (K2), which would be a perfect substitute for L.

Income Divide

Thomas Piketty’s core argument remains unchallenged, says Kemal Dervis (photo: CC BY-NC-ND 2.0, Socialdemokraterna on Flickr)

An increase in K2 would lead to increases in output, the rate of return to K1, and capital’s share of total income. At the same time, increasing the amount of “effective labor” – that is, K2 + L – would push wages down. This would be true even if the elasticity of substitution between K1 and aggregate effective labor were less than one.

Until recently not much capital could be classified as K2, with machines that could substitute for labor doing so far from perfectly. But, with the rise of “intelligent” machines and software, K2’s share of total capital is growing. Oxford University’s Carl Benedikt Frey and Michael Osborne estimate that such machines eventually could perform roughly 47% of existing jobs in the US.

Oxford University’s Carl Benedikt Frey and Michael Osborne estimate that such machines eventually could perform roughly 47% of existing jobs in the US.

If that is true, the aggregate share of capital is bound to increase. Given that capital ownership remains concentrated among those with high incomes, the share of income going to the very top of the distribution also will rise. The tendency of these capital owners to save a large proportion of their income – and, in many cases, not to have a large number of children – would augment wealth concentration further.

Other factors could help to augment inequality further. One that has been largely neglected in the debate about Piketty’s book is the tendency of the superrich to marry one another – an increasingly common phenomenon as more women join the group of high earners. This, too, causes income concentration to occur faster than it did two or three decades ago, when wealthy men married women less likely to have comparably large incomes. Add to that the modern scale effects on professional and “superstar” incomes – a result of winner-take-all global markets – and a picture emerges of fundamental forces tending to concentrate primary income at the top.

Without potent policies aimed at counteracting these trends, inequality will almost certainly continue to rise in the coming years. Restoring some balance to the income distribution and encouraging social mobility, while strengthening incentives for innovation and growth, will be among the most important – and formidable – challenges of the twenty-first century.

© Project Syndicate

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]]> 1 kemal dervis Kemal Dervis Piketty Thomas Piketty's core argument remains unchallenged, says Kemal Dervis (photo: CC BY-NC-ND 2.0, Socialdemokraterna on Flickr)
"Germany And Europe’s Surplus Of Stagnation" by Robert Skidelsky Fri, 25 Jul 2014 12:54:54 +0000 Robert Skidelsky
Robert Skidelsky

Robert Skidelsky

While the rest of the world recovers from the Great Recession of 2008-2009, Europe is stagnating. Eurozone growth is expected to be 1.7% next year. What can be done about it?

One solution is a weaker euro. Earlier this month, the chief executive of Airbus called for drastic action to reduce the value of the euro against the dollar by about 10%, from a “crazy” $1.35 to between $1.20 and $1.25. The European Central Bank cut its deposit rates from 0 to -0.1%, effectively charging banks to keep money at the Central Bank. But these measures had little effect on foreign-exchange markets.

That is mainly because nothing is being done to boost aggregate demand. The United Kingdom, the United States, and Japan all increased their money supply to revive their economies, with currency devaluation becoming an essential part of the recovery mechanism. ECB President Mario Draghi often hints at quantitative easing – last month, he repeated that, “if required, we will act swiftly with further monetary policy easing” – but his perpetual lack of commitment resembles that of Mark Carney, the governor of the Bank of England, whom one former UK government minister recently compared to an “unreliable boyfriend.”

The United Kingdom, the United States, and Japan all increased their money supply to revive their economies, with currency devaluation becoming an essential part of the recovery mechanism.

But the ECB’s inaction is not wholly responsible for the appreciation of the euro’s exchange rate. The pattern of current-account imbalances across the eurozone also plays a large role.

Germany’s current-account surplus – the largest in the eurozone – is not a new phenomenon. It has existed since the 1980s, falling only during reunification, when intensive construction investment in the former East Germany more than absorbed the country’s savings. The external surplus has grown especially rapidly since the early 2000s. Today, it remains close to its pre-crisis 2007 level, at 7.4% of GDP.

Now, however, previously deficit-stricken countries are moving into surplus, which means that the eurozone’s current account is increasingly positive; indeed, the eurozone-wide surplus is now expected to be 2.25% of GDP this year and next. The eurozone is saving more than it is investing, or, equivalently, exporting more than it is importing. This is strengthening its currency.

Back in October 2013, the US Treasury pointed the finger at Germany’s structural surplus as the source of Europe’s woes. Its argument was that if one country runs a surplus, another must run a deficit, because the excess savings/exports of the surplus country must be absorbed by another country as investment, consumption, or imports.

The reluctance of the German government to reduce its current account surplus is a big part of the problem, according to Robert Skidelsky (photo: CC Paul Jeannin on Flickr)

The reluctance of the German government to reduce its current account surplus is a big part of the problem, according to Robert Skidelsky (photo: CC Paul Jeannin on Flickr)

If the surplus country takes no steps to reduce its surplus – for example, by increasing its domestic investment and consumption – the only way the deficit country can reduce its deficit is by cutting its own investment and consumption. But this would produce a “bad” equilibrium, achieved by stagnation.

Something like this seems to have happened in the eurozone. Germany has retained its “good” surplus, whereas the Mediterranean countries slashed their deficits by cutting investment, consumption, and imports. Greece’s unemployment rate soared to nearly 27%; Spain’s is almost as high; and Portugal faces a banking crisis.

In November 2013, Paul Krugman wrote that, “Germany’s failure to adjust magnified the cost of austerity.” Though it “was inevitable that Spain would face lean years as it learned to live within its means,” Krugman argued, “Germany’s immovability was an important contributor to Spain’s pain.”

But Germany rejected this logic. Its current-account surplus was its just reward for hard work. Indeed, according to the German finance ministry, the surplus is “no cause for concern, neither for Germany, nor for the eurozone, or the global economy.” Because no “correction” was needed, it was up to the deficit countries to adjust by tightening their belts.

John Maynard Keynes pointed out the deflationary consequence of this attitude in 1941. Deficit countries with a fixed exchange rate (as is the case in the eurozone) are forced to cut their spending, while surplus countries are under no equivalent pressure to increase theirs. Keynes’s proposed solution to this problem was an international payments system that would force symmetric adjustment on both surplus and deficit countries. Persistent surpluses and deficits would be taxed at an escalating rate. His plan was rejected.

Of course, a creditor country can always help a debtor by investing its surplus there. Germany is willing to do this in principle, but insists that austerity must come first. The problem is that stagnation ruins investment prospects.

China has shown that voluntary adjustment by a surplus country is possible. Until recently, the global imbalances problem was centered on China’s bilateral surplus with the US. China used its excess savings to buy US Treasury bonds, which drove down world interest rates and enabled cheap borrowing, permitting America to run a vast current-account deficit. The main impact of low interest rates, however, was to fuel the housing bubble that burst in 2007, leading directly to the 2008 financial crisis.

Since then, China has made great efforts to reduce its external surplus. At its peak of 10.1% of GDP in 2007, the surplus was larger than Germany’s; by the end of 2013, it had plummeted to 2% of GDP.

Why was China willing to adjust while Germany would not? Perhaps a key difference lies in the fact that Germany has significant political clout over the deficit countries with which it trades.

Why was China willing to adjust while Germany would not? Perhaps a key difference lies in the fact that Germany has significant political clout over the deficit countries with which it trades. Germany was effectively able to force austerity upon its neighbors.

That raises an important issue regarding the legitimacy of austerity. Its main proponents are creditors, who have much to gain from it (relative to the alternative of raising domestic wages and forgiving debts). Creditor-debtor conflicts have always been the stuff of monetary politics, and the persistence of austerity has set the stage for a new debtors’ revolt.

So we will have to rely on Draghi and quantitative easing to save the euro from Germany. Money will have to fall from the proverbial helicopter before Germany shows any willingness to reduce its surplus.

© Project Syndicate

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]]> 2 Robert Skidelsky Robert Skidelsky Kanzleramt The reluctance of the German government to reduce its current account surplus is a big part of the problem, according to Robert Skidelsky (photo: CC Paul Jeannin on Flickr)
"The Three Policy Changes Europe Needs" by Engelbert Stockhammer Fri, 25 Jul 2014 12:17:27 +0000 Engelbert Stockhammer
Engelbert Stockhammer, Policy Changes

Engelbert Stockhammer

The European economy is still in crisis. Real incomes in the Euro area are below the level of 2008 and unemployment is in the double digits in the southern European countries. While the crisis has originated in the USA, it is Europe that has fared worse. The European economic policy regime and European institutions, far from shielding the European population from the storms unleashed by a financial system gone wild, have contributed to a deepening of the crisis.

The mix of constrained national fiscal policy on the one hand and liberalised finance and European monetary policy on the other hand has proven counterproductive. Worse, the austerity policies imposed by the Troika have trapped those countries that have suffered most in the crisis in a state of depression. These reforms and high unemployment undermine the legitimacy of the EU and ultimately its political stability. To gain the trust of its citizens, Europe will have to radically change its economic policy. I will outline three elements of the necessary changes.

Rejuvenate Fiscal Policy: Deficits In The Recession Countries And Taxes For The Rich

The crisis has demonstrated that fiscal policy can be an effective tool to stabilise collapsing output and to create jobs. Government multipliers are higher in recessions than in periods of solid growth (see here and here). To make use of this, countries in recession have to be able to run budget deficits in the first place. But that is not what the EU has done. Rather it has tried to circumscribe the room of national governments, while the European budget is too small to make a difference. National governments are to have constitutional debt brakes, but a European stimulus package worthy of that name has never materialised.

Markets have proven to be unreliable means of guiding production decisions.

Markets have proven to be unreliable means of guiding production decisions. Investment is needed in areas such as green technologies, housing, child care and education. In a recession much of that should be deficit-financed to stimulate demand, but there are also areas where taxation should be increased to guarantee a fair system. Multinational corporations presently avoid taxation by transferring profits to tax havens, many of them within the EU, like Luxembourg and Ireland. The super-rich park their wealth offshore to avoid paying their legal share. Like the financial transactions tax, these are all areas where a European initiative would be welcome.

Policy Changes

Senator Kennedy used to campaign for higher wages in the US. And also the European economy would benefit from higher wages. (photo: CC SEIU on Flickr)

A Monetary Policy That Supports Job Creation

The Euro crisis does have its root in part in the separation of fiscal policy, which takes place at the national levels, and the monetary policy, which is now conducted at the European level. Central banks are lenders of last resort – both for the private (banking) sector and for the public sector. The ECB, however, is trying to only serve the banking sector. It should also step in to support public debt of the member states. As Europe is dealing with a debt overhang in many countries. The low inflation target of the ECB is counterproductive. If inflation rates stay low, the real debt burden (both for households and for governments) will be more difficult to deal with.

Wage Policy: Creating A Floor For Wages

European integration has in the past aimed at creating a competitive economy. But the wealth created has not trickled down. Globalisation, financialisation and welfare state retrenchment have put a downward pressure on wages. Indeed wage growth has stalled in many countries already before the crisis, and real wages have been falling since. Europe has contributed to this by creating a setting that invites countries to compete by means of wage restraint, thus encouraging a race to the bottom for wages in a futile quest for competitiveness. If all countries pursue this strategy of wage restraint, who is going to buy what has been so competitively produced? Consumption propensities out of wages are higher than those out of profits; wages are the main source of consumption demand and the European economy overall is wage-led.

Wage restraint can create export-led growth in some countries for some time, but not in all countries all the time.

Wage restraint can create export-led growth in some countries for some time, but not in all countries all the time. The neoliberal growth model relies either on increasing debt to fuel consumption. Or it creates a model that relies on export surpluses, which results in international imbalances. The conditions of the Troika in those countries hit worst by the crisis have furthered these developments. The Troika has asked for what is euphemistically called ‘internal devaluation’, which means reduction in minimum wages, weakening of labour law and an undermining of collective bargaining. A system of national minimum wages, say at two thirds of the national median wage, could create a useful wage floor and collective bargaining should be strengthened rather than weakened.

European has to get serious about a European social model or it will disintegrate.

This column is part of our Social Europe 2019 project.

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]]> 1 Engelbert Stockhammer Engelbert Stockhammer higer wages Senator Kennedy used to campaign for higher wages in the US. And the European economy too would benefit from higher wages. (photo: CC SEIU on Flickr)
"Why We Need A European Solidarity Union" by Michael Roth Thu, 24 Jul 2014 11:23:22 +0000 Michael Roth

Michael Roth, European Solidarity Union

Europe is heaven on earth, the promised land, as soon as you look at it from the outside. [...] Europe appears in a different light, but always as paradise, as a dream of mankind, as a stronghold of peace, prosperity and civilisation.

Here, Wim Wenders impressively describes Europe’s promise of hope. He is right, and we are made especially aware of it once more when we look around our neighbourhood. Refugees from beyond the Mediterranean Sea are putting their lives at risk because they hope to be safe from persecution and enjoy a life in dignity in Europe.

Yet, from the inside things are not looking so good at present: solidarity in the EU seems damaged, the sense of justice is shaken and social cohesion is too weak. Many citizens are asking themselves: is Europe going to lose its sense of solidarity and social justice in the face of the crisis?

We have allowed the welfare state to be cut back in several member states – especially at the expense of the young, the unemployed, the sick and the socially vulnerable.

We have to counter this impression. Social cohesion and solidarity were always Europe’s trademark and guarantors of the EU’s credibility – both within the Community and in the outside world. However, neither can be taken for granted. They have to be lived and cultivated constantly. We have to be self-critical and admit that while we strove in the light of the crisis to regain our credibility by returning to sound finances, we have allowed the welfare state to be cut back in several member states – especially at the expense of the young, the unemployed, the sick and the socially vulnerable.

There is no doubt that we need a competitive Europe to perform well in a globalised world and to foster our wealth and prosperity. We are bound by our excellence in Europe. This excellence, which consists of economic strength and a certain level of social security, brings with it a responsibility. If principles of the social market economy are thrown overboard, sustainable economic success will not be possible.

The European Union must find new ways to live solidarity, according to Michael Roth (photo: CC European Parliament on Flickr)

The European Union must find new ways to live solidarity, according to Michael Roth (photo: CC European Parliament on Flickr)

Our European model is based on the internal cohesion of our societies, both from the inside and from the outside. This well-balanced approach between economic and social interests needs to be secured – despite the crisis! We need an EU that is not just politically and economically strong, but also socially just. There is a good reason why economic and social cohesion are set down as goals in the EU treaties. They are essential if we are to achieve our goal of a better standard of living for all Europeans.

It is clear that the economic and monetary union also has a social dimension. It is necessary for two reasons: economically speaking, an appreciable economic recovery with a marked fall in unemployment is needed to reduce public debt. In political terms, the majority of people will not support reform policies if social equality is left by the wayside. At worst, entire societies and political systems can become unstable because reforms are not accepted by citizens.

The most pressing problem is the dramatic rise in youth unemployment. It is through this that the economic and financial crisis has given rise to a severe crisis of confidence. If the young generation comes to think of Europe as part of the problem and not part of the solution, we will not only be depriving people of their prospects, but also driving them into the arms of those who ultimately want to dismantle the EU.

We have to achieve better coordination, also in those spheres within the EU which go beyond financial policies in the narrower sense.

We have to achieve better coordination, also in those spheres within the EU which go beyond financial policies in the narrower sense. It is not enough to merely look at budget figures or public debt. At the same time, let us do away with the myth that we need or want Europe-wide harmonisation of national social welfare systems. So, how can we make existing strategies with ambitious Europe-wide goals and guidelines and existing coordination mechanisms more binding? How can we finally implement the commitment under Article 3 of the Treaty on European Union with a view to achieving a “social market economy, aiming at full employment and social progress”?

When it comes to solidarity and internal cohesion, Europe will have to deliver even more in future. Europe must finally be seen once more by people as a social corrective, as an answer to people for their everyday life. If we succeed in achieving that, then perhaps more Europeans will soon look to Europe with the same measure of hope as Wim Wenders. A genuine “solidarity union” can lend Europe a new appeal – both within the Community and to the outside world.

This column is part of our Social Europe 2019 project.

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]]> 1 Michael Roth European Flag The European Union must find new ways to live solidarity, according to Michael Roth (photo: CC European Parliament on Flickr)
"How Money And Credit Work" by Henning Meyer Wed, 23 Jul 2014 16:39:06 +0000 Henning Meyer

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 start here. By the way, these resources are useful wherever you live and whatever currency you use.

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]]> 0 Henning Meyer: How Money And Credit Work Henning Meyer collects educational resources that provide an introduction into how money and credit work. credit,Credit Work,Meyer,money,Money And Credit,Money And Credit Henning Meyer Henning Meyer