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Basic Economic Issues on the Agenda at EU-Summit in Britain

by Geir E Jansen Sun Oct 23rd, 2005 at 08:51:57 AM EST

promoted by Jerome. Some of the text put below the fold.

Next week’s summit in Britain of the heads of states and heads of governments in the member-states of the EU, will be dominated by a topic that politically are directly linked to core-values within all European nations, and touches issues that are fundamental in domestic economic policy.

How to organize the society, and what to emphasize and give priority in the economic policy, are controversial and hot political issues, in any given state, and that is certainly the case too, with the discussions that already have taken place, prior to the upcoming high-level summit in the EU.

The discussions have already materialized themselves, though only vaguely so, along the lines of the pros and contras of two different models of organizing the society and ways of executing economic policy, the “Anglo-Saxon”-model and the “Continental” or “Social Welfare-State”-model.

The political challenges ahead for the EU and directly affecting the social and economic policies in the member-states, is how to be competitive and cost-efficient in an ever internationalized economy, without loosing the grip on the fundament of a modern civil society, a social structure and an economy that benefits all citizens.

Financial Times writes:

This fundamental dispute will be at the heart of next week's summit of the European Union at Hampton Court, heated by fears in France, Germany and other EU countries that their generous jobless and pensions systems, whose benefits are often pegged to wages, could be slashed if replaced by far less beneficial pay-outs in the US and the UK.

The core of the critic against the so-called Anglo-Saxon-model, giving priority to economic growth and flexibility within the economy at the expense of a mutual beneficiary social structure, and an economic policy that to a greater extend emphasizes the importance of publicly financed social-security-programs, is that such a society does not use it’s resources efficiently, as the model at any given time excludes from the economy, a sizeable part of it’s potential work-force, unemployed, home-less etc.      

Financial Times writes further:

To critics' eyes, the UK model is seen to have produced high levels of poverty and inequality, along with draconian welfare-to-work policies. Recent private pension scandals in the UK also have been grist for their mill.

On the other hand an economy and a social policy that is too rigid can represent a major obstacle for necessary flexibility within an efficient and competitive economy, thus resulting in high rates of unemployment, as is the case in many of the major continental European states.

Financial Times writes:

UK politicians look at high rates of unemployment in the rest of Europe, and at pension systems that still need reform and much higher public spending, and wince.

The political and economic challenges for the economies in the member-states, is to find the sufficient balance between flexibility and efficient use of the national work-force at hand.
Finding an economic model that both gives the necessary flexibility, and at the same time do not exclude parts of the work-force from the economy, but rather prepares and gives the work-force the needed skills for an ever changing working-environment.

The solution could lie in the nuances in the discussion of these models, and instead of discussing comprehensive models; one rather should fragment the models and adopt the desired parts, and add an aggressive labour-policy to make the work-force better prepared for the ever internationalized economic environment, in which they are to operate in the future.

Financial Times goes on writing:

But painting a stark contrast between the so-called "Anglo-Saxon" model and the European "social model" is to miss the point, according to Richard Layard, an employment economist at the London School of Economics.

"The real distinction is between those countries that have had effective active labour policies, and those that have not."

Thus, he argues many of the Nordic countries have high levels of public expenditure and social protection but also high levels of employment thanks to policies that ensure those out of work are actively seeking to return to it.

This article is also available at Bitsofnews.com.

There seem to be plenty of fallacies in the FT story. Or if "fallacy" is too harsh, a bunch of assertions that are far from proven:

  • Higher economic growth in the US and UK is a direct result of deregulation and "market flexibility," rather than, say, excessive money growth and asset bubbles;

  • Slow economic growth on the continent is due to social protection and generous welfare states;

  • "Active labor market policies" can do a lot to reduce unemployment.

On the third point, Layard is an academic cheerleader for active labor market policy (which can mean anything from providing generous re-training and re-location benefits to pushing people to take any low-wage job that comes along), but evidence suggests that the link between such policies and reduced unemployment is tenuous at best. Not that they don't have some positive effect, but they are not the whole answer to the unemployment problem, either as far as we can tell.
by TGeraghty on Sun Oct 23rd, 2005 at 02:12:13 AM EST
TG, since you have written a number of (really informative) articles on the success of various Northern countries (Finland, Sweden and Norway), what is your take on what he says here:

Thus, he argues many of the Nordic countries have high levels of public expenditure and social protection but also high levels of employment thanks to policies that ensure those out of work are actively seeking to return to it.

Is he contradicting himself, leaving himself an out...or am I missing something...the "Nordic countries" have high taxes and great social systems, which would seem to contradict his thesis, yet he points to these as a model...


"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Sun Oct 23rd, 2005 at 11:45:16 AM EST
[ Parent ]
One of the things Sweden has been famous for is "active labor market policy," as my favorite US economics journalist Robert Kuttner talks about in his book The Economic Illusion: False Choices Between Prosperity and Social Justice.

In the 1950s, Sweden was trying to find a way to maintain full employment without the high inflation that conventional Keynesian taxing and spending policies generated. Part of the solution was selective interventions in labor markets to soak up unemployment.

A national labor market board was charged with coordinating job training, relocation, placement, and job creation policies. Local boards made up of business, labor, and government representatives designed local programs that the national board would fund. During recessions (for example in the 1970s) the boards could expand temporary public service employment, early retirement packages, and retraining sabbaticals to reduce unemployment. High local unemployment rates could be dealt with through relocation subsidies to workers or wage subsidies to firms who moved into the area. At some points the boards were spending up to 3% of GDP.

This is the classical social-democratic version of "active labor market policy." It was clearly designed to impart "flexibility" into local and national labor markets, but in a way that preserved worker living standards rather than thwarting them.

Economists who have tried to find statistical correlations between these policies and employment indicators usually have had some trouble doing do. There is usually a somewhat positive correlation, but it is often "statistically insignificant," i.e. the data are so variable that they do not permit a solid conclusion that there is a strong positive effect of active labor market policy on employment.

For example, ALMP did not prevent the Swedish unemployment rate from skyrocketing to double digits in the early 1990s, although during the 1980s Swedish policy had become more "passive" (e.g. simply paying benefits to the unemployed). In the 1990s there was more emphasis again on programs like retraining and wage subsidies, and unemployment did come back down. In all, ALMP is still an important part of economic policy in Sweden, but in a somewhat leaner form than in the 1970s.

So making continental unemployment insurance systems more "active" may be part of the answer to unemployment, but probably not the whole answer.

The other problem with modern discussions of ALMP is that all sorts of undesirable policies are now collected under that label. For example, the US welfare "reform" of the mid-1990s could be described as an "active labor market policy," but one that emphasizes the stick - pushing people to accept any low-wage job that comes along - rather than the carrot of policies that invest in human capital and create better jobs.

by TGeraghty on Sun Oct 23rd, 2005 at 07:42:33 PM EST
[ Parent ]
I want to add to this discussion an anecdote:

When I first went to the US I was totally astonished to find out that the baggage cart with my suitcase and handbags would not pass thru' the polished chrome cylinders which separated the hall behind the US customs from the entrance to the public terminal area. Actually I thought that I had somehow not understood the specific technique of how to steer the cart thru' the obstacle. So I tried again. Alas, it was to no avail. I finally got it. The steel cylinders were meant to form insurmountable barrier. And it truly was. The cart had to be abandoned there! Wow! What a surprise. I looked what to do next. And I saw it: Just a few feet away were PORTERS in the waiting.

With luggage carts!

For the cost of 5 USD per suitcase, they would take care of it and bring it to the airport terminal exit. (Tips welcome!)

So, here I was given an insightful crash course lesson on the delights of the new, flexible service industries of the 21st century.

Stop travellers from using luggage carts. Build barriers. And thus: Create new jobs.

Well, since we were discussing statistics - what about this statistic:

The EU has 150 international airports (true?). Then let's introduce 1:1 the revolutionary 'free market' US cart - barrier/porter - job - creation scheme (tm) at these airports.

Or better still:

We buy the franchising rights for this scheme from an US company. This way we even get the state-of-the-art 'implementation' and 'on-the-job-training' for the personnel which goes with it. And then we impliment it troughout the EU Member States. How is that for an 'exciting', new business idea?

Now, back to the statistical part of it.

We might need to run the luggage porters scheme in a two shifts system. Say 250 workers per shift. Which makes it 500 per international airport. We have then 150 airports x 500 porters.

Fantastic, we just created 75.000 new jobs. From scratch. Without government monnies! Also, we have made another step foward toward the implementantation of the new economy.

But: It must not end here! We can be even more audacious, we can finally play out the trump card of the European countries. We can OUT PACE the US, BECAUSE we can introduce this luggage/porter system in all the RAILWAY STATIONS. Have we 750 train stations which would qualify for it? Yes, you got. Easy!

So here we go - another 225.000 new jobs created!
Grand total so far: 300, 000.

Which leaves only one final question open: Should we also adopt the US model to let the local mafias run the job hiring and workers control 'issues'? Or do the European trade unions still have a place in this?  

Should we make this a statistic?

"The USA appears destined by fate to plague America with misery in the name of liberty." Simon Bolivar, Caracas, 1819

by Ritter on Sun Oct 23rd, 2005 at 12:04:41 PM EST
[ Parent ]
The article I refer to in the FT, I agree, is by no means any in-depth-article on the basic economic issues that will be discussed at the summit in Britain.

I find the article interesting though as an introduction to the discussion on the economy the member-states will have to engage in, because it high-lights the difference of opinion, and points out some possible lines the discussion about the economy could follow; within a framework of two particular economic "models".

I too, agree with you on the points that neither is the link between US and UK growth and marked flexibility as "clear cut" and that the reasons for lack of growth is social-security-programs and the welfare-state as the supporters of a deregulated economy would have it. On the contrary it could be argued that an economy with little or no social protection is an inefficient and less productive economy than it would have been with such programs.

Personally I tend to be of that opinion, excluding parts of the most important asset any society has it's human resources is not attributes of an efficient and healthy economy.

I am of the opinion though, that an active labour-market-policy is of importance, not as a job-creating economic instrument, but as a facilitator for an efficient economy that gives the most important resource of any economy the work-force, possibility to update their skills in a situation were danger of falling behind could reduce your chances to get back on the job-market.        

Bitsofnews.com Giving you the latest bits.

by Geir E Jansen on Sun Oct 23rd, 2005 at 06:30:31 PM EST
[ Parent ]
The solution could lie in the nuances in the discussion of these models

Opposing two models (the "Anglo-saxon" one and the "Continental" one is too simplistic). Even if many of them have some principles in common, the diversity of social models in Europe is much larger.

About the different European social models, it is very interesting to read André Sapir's paper: « Globalization and the Reform of European Social Models » presented to the informal ECOFIN in Manchester. You can find it on the Bruegel think tank site.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Oct 23rd, 2005 at 12:59:18 PM EST
This paper is fast becoming the new common wisdom. On the one hand, it seems like a progress, because it shows that high taxes and strong social support are not incompatible with strong economic performance. But if you read through, it's still about making the labor market more "flexible", and it's still about bashing the inefficient continental (France/Germany) model and the even worse Mediterranean one - at least in the way it is presented in the press.

Plus, it also preempts the Nordic countries (traditionally pretty euroskeptic) in the "right" camp.

Maybe Sapir's paper deserves another reading, but how it is used should be read with some suspicion.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 23rd, 2005 at 02:51:43 PM EST
[ Parent ]
I agree completly with this point of view, I think setting up this two economic models only have an interest as an introduction to further discussions on economic models, their justification and consequenses.

Forgetting, or ignoring important nuances, would almost certainly result in lost opportunities for a meaningful discussion within the EU on important issues concerning the economy.    

Bitsofnews.com Giving you the latest bits.

by Geir E Jansen on Sun Oct 23rd, 2005 at 06:42:40 PM EST
[ Parent ]

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