Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Savings glut vs income shortage

by Jerome a Paris Thu Jan 8th, 2009 at 06:25:17 AM EST

Martin Wolf is still pushing the savings glut theory in his column yesterday and, predictably, calls for countries with large surpluses (China and Germany first and foremost) to increase their spending to save the world economy, as the debtor nations can no longer increase their debt to sustain activity, as they used to until the crisis. and he promises (should this be worth a Godwin alert?) 1930s turmoil if this does not happen:

think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.

But I think he misses the point. The problem is not one of insufficient demand (which he proposes to boost via US budget deficits and, idieally, spending by China and Germany), the problem is one of insufficient incomes. If the US spends more debt-provided money, it will only generate distortions and imbalances to the economy, which will still need to be corrected later. If Germany or China spend more, it will only mean that they will be buying their own goods instead of Americans doing so: it will not improve global welfare, as it means Americans with less junk and Germans with more (presumably making both unhappy). No, what is needed is for spending to be increased in a sustainable way, and that can only happen if incoems increase. Wages (income for workers) need to be increased, and taxes (income for govenrment) ditto. Otherwise demand will shrink.

Debt created the appearance of prosperity. We should not try to restore that fake, unsustainable "growth" which brought us the current crisis (as had been announced for a long time by a few lonely voices); we need to focus on re-creating real prosperity, and that means the policies that were proven to work in the second half of the 20th centuries: strong regulation of banks and labor markets, with actual enforcement, wages following productivity growth, and public investment in education, healthcare and social safety nets. Add to this today a drive to invest in a new energy infrastructure, and a construction sector bailout focused on refurbishing existing buildings to improve energy efficiency, and you get a comprehensive package that will actually work.


Display:
I read an interesting idea recently (here?), that state aid should be issued as vouchers that can only be spent in specific ways. I'm not competent to evaluate the idea economically or the full ramifications of it, but it appears to offer a method of directing and monitoring how capital injections are used.

You can't be me, I'm taken
by Sven Triloqvist on Thu Jan 8th, 2009 at 06:42:59 AM EST
If the concern is that the money be spent, vouchers are unnecessary for aid directed to those in the bottom six or seven deciles of the income distribution.  Wealth and income have become so skewed that they have little choice but to spend all they get.  But most of the top 3% of income earners would rather see the universe implode into a new big bang rather than reverse the flow of wealth which has served to so enrich themselves.  We call reversal of that flow class warfare in the good 'ole USA and the fundies and the Scots-Irish descendants, often one and the same, see their troubles as God's Righteous Punishment for our wickedness.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 8th, 2009 at 11:35:11 AM EST
[ Parent ]
I was referring to the idea that state aid to companies (not individuals) would be in the form of vouchers.

You can't be me, I'm taken
by Sven Triloqvist on Thu Jan 8th, 2009 at 12:03:06 PM EST
[ Parent ]
I shoulda picked up on the "capital injection" language.  Definitely not language commonly used in reference to individuals, even though much of it has apparently ended up in the pockets of individuals in the finance community.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 8th, 2009 at 05:26:27 PM EST
[ Parent ]
Have all economists really been looking at just the supply side of the economy for the last however many decades, and have they really been saying that everything is fine and dandy as long as costs are kept down sufficiently? Havent they been shouting that sooner or later that If you drive costs down by exporting jobs and cutting wages, then you're going to end up with noone left to buy anything?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Thu Jan 8th, 2009 at 07:19:50 AM EST
Yes, yes and no.  Only lunatics such as myself have been saying that the policies that have been in place since the early 90s would result in all of us having the privilege of living in a cardboard or wood shipping container sitting in an open sewer.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 8th, 2009 at 11:38:29 AM EST
[ Parent ]
You say that as if living in a closed in sewer in plastic or Styrofoam would be a better choice.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Jan 8th, 2009 at 03:18:33 PM EST
[ Parent ]
Sorta Hobson's choice between the two.  Better might be to squat in abandoned McMansions.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 8th, 2009 at 05:20:51 PM EST
[ Parent ]
European Tribune - Community, Politics & Progress.
as it means Americans with less junk and Germans with more (presumably making both unhappy)

So zee solution is vor zee Chermans to give zee americans all zer junk and efferbody will be happy, No? Jah - a ferry gut idea...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 8th, 2009 at 07:40:06 AM EST
Not gif, just sell for teuros.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 8th, 2009 at 07:57:00 AM EST
[ Parent ]
teure euros?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 8th, 2009 at 08:21:18 AM EST
[ Parent ]
People were calling the euro the "Teuro" for awhile after its introduction because there was a broad perception that a lot of businesses were taking advantage of conversion to raise prices.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt ät gmail dotcom) on Thu Jan 8th, 2009 at 08:37:25 AM EST
[ Parent ]
Debt created the appearance of prosperity. We should not try to restore that fake, unsustainable "growth" which brought us the current crisis (as had been announced for a long time by a few lonely voices); we need to focus on re-creating real prosperity, and that means the policies that were proven to work in the second half of the 20th centuries: strong regulation of banks and labor markets, with actual enforcement, wages following productivity growth, and public investment in education, healthcare and social safety nets. Add to this today a drive to invest in a new energy infrastructure, and a construction sector bailout focused on refurbishing existing buildings to improve energy efficiency, and you get a comprehensive package that will actually work.

Say it again now, inequality is inefficient.

For the better part of the last 40 years, we've been feed this line that wages must be suppressed or the economy will shrink, but it was all bullshit. The deadweight loss models used by the Right to brand living wages as anti-social are nothing less than a projection of the anti-social tendencies of neo-liberals onto their real, and imagined, enemies.

It's the Anglo Disease at work.  

BTW, Jerome, did you by chance get my email?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Jan 8th, 2009 at 08:16:43 AM EST
Just thought about this walking to the gym.

Given that China just signed off on a 4 Trillion Yuan (586 Billion USD) stimilus package,  the largest ever peacetime cash infusion by a government relative to GDP, haven't the Chinese actually done what Mr. Wolf has suggested?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Jan 8th, 2009 at 08:37:49 AM EST
[ Parent ]
ManfromMiddletown:
Say it again now, inequality is inefficient

It is.

But more to the point, returns to rentiers are inefficient, and my thesis is that returns to rentiers are no longer necessary.

A "Co-operative Capitalism" is capable of out-competing conventional Capitalism because it may operate without returns to rentiers either as shareholders or bank depositors.

The replacement will be direct "Peer to Peer" investment in future production/use value of productive assets and direct "Peer to Peer" credit with shared costs and defaults.

Ethical is Optimal.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jan 8th, 2009 at 08:43:25 AM EST
[ Parent ]
I did get it, and responded (very enthusiastically!). So: did you not get my response?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 8th, 2009 at 08:48:00 AM EST
[ Parent ]
have now.

It was in the junk mail.  I just sent a response.

Let me think about it.

I like the simple message:

Inequality is inefficent.

That will raise some eyebrows, and get people to engage you whether they agree or disagree.  

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Jan 8th, 2009 at 09:24:07 AM EST
[ Parent ]
I agree with you: the world economy should go into debt rehab and set-up preventive mechanisms/regulations to avoid to return to debt binge, especially in  the countries with huge deficits and we should not drag countries with surpluses into the debt trap. And, yes, raising the incomes and closing the income gap should be a key feature of any policy, together with implementing a strong redistributive tax policy. Some remarks:
  • What should be put under control is the overall debt (public+private). However, in the short term, as Michel Aglietta advocated it in a recent conference, public debt should replace private debt.,

  • Not all countries have the same saving rates, deficits and debt, so it can't be one size fits all,

  • Government spending on productive, sustainable material (energy-conservation, renewable energy, public transports, R&D...) and social infrastructures (education, healthcare, fundamental research, culture, community-building...) is the right policy,

  • However, government spending (as well as boosting demand) will not automatically translate into wage increase: in a situation where unemployment is rising and insecurity is growing, the bargaining power of employees is not strong enough, especially in countries where unionisation is low. That means governments should use the power given to them by their position as the biggest investors to set-up tripartite collective agreements (government, employers, unions) or "economic re-development pacts" including wage increases. Although it might happen in some countries where social-democrats are in charge or where the industrial relations are strong, I don't see it happen easily in most of them, particularly in the US and the UK (and France). In my opinion, for some countries, it will only become possible if widespread social unrest (à la 68) forces the government to set-up such pacts.

Furthermore, if we want the policies/solutions implemented to be really sustainable, the collective agreements should involve first and foremost the unions and employers, but also other stakeholders like consumers and environment-oriented NGOs...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Jan 8th, 2009 at 09:08:48 AM EST
I will add that, although strong redistributive tax policies are the right solution for the medium/long term, they will not allow to raise the huge sums required for the necessary short-term stimulus plans. So, in the short term, increasing public debt is unavoidable if we want to prevent a deep depression and the social/political consequences. Although I do not share Wolff's diagnosis, I share his fears: the dangers he mentions (nationalism...) are real. But at the same time, we should aim at reducing private debt.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Jan 8th, 2009 at 09:21:53 AM EST
[ Parent ]
Melanchthon:
What should be put under control is the overall debt (public+private). However, in the short term, as Michel Aglietta advocated it in a recent conference, public debt should replace private debt.

When we say "Public" we mean "State" or "Municipal".

When we say "Private" we mean "owned by an Individual or a Corporation".

This "either/or" assumption is obsolete.

IMHO we may reinvent Equity, through the use of alternative enterprise models, and in so doing, totally reinvent the economics of public financing.

We should replace Private (Corporation) Equity with Public (Municipal) Equity within legal frameworks other than the conventional Corporation.

Not only is that not difficult, it is actually already being done because it works. By way of example the City of Glasgow has three municipal partnerships, with more to follow, albeit with conventional debt funding.

Debt may be conventional: but it is neither necessary nor efficient.

The use of such Municipal Equity will revolutionise public finance.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jan 8th, 2009 at 09:24:58 AM EST
[ Parent ]
I certainly agree with the idea of reinventing public (as well as private) financing. However the question of the existing debt remains...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Jan 8th, 2009 at 09:42:00 AM EST
[ Parent ]
Melanchthon:
However the question of the existing debt remains...

It's refinancing existing debt with "Municipal Equity" that constitutes the "killer application" of a "Unitisation" approach....

Refinancing existing debt - a Debt/Equity swap - typically cuts the cost of existing municipal finance by at least 50%, (due to no capital repayment, and a lower rate of return) and probably a lot more.

This would free many billions for investment in new municipal assets (eg in affordable housing, renewable energy and energy savings) - which takes more time, and involves development risk.

Municipal Equity gives us an entirely new asset class with perhaps a 1.5% to 2.5% index-linked return, asset-based - typically on land and buildings in public ownership - and with a rock solid (because it's affordable) municipal rental stream.

"Pools" of such municipal asset rental streams would give rise to the sort of high quality, secure, low risk returns investors are currently trying, and failing, to get.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jan 8th, 2009 at 11:38:04 AM EST
[ Parent ]
I agree. Redistribution of the wealth is needed.Simple as that. It's not socialism or anything...it's only that states should make some fair-play rules in to this game called "economy".There is nothing even similar to freedom in a fact that 1-2% of people own 90%(or so) of wealth.Actually it's against nature...

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Thu Jan 8th, 2009 at 09:33:11 AM EST
There has been a redistribution of wealth, it's just that it was the rich, who live by wealth, stealing from the poor, who live by work.

And its precisely this redistribution that has created the current situation in which the economy is set to shrink, because it turns out that supply must be matched by demand for economies to work.  And when the plastic parade ended that got considerably more difficult.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Jan 8th, 2009 at 10:44:42 AM EST
[ Parent ]
I was about to say JUST (fair) redistribution of wealth...
"Plastic parade" is/was nothing but the FRAUD.And they made it legal thanks to the state / politician that are definitely working for the rich ( no matter being left or right parties).

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Thu Jan 8th, 2009 at 06:36:18 PM EST
[ Parent ]
Why not socialism? Socialism is neither a bad word, nor bad policy. (The devil is in the details, of course.) So let me openly call for it: more socialism, please.
by someone (s0me1smail(a)gmail(d)com) on Thu Jan 8th, 2009 at 10:48:48 AM EST
[ Parent ]
Well I personally am not fan of the socialism (as we know it through the practice). I was unfortunate to live through it for 38 years. Yes we had "free" education and health system and that was good but in many aspects it was similar or worse then developed capitalism of say West Europe. There are classes still in socialism and there are injustice...and there are poor people...oh yes many of them. But that's a long story.
Theoretically socialism (or even better communism) is ideal...but it looks more like a dream. I am very skeptical that people (as we know our nature) will ever get there...


Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Thu Jan 8th, 2009 at 06:46:49 PM EST
[ Parent ]
So what alternative do you suggest? and how is it going to deal with the poor, the sick, and the needy?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Thu Jan 8th, 2009 at 08:20:30 PM EST
[ Parent ]
I think something like Swedish model ( during U.Palme's times)is the way to go.I am not sure but it looks like Sweden changed nowadays a bit...and moved right...
It may not give the fastest growing economies (I don't see why we are in a hurry anyway) but it is much more just...OK Swedish are a small population so it's much easier for them then for China.But yes , I think rich people should pay high taxes.They'll be rich enough after paying these taxes too.Education and health should be totally free and of a highest standard.
State needs to suppress greed in people and develop other better feelings but it's not possible by nationalization .We are "social animals" but "collectivization" did not give results...Private property is still "in our blood"...

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Thu Jan 8th, 2009 at 11:08:19 PM EST
[ Parent ]
Heh. So, mostly a disagreement on terms, I think. I would count Social Democracy as a branch of Socialism. In that it implemented (in Sweden, as an example I am somewhat familiar with) not just such good things as you describe above, but also a system of collective bargaining between employer and employee unions, enforced by law and by courts, including codecision rights in questions of hiring, firing, direction of the company, etc. There where also state monopolies, and various level of state steering of what was considered strategic interests.

I would count this as a different, and better, implementation of socialist ideas. Some things where indeed collectivized and nationalized. Private property obviously existed, but there where (and are) strict limitations when it comes to land of where and how you can exclude people from that which is considered private. I.e. there is a maximum distance from the dwelling that can be fenced in and allocated as private space, the rest of the land people must be allowed to pass over. As well as pick berries, fruit, mushrooms, etc. etc. etc. Of course different rules apply for land under agricultural production, but also there the exclusion is limited to what is crop damaging. I.e. you must permit persons to walk in the border between fields, out of growing season, etc.

So, if private property is in our blood, it is sure in our blood in different ways as to what rights we have with respect to exclusion.

by someone (s0me1smail(a)gmail(d)com) on Fri Jan 9th, 2009 at 01:15:12 PM EST
[ Parent ]
Ditto for Finland.

You can't be me, I'm taken
by Sven Triloqvist on Fri Jan 9th, 2009 at 01:18:21 PM EST
[ Parent ]

and the same for Norway...

by Solveig (link2ageataol.com) on Fri Jan 9th, 2009 at 05:07:25 PM EST
[ Parent ]
I know it's not perfect but Scandinavian model looks the best we have for now...

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Fri Jan 9th, 2009 at 09:15:00 PM EST
[ Parent ]
I take exception to the idea that the developed nations need more "growth". If we look at the average standard of living, people have as much (or more) than the need to live a decent life.

We have inequality, so that there are many who don't have enough, but this is a distribution issue not a lack of wealth. The panic in these countries is that enough demand can't be created to absorb all the output from factories which can make more than is needed.

The Consumer Electronics Show starts today in Las Vegas and the discussion is all about what gimmick can be found to revive the electronics industry. Obviously people have been getting along without it, whatever it is.

If we could achieve a balanced society then we wouldn't need to generate all that "growth" and the resources saved could be used to improve the lives of the bottom billion.

As long as there is no model other than capitalism there will be no solutions which don't involve increased resource consumption and cycles of boom and bust.

We should aspire to continual improvements in quality, not quantity.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Thu Jan 8th, 2009 at 09:33:36 AM EST
I stayed within the traditional paradigm to discuss economics, but you're absolutely right.

But I think it will actually be easier to redefine growth than to give it up. If quality translates into "bigger price", then we can have growth without having more.

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

by Jerome a Paris (etg@eurotrib.com) on Thu Jan 8th, 2009 at 09:41:20 AM EST
[ Parent ]
My latest hobby horse is to question why the various bailout plans are being designed by economists.

Notice the framing of the debates: tax adjustments vs interest rate adjustments vs more direct federal spending. These are all tools, not goals. We don't ask a plumber to design our house, we give him the plans and then he decides which size wrench is needed for a specific activity.

So what we need are sociologists and moral philosophers setting goals and then turning to the economists for suggestions on how to implement them.

The idea of "stimulating" the economy is  unfocused, it is as if as long as it is bigger it doesn't matter how the restoration goes. This is completely backwards and will only end up with the haves ending up with even more.

There is a good chance that China will suffer from some wholesale civil unrest because of the downturn, I would not be surprised to see this show up in developed countries as well.

Perhaps the riots in France last year were just a foretaste of what is to come.

Goals first, then implementation plans.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Thu Jan 8th, 2009 at 10:59:40 AM EST
[ Parent ]
Inequality is inefficient.  Why?

Because the suppression of wages for labor is a rent seeking behavior.  In English, this means that in order for the part of the pie going to employers to increase in size, the size of the pie must shrink.

It's the mirror image of what we've been told is happening.

Now, typically, the story that's been told over the past 40 years is that demanding a living wage is anti-social, because increasing the slice of the pie going to workers means shrinking the pie.  There's even a neat little graphic that can be used to demonstrate the concept.

In the case of the labor market, workers are producers, while employers are consumers. I've mark the producer surplus in blue, and the consumer surplus in red.  So think of the blue as the wages paid to workers, and the red as the profits made by companies.

Now if the market is providing the maximum benefit to society, it should look like this.

But, the story that we've been told is that because wages are inflated by minimum wage laws and unions demanding wage hikes, what we get is something like this.

So what you see is that the red area shrinks.  The purple area represents money that previously went as profits to companies, but is now paid out in increased wages.  But the real trick is in the pink and light blue areas.  Because workers and unions have engaged in rent seeking they have denied the economic benefit of these areas to society, and have reduced the total amount of labor consumed.  So basically, increased wages have increased unemployment.

But, the truth of the Anglo disease is the mirror opposite of this.  Part of the money made by the financial sector is just total bullshit. But, another part of the disease is rent seeking behavior..... by capital.  By employers supressing wages. So we get this.

So again we see that employment is reduced.  In this case because the reduced wages fail to draw people into the labor market, and the same social loss occurs.

The big difference is that in this case the purple area is consumer surplus.  This is money taken from workers wages and shifted to employers profits.

So yes, the economy is suffering from rent seeking behavior, but the businessmen pointing to labor are projecting their own deficiencies on people who actually work for a living.

The bottom line is that a redistribution of wealth has shrunk the economy.  But it's been a redistribution of wealth from workers to employers. From labor to capital.

Inequality is inefficient.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Jan 8th, 2009 at 11:32:20 AM EST
That analysis is remarkable in its simplicity;  irrefutable in its logic; and elegant in its representation.

Brilliant!

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jan 8th, 2009 at 11:42:58 AM EST
[ Parent ]
Rather than lower wages discouraging employment, I think you need to look for the explanation of unemployment in the macroeconomic policies of a country. Workers need to eat - they cannot simply withhold their labour for an extended period of time, the way capital can withhold access to the means of production.

This precise mechanism means that artificial un- and under-employment is desirable to those who wish to reduce wages. So I think your causality is upside down. (Not that this matters to your pictures.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jan 8th, 2009 at 11:49:29 AM EST
[ Parent ]


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 8th, 2009 at 06:06:57 PM EST
[ Parent ]
With one addition.

What MfM is showing is two ways of reducing the social product. One is by artificially raising wages (thus reducing the demand for labour) and the other is by artificially lowering wages (thus reducing the supply of labour). The question is which one of the two situation occurs in practice.

This reminds me of the Laffer curve. One thing that is never explained (assuming the Laffer curve is a sound model in the first place) is how we know that we're in the part of the curve where reducing taxes increases revenues and not the other way around.

As we know, there have been empirical tests of the effect of minimum wages being introduced in various US states and the result of the research was to show that a minimum wage increased the number of McJobs.

Now, we can look at the question of who has the upper hand in the competition between employers and workers to fix the wage level. If workers are stronger than employers you can argue that you are likely to find yourself in the situation that workers are imposing too high wage levels. If the employers are stronger you can argue that you are likely to see employers imposing too low wage levels.

It follows that with strong unions you don't need minimum wage laws and they are possibly counterproducing. But it also follows that with weak unions you need minimum wage laws to prevent rent-seeking by the employers.

I think it is reasonable to claim that the employers are in the more powerful position. They don't need to hire a worker in order to make a living. They can always eat their seed corn, as it were, whereas workers have to rent out their labour because they have no seed corn to eat. The necessity of a combination of unions and minimum wage laws follows. In fact, if one prefers a "liberal" model in which "corporatist" behaviour as that displayed by unions is undesirable, then minimum wages are necessary.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Thu Jan 8th, 2009 at 06:21:14 PM EST
[ Parent ]
that Adam Smith quote you have about this very topic you discuss...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 8th, 2009 at 06:54:47 PM EST
[ Parent ]
With a hat tip to nanne:
The workmen desire to get as much, the masters to give as little, as possible. The former are disposed to combine in order to raise, the latter in order to lower, the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it.



Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Jan 8th, 2009 at 07:01:23 PM EST
[ Parent ]
I also note that Adam Smith was not fond of "corporations" i.e., guilds. He probably wouldn't have liked unions too much. Taken together with his comment on legislation that is equitable if it favours the workmen, he would likely advocate what I call in my last paragraph a "liberal" model with minimum wages but without unions.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Jan 8th, 2009 at 07:10:16 PM EST
[ Parent ]
Don't forget the pivotal role that unions have to play not only in how much money the workers get, but also in influence the terms under which workers get that money.  Hours, overtime, safety, vacation, minimum staffing levels, etc.

Well paid workers who are bled to the bone on the job aren't necessarily happier than poorly paid workers with more reasonable hours.  They may be a better off, in many cases, but it's arguable.

by Zwackus on Fri Jan 9th, 2009 at 04:40:48 AM EST
[ Parent ]
I would argue that it's better if work standards, not limited to minimum wage, are legislated rather than a result of collective bargain which can be limited in it scope, applying to a single plant, company, or union. But that's just me.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Jan 9th, 2009 at 04:57:06 AM EST
[ Parent ]
That's a tactical question, IMO. In some countries, the social democrats in parliament can achieve more than the syndicalists in the unions. In other countries it's the other way around. And in some countries it's hard to tell where the state stops and the labour market begins, which kinda renders the discussion moot.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 9th, 2009 at 05:09:24 AM EST
[ Parent ]
I beg to disagree. Sure, general work standards (like maximum working time) can be legislated, but working conditions, work and working-time organisation, skills and safety are highly specific to a given industry and sometimes to a given company or site.

Wanting to legislate all the situations leads to heavy bureaucracy and in fine is socially inefficient. One example: the application document for the working-time reduction was 180 pages long and it didn't cover (by far) all the situations (I could provide many examples).

Legislation is necessary to provide the framework within which the collective bargaining must take place. It should fix the limits (minimum wage, maximum working time, minimum amount for training expenses...), the governance system (role and power of employees' representatives) and the methods (scope and frequency of compulsory negotiations...), but it should aim at empowering the social partners, especially the employees' representatives.

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

by Melanchthon on Fri Jan 9th, 2009 at 05:30:17 AM EST
[ Parent ]
Joseph Stiglitz: The US Federal Reserve is drink-driving on America's road to recovery | Comment is free | guardian.co.uk
In some ways, the Fed resembles a drunk driver who, suddenly realising that he is heading off the road starts careening from side to side. The response to the lack of liquidity is ever more liquidity. When the economy starts recovering, and banks start lending, will they be able to drain the liquidity smoothly out of the system? Will America face a bout of inflation? Or, more likely, in another moment of excess, will the Fed over-react, nipping the recovery in the bud? Given the unsteady hand exhibited so far, we cannot have much confidence in what awaits us.

...

Moreover, growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can't spend it all.

...

America's government will, for a time, partly make up for the increasing savings of US consumers. But if America's consumers go from their near-zero savings to a modest 4% or 5% of GDP, then the depressing effect on demand (in addition to that resulting from declines in investment, exports and state and local government expenditures) will not be fully offset by even the largest government expenditure programmes. In two years, governments, mindful of the huge increases in the debt burden resulting from the mega-bailouts and the mind-boggling deficits, will be under pressure to run primary surpluses (where government spending net of interest payments is less than revenues).

...

First, we need to reverse the worrying trends of growing inequality. More progressive income taxation will also help stabilise the economy, through what economists call "automatic stabilisers". It would also help if the advanced developed countries fulfilled their commitments to helping the world's poorest by increasing their foreign-aid budgets to 0.7% of GDP.

Second, the world needs enormous investments if it is to respond to the challenges of global warming. Transportation systems and living patterns must be changed dramatically.

Third, a global reserve system is needed. It makes little sense for the world's poorest countries to lend money to the richest at low interest rates. The system is unstable. The dollar reserve system is fraying, but is likely to be replaced with a dollar/euro or dollar/euro/yen system that is even more unstable. Annual emissions of a global reserve currency (what Keynes called Bancor, the IMF calls SDRs) could help fuel global aggregate demand and be used to promote development and address the problems of global warming.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Jan 9th, 2009 at 07:31:26 AM EST
The problem IMO is not only the low incomes. It is also the high costs of necessary goods. Here i mean mainly the housing costs. People pay a lot of money for the land where they have place to live. Also there are a lot of costs for raw-materials and oligopolistic construction business. Land costs in farming, roads etc. When economy grows, grows also land value and raw-material costs, which eat the results of capital and labour use. Zero amount of labour and capital is tied to land and raw-materials. They are not products of the markets. Land is not capital nor it is product of labour. When money goes to land and other natural resources it doesn't create any demand, labour or capital. Before this issue is addressed, i believe nothing will change, because wealth does not trickle down and improve household self-sufficiency. Wealth just moves from one land owner to another.
by kjr63 on Fri Jan 9th, 2009 at 11:08:58 AM EST
The crucial role of the "Commons" of Land in an Economy has been quietly airbrushed out of conventional Economics, in best Orwellian tradition.

Mason Gaffney and Fred Harrison documented this process in

The Corruption of Economics

Essentially Land has been conflated with Capital, and an anthropocentric assumption made (which Marx also makes) that only Labour is "productive".

This essentially allows the wealthy to exclude economic justification for taxes on wealth, and in particular the taxation of the privilege of private Property in Commons such as Land.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Jan 9th, 2009 at 12:07:39 PM EST
[ Parent ]
Thank you for the link! I read about Henry George from Arvid Järnefelt's (a finnish intellectual in the beginning of 20th century) book. I thought, these principles are completely buried in history. It is fantastic to see that is not the case!
by kjr63 on Sat Jan 10th, 2009 at 06:29:57 AM EST
[ Parent ]
Tervetuloa ET:lle!

You can't be me, I'm taken
by Sven Triloqvist on Sat Jan 10th, 2009 at 06:34:07 AM EST
[ Parent ]
Kiitoksia!
by kjr63 on Sat Jan 10th, 2009 at 07:02:51 AM EST
[ Parent ]
kjr63:
I thought, these principles are completely buried in history. It is fantastic to see that is not the case!

As you see, they were indeed buried...but fortunately they are not dead - far from it!

Indeed I see the principle underlying Georgism - ie taxation of Privilege - as informing a new generation of policies which are based upon different assumptions to the discredited assumptions now being exposed in all their worthlessness.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 10th, 2009 at 07:36:56 AM EST
[ Parent ]


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