More On The Social Model

Well French Central Bank Governor Christian Noyer is back in the news again. Today the FT have an interview with him, and some of his points make interesting reading.

Firstly on the euro and structural reform:

Q: “Of the three Scandinavian countries in the EU, one is in the eurozone (Finland), one links its currency to the euro (Denmark) and one is not in the eurozone (Sweden).”

A: ?That clearly demonstrates that it is not the monetary regime that eventually leads to good economic results and low unemployment. It is really the way that structurally the economy works.?

Note, he is not saying that monetary policy isn’t important, but simply that the big issue is the way an economy works structurally. These ‘structural differences’ are of course quite wide within the eurozone, and this then complicates the application of uniform monetary policy.

Then on the social model, in answer to the same question he says:

?One of the key elements of the way these countries work is that they have mixed a greater level of flexibility in labour and product markets – a bit like the UK economy – with a high degree of social protection, which is traditional in continental Europe.?

?This kind of model might be the appropriate one for continental Europe. You could never repeat it exactly, but it is full of lessons for countries such as France, Germany and Italy.?

?To me, the Scandinavian model shows that you can have both flexibility and protection – but not protection in the sense of a job for life, even if your company is sinking. Protection means that you have a social safety net to help you during a transitional period, and have a whole system of education, training and re-training that obliges people to find a new job. It gets people back into work.?

Interesting. This is not an ‘either-or’ situation. I tend to agree with that.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

24 thoughts on “More On The Social Model

  1. Yes, the Scandinavian model seems to be in vogue again after a period of un-trendiness. But before one embraces the third way – and German politicians like Lafontaine have been doing just this in pointing to Scandinavia as a critique against SPD:s reform politics – one mustn’t forget a few vital and unique Scandinavian characteristics. I will focus on Sweden as the prime example:

    1) Long tradition of centralised state governance (since 16th century). Totally different structure than federal Germany or even Britain.

    2) Culture of homogenity and collaboration. There is an accepted narrattion of inclusiveness and conflict-avoidance which enables the government to implement change relatively unchallenged.

    3) Virtually a one-party-system (Sweden only). No opposition party has successfully challenged the Social Democrats since the 30ies. Indeed it is safe to say that the Social democrats ARE Sweden in its current form.

    4) Modern tradition of technocrat social planning. People are used to state solutions to problems. History is secondary, even gets in the way of efficient organisation.

    I don’t think this model would work anywhere else. The question is rather why government solutions seem to be getting popular at this point in time.

  2. “The question is rather why government solutions seem to be getting popular at this point in time”.

    Well I’m not really sure it’s quite this. I think the point is that the key structural reforms being advocated in Europe are labour market reforms. The point would be that they are perfectly compatible with a strong social safety net. So a lot of this scaremonger stuff that says Europe is torn between social economy and neo-liberalism is just balderdash, or paranoia (some of the ‘no’ vote in France). There are no real rational grounds for this kind of cross-polarisation, if the Chirac-Schroder axis was what typified the last phase, the Blair-Merkel axis may well define the next one. This is not Sarkozy-Thatcher, this would be the point.

    The issue is how to shift non-wage costs off employment creation. Merkel’s solution is a highly questionable rise in VAT, but that’s another debate.

  3. There have been 3.

    1976-1982
    1991-1994

    Do you think they had time to make any changes in the administration?

  4. I think it’s interesting too, but I’m not sure whether it isn’t actually a question of either/or, at least to a certain point. Not because I buy the neoliberal lassez-faire ideology, but because there is always a price to pay for social security nets and at this point in history we face different challenges than in the 30ies when this developed.

    But the question of what to tax if not wages might be a simple way of finding new paradigms as the labour market changes its nature completely. If not VAT what then? The VAT in Sweden is 25%.

  5. “and at this point in history we face different challenges”

    I agree :).

    “of what to tax if not wages”

    Yes, again I agree. The point is that one of the characteristics of the German ‘problem’ is lack of internal demand. Now raising VAT is going to be negative for domestic consumption that is clear. So this won’t work, and ideally there has to be a combination of reducing spending (again, ironically, a re-elected Schr?der, which I don’t think we’ll see, might have had more willingness to do this) and increasing revenue by having more people working. The hard part is to hit the ‘balance point’.

    @ Fredouil

    I don’t know if you are reading today, but you once asked me the same question about France, and this again would be my answer. Increasing taxes is normally going to be employment negative. This is the big issue about how you pay for an ageing society in a globalised world, for every % point you raise eg VAT a determinate number of jobs will relocate.

  6. “But the question of what to tax if not wages… ”

    How about taxing income ( which comprises more than wages ) ? Dividends, inheritances, Capital gains, interest, land property gains ….

    And there are lots of ways to vary that in detail to get more or less progressive scales or to control incentives.

  7. Merkel of course argues that before VAT is raised, unemployment insurance is lowered by 2% – one for employee, one for employer. This lowers the wage costs all in all. Another point by someone I forgot is that prices might not rise very much exactly because demand and purchase power is low. Wholesale might choose to keep the prices unchanged and swallow this VAT increase. Looking at the shopping landscape around Berlin I’m prone to agree with this, probably for Germany as a whole actually. I think we have seen a steady price decrease in most consumer goods for a year or two now. Globalisation obviously has to do with it as well.

    Lotta ins, lotta outs…

    😉

  8. “ironically, a re-elected Schr?der, which I don’t think we’ll see, might have had more willingness to do this”

    Without taking sides here, Merkel might want to play it safe before the elections and then go on to reduce spening more than initially accounted for. At least this is the theory in Monday’s Der Spiegel. But this is off topic…

  9. “and then go on to reduce spending”

    Oh, I’m sure you’re right. I think there is no real alternative. Remember much of this spending is structurally determined (eg health). It isn’t just how you maintain the current spending, it is how you pay for the increases which are inbuilt. So then Merkel suddenly becomes unpopular, and has all the issues Schr?der has been having. Really a good case could be made for an SPD/CDU coalition to just get on with the job. I go back to Frans’ post on the referendum, in many ways all this is about the centre versus the perifery (at both ends).

    @ khr

    BTW I have been following your advice and reading Bofinger (I simply haven’t had time to post on it with everything that is happening). Whilst some of the points he makes are technically correct in an abstract world (about automatic fiscal stabilisers rather than rule of thumb committee decisions) I have searched his works in vain for any reference to the fact that the SPG rules were designed *explicitly* to handle sustainability in an ageing context. Any discussion of fiscal policy which doesn’t have this at its heart isn’t worth the paper (or electronic ink) it is written on (or with). IMHO.

  10. That clarifies the term.

    Just to make sure, you refer to the rules govern the Euro countries’ financial limits, aka teh Maastricht criteria ?

    In his book ( have you read that or only hi website ? ) he discusses both the Maastricht criteria and demographics, tzhough I don’t remember him drawing a link between the two.

    Basically, Bofinger thinks that Germany’s demographic problems have been exaggerated, that the pension system has been overloaded with payments (East German pensions, immigrants, compensation for child-rearing years etc.) that should properly be paid by general taxes, and that policies that actually promote economic growth and full employment would go a long way to keep the pension problems manageable.

    He does not have a high opinion of the Maastricht criteria. Period.

  11. “for every % point you raise eg VAT a determinate number of jobs will relocate.”

    Why, don’t see why that would be the case? It is not like export have VAT on them.

    khr, income is mostly earned and the non-wage part of income is the easiest to evade paying tax on.

  12. @ c

    “for every % point you raise eg VAT a determinate number of jobs will relocate.” “Why, don’t see why..”

    Ok, I own up, you’ve caught me, this is badly put. This is a point which applies to non-labour costs. The expression should have been written:

    “for every % point you raise eg VAT a determinate number of jobs simply disappear.”

    Why, because you raise the price, and following normal economic logic this reduces demand, a simple elasticity point. I could spice it up and say something like – indirectly firms will move out to lower production cost areas to maintain price competitivity, and avoid passing on the VAT – but it wouldn’t be honest. I just wrote the phrase too quickly without thinking sufficiently. Shoot first, ask questions later. Mind you my mind was rather elsewhere at the time.

    While we’re here I also want to concede another point of yours which I never had time to get back to, the deaths in Iraq. At least I don’t concede, or not concede, I just accept that there are reasonable doubts, and we may never know, but if we ever do it will be certainly after the war, and the propaganda on both sides, has ended.

    @ khr

    “Bofinger thinks that Germany’s demographic problems have been exaggerated”

    I think this is the point. I think it is he who doesn’t understand the significance.

    “he discusses both the Maastricht criteria and demographics, tzhough I don’t remember him drawing a link between the two”.

    I have only read the WPs and not the book. I was very surprised on first reading them since I thought I must have got it wrong so clear is the absence of any ageing connection in his material. So I went back to the sources, and of course, the link is quite clear. In the end I think he is dishonest. It is one thing to argue against something, and another to pretend it isn’t there.

    I think this also puts his observations on Sinn in some sort of context. Sinn may be boring, and he may dramatise, but he is basically on the right track.

  13. I would assume that the higher VAT rate is compensated with lower wage taxes, as in Merkel’s plan or what Thacher did, so the cost of a product would be the same in pre tax wage hours. This shouldn’t lead to lower consumption (after people get used to it atleast)
    Add to this that will tax imports more than a wage tax and i would even argue that it will increase the number of jobs. Plus it will benefit the black economy which is more based on local employment.

    ps. About Iraqi deaths. Just count the number of deaths caused by anti American forces (including or excluding police etc.) If what the media reports is most than the answer is clear. Only in recent months are the anti American forces getting close

  14. “I would assume that the higher VAT rate is compensated with lower wage taxes, … so the cost of a product would be the same in pre tax wage hours.”

    The intention is use the extra VAT revenue to reduce Jobless Insurance Payments.

    But wage earners who pay jobless insurancce are not the only people who pay VAT. The jobless, pensioners, state officials (in Germany), non-working wives and children don’t benefit from the shift.

  15. “But wage earners who pay jobless insurancce are not the only people who pay VAT”

    Yeah, kv is right here, consumption taxes are also regressive, since you pay them regardless of income. Sorry, I’m just not on this at the moment.

  16. The jobless, pensioners, state officials (in Germany), non-working wives and children don’t benefit from the shift.

    It has been said that Germany needs to cut benefits and pensions. Actually numerically cutting pensions is political suicide and cutting unemployment benefits is also very risky and not increasing consumer confidence either. So raising the VAT is the next best thing you can do.

    The regressiveness of that is overestimated because rents are not taxed and the reduced rate is planed to remain stable.

    Thirdly, if it does reduce unemployment everybody profits eventually. Even a serious hope that it will reduce unemployment would help.

  17. @Edward
    I will try to summarize Bofinger’s view of the demographic problem.
    (based on his book “Wir sind besser als wir glauben”, p.153 ff. The data he cites are mostly from the R?rup committee that was tasked with working out a long-term plan for the German pension system)

    1) The problem is exaggerated if you look only at old-age pensioners as dependents. Children and teenagers are equally dependent on support. In 2030 there will be 6.7 Million more people over 65 than in 2000. But there will also be 4.1 Million fewer Children. Net difference: 2.6 Million more dependents. Still a substantial number, but rather less than the present number of registered jobless in Germany, who also are supported by society. Getting them back to work would compensate increased number of old people.

    2) Moderate shifts in the pension system, e.g. in the entry age would eliminate the problem, if you take account of the total number of dependents. The ratio of 20-65/those over 65 old is 3.6 in 2001 and will be 2.1 in 2030. But the ratio 20-65/(below 20 + over 65) will only shift from 1.6 to 1.3, and if you put the pension age at 67 it becomes 1.5, essentially identical to present numbers.

    As child care is mostly privately financed, but old-age pensions are paid by the public, these two topics get entirely different political attention.

    3) Much of the discussion about pension systems is misguided. B. is a macroeconomist, and he argues that from a macro perspective, all pension systems are pay-as-you-go. This is obvious in terms of real goods and services. There are not many goods that a 25-year old can buy that he can reasonably expect to enjoy at old age. But it is also true in monetary terms. Say, the 25-year buys 40-year treasury bonds. When he cashes them in at 65, the state has to finance that through taxes, culled from the then-working generation. Similar arguments can be brought forward for any kind of financing support for old age. This means that all pension schemes are susceptible to demographic shifts. The question then is about seccond order effects: what scheme is likely to prove safe, effective, equitable and to best promote growth over the long term ? Many saving schemes do not pass that test.

    3) Immigration of young, productive people would be useful, but is fairly unpredictable.

    4) Given the above, the only sure way to cope with demographic shifts is higher productivity in the working population, by technological innovation and getting the jobless to work.

    Greetings
    Karl Heinz

  18. @ Karl

    OK thanks for this. My own view I guess you already know, but:

    “But there will also be 4.1 Million fewer Children. Net difference: 2.6 Million more dependents.”

    This point is clear, but I don’t think reducing children and adding elderly is neutral. Even in cost terms the elderly may be more expensive, but leaving this aside the median age (or the average one) will rise and this must have implications for productivity and attitudes to change, as well as the average levels of eductaion, if you take into account stocks and flows, and the fact that young people need more and more years of preparation as a continuing trend in the knowledge society. So I think he is missing this.

    “Getting them back to work would compensate increased number of old people.”

    Well obviously, this is the Lisbon agenda, and the argument for labour market reforms, but better put: “Getting them back to work would *help* compensate increased number of old people”. Since I think understating the extent of the problem he then overstates the effect of getting people back to work. Still, it would be important if it were achieveable. I have my doubts since I think you may already be in a “double bind”. BTW increasing participation rates of younger women is of course very ‘doable’ with fewer children, but you need to watch the negative feedback effects of having everytime less children in the next generation, this would be ‘population meltdown’.

    “Much of the discussion about pension systems is misguided. B. is a macroeconomist, and he argues that from a macro perspective, all pension systems are pay-as-you-go.”

    If I understand what he is saying, I think he may be right. He is saying in effect that even private and fully funded pensions depend on the rate of return, and the stock market etc. This I agree, but I don’t think it helps his case. If we look at the very low yields which many (including me) think may be partly demographically induced (the global savings glut) then this itself means lower pensions. If this pushes eg hedge funds into riskier assets and this causes problems in the financial system, then this would be even worse. B?rsch Supan is interested in what is known as the ‘asset price meltdown issue’. The jury is out on this.

    “There are not many goods that a 25-year old can buy that he can reasonably expect to enjoy at old age”

    The obvious one is housing. This is why there is the boom. But with so many people buying, and prices being forced up so far (not, of course in ageing Germany and Japan), and less people coming behind to eventually buy them, one day or another this has to crash.

    “Given the above, the only sure way to cope with demographic shifts is higher productivity in the working population, by technological innovation and getting the jobless to work.”

    Well we would all agree with that, if it were possible. But what he doesn’t seem to get hold of, and you raised this on an earlier occassion, is the ‘boom generation’ issue (in Germany this might put maximum pressure what 2010 – 2015). Fiscal policy can be important in getting through *some* difficult years, but this recourse will only realistically be available as a weapon if you reduce the debt stock now. This is the Maastricht argument, and this is the one I haven’t seen him address.

    If you want more on all these issues I have loads of references here:

    http://www.edwardhugh.net/demography.html

    I just think in the end that he is way behind the curve on where macro-economics is moving. Of course, being immodest, I think I’m in front of it :).

  19. @ Karl

    All this will be useful at some point as I will do a post. I just haven’t the mental energy right now. Probably you can imagine why.

  20. “the median age (or the average one) will rise and this must have implications for productivity and attitudes to change”

    Age here, is, at most, a second order effect. Productivity is primarily shaped by economic factors (incentives, technology, infrastructure, advanced training etc.).

    Attitudes to change is a complex issue. Many of the “Green” antitechnology activists (nuclear, genetic engineeering, Transrapid train etc.) are quite young. Again, the basic economic outlook may be more important than age as such.

    “increasing participation rates of younger women is of course very ‘doable’ with fewer children”
    But the main problem is jobless older people (over 50) and very young people (often male) with poor schooling, and regional jobless concentrations.

    Young parents (male or female) are quite likely to start working soon if good, affordable child care is provided.

    And a population meltdown is a rather exaggerated risk. Even under pessimistic assumptions, Germany would remain a quite densely settled country for the foreseeable future.

    “There are not many goods that a 25-year old can buy that he can reasonably expect to enjoy at old age

    The obvious one is housing.”

    Indeed

    “This is why there is the boom. ”

    What about the more conventional explanations for the housing boom (and its pending demise in Britain) ? What about interest rates, cheap credit, rising incomes, speculation etc. ?

    As to policies, Bofinger thinks that the poor growth that Germany has suffered since the early 1990’s can be explained by conventional economic reasons, rather than demographics. Notably: poor domestic demand due too-high interest rates, a tax regime that penalizes wages, stagnating wages, what economic growth there is mainly benefits high-income groups unlikely to spend it, overrestrictive government spending etc.

    Conversely, he claims that the better performance of the US and Britain is largely due to better policies on these issues, rather than to better flexibility, lower overall taxes and the other arguments commonly heard.

    Greetings
    Karl Heinz

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