Why reform has become a dirty word.

This anniversary guest post was written by the indispensable Jérôme Guillet, who normally writes for The European Tribune.

Laurence Parisot, the head of MEDEF, the French business
organisation, recently complained that:

There is one word who meaning for the public has changed in the past 25 years: “reform”. It used to be synonymous with progress, and now it means social regression.

One wonders why. Or not. As I’ve written incessantly over the past year at European Tribune (for instance here), “reform” has come to mean only one thing: less regulation of corporations, lower wages, fewer rights for workers, and weaker unions, i.e. the elimination of anything that can impede corporations’ freedom to make profits in the short term.

[And it works:

]

There is no better demonstration of this state of mind than the recent report prepared by the World Bank, Doing Business 2007 (pdf) which “compares regulations in 175 countries”, and whose substitle is, simply, How to reform. Thie introduction deserves to be quoted:

Regulations affecting 10 areas of everyday business are measured: starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. The indicators are used to analyze economic outcomes and identify what reforms have worked, where and why.

The methodology has limitations. Other areas important to business—such as a country’s proximity to large markets, quality of infrastructure services (other than services related to trading across borders), the security of property from theft and looting, the transparency of government procurement, macroeconomic conditions or the underlying strength of institutions—are not studied directly by Doing Business.

“Reform” has been hijacked, even by the World Bank, which should know better, to mean reducing the “burden” on corporations. Te Bank’s index, which has become quite influential and is widely used by governments around the world to set their policies, specifically excludes things like infrastructure, institutions and security, i.e. these pesky things usually provided by good governments and paid by taxes and “forgotten” by businesses when they complain about governmental interference (but not when they choose where to invest, as attests France’s almost permanent presence in the top five favorite destinations for FDI alongside China and the USA). That such issues can be mindlessly excluded from public discourse on this topic via a 3 line disclaimer in their report is profoundly dishonest.

If the logic was to facilitate wealth creation by companies with a later focus on redistribution of that wealth, that might make a little bit of sense, but the goal seems only to be wealth capture by corporations per se, whether out of actual creation of wealth or, increasingly, from the shifting of costs from their P&L to the public purse. Where that wealth goes is obviously no longer a worry of the World Bank, something I find frankly disquieting. Even more, as taxes are seen as a negative thing, any redistributive policy is explicitly considered an obstacle to “reform”. Thus we end up in situations where economies appear to be growing strongly and yet median income (as opposed to average income) is stagnant or even declining, a sure sign of growing inequality rather than growing prosperity.

The case of Germany in recent years is striking. The country has “reformed” in that real wages have been going down significantly against all competitors. And it worked: German companies are the world’s export champions and are making record profits, and Germany is seen as one of the two big winners, with China, of globalisation. And yet German growth, until this year, has been dismal, something blamed on the lack of dynamism of domestic consumption, the very direct and unavoidable consequence (unless you indulge in a debt orgy as some other countries are doing) of wage moderation and “reform”. So profits have been created for profits’ sake, but they obviously don’t benefit Germans, beyond the small class of investors in the financial markets. OECD’s response: increase wages so that all can benefit from the wealth created? Nah – “reform more“.

That business leaders push for such short-sighted policies is somewhat understandable – after all, it makes their life easier in the short term, and, via stock options, they can capture a disproportionate share of these profits. That politicians follow their advice so blindly these days is a betrayal of their role as custodians of the general interest, and they should not be surprised that increasing numbers of their citizens find it unfair.

Reformers and would-be reformers might do well to read again the Wealth of Nations (as quoted by Migeru over at European Tribune):

Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical.

Adam Smith, the hero of most self-labelled liberals (in the European meaning) who have obviously never read his works, said it two centuries ago: business must be regulated, otherwise it will inevitably abuse its position of strength against workers and others. Transforming “reform” into a blind quest to eliminate all constraints on corporations, as seems to be the zeitgeist today, is ignorant, callous, and a profound betrayal to true liberalism. It must be fought resolutely. it’s one of the core ideas at the heart of the European Tribune community.

46 thoughts on “Why reform has become a dirty word.

  1. Glad to have you on board, Jerome.

    Personally, I agree with every damn thing in this post, especially the bollocking directed at users of the word “reform”. A horrible word, long drained of significance and used to shut down any form of intelligent discussion.

    “Modernise” is as bad, and Blair is a chief offender.

    It’s also pleasant to see some criticism of sectoral whingers like Digby Jones’s CBI for demanding better public infrastructure and also lower taxation, as if there was no conflict between these moans.

  2. This is hilarious, I couldn’t believe I was reading it. Nothing like embracing the road to economic decline with enthusiasm.

    Europe has encrusted companies with so many regulations that they are moving out of the continent, to the many hospitable jurisdictions now available around the world, pretty much as fast as they can go. Europe’s problem is that it is not removing restrictions on companies fast enough, or addressing the formerly neglected question of which of the many regulations already in place make any sense or do anyone any good.

    Europeans will be forced to recognize this reality eventually, by which time millions more of them will be doing so from what has become the signature EU position – lecturing the rest of the world from the dole queue!

  3. ZF – if you’re so sure of what you say, how do you explain the following:

    – the eurozone’s job growth rate between 1995 and 2005 is higher than that of the USA;
    – France is consistently in the top 5 destinations for FDI, with absolute amounts not very different from the USa or China
    – France’s growth per capita (note that word: per capita) is identical to that of the USA for the past 15 years
    – France has created more private (note that word: private) sector jobs than the USA or the UK over the past 10 years.

    I’ll give you stats courtesy of the Economist of the Financial Times to back all these assertions if you need them.

  4. tom

    Because it’s more accurately measured? See this story by Colman:
    http://www.eurotrib.com/story/2006/6/15/7531/94062

    Perhaps you can explain why the number of Americans without health coverage is so high? Why the average life expectancy is the lowest of the rich countries? Why poverty is so prevalent?

    Or is the unemployment number the only relevant criteria? Or is it the only one that makes France look somewhat bad, thus the only one that should be used?

  5. tom harlen, remember that unemployment rate does not count the “inactive” people, and studies reveal that between inactive and unemployed there’s not much different.

    If you look at the core of the work market (25-54), employment rate is consistent with what Jerome says.

  6. I agree that the World Bank oversells “regulation” as a constraint on development, but bear in mind that nothing in the Doing Business indicators penalises having high taxes. The indicators try to measure the cumbersomeness of administrative procedures; the argument is that a particular procedure should be completed in a timely fashion and at relatively low cost, not that the procedure shouldn’t exist at all.

  7. Jerome,

    The reason I’m so sure of what I say is that I live and do business part of the time in the US, part in the UK and part in France.

    Ordinary young people have vastly better opportunities in the US, and anyone who is even half-way inclined to take advantage of those opportunities has a much better standard of living than ordinary young people in France.

    I support meaningful and useful regulations for companies. I’m simply pointing out that while (over much of the past century) the US and Europe could deliver the best environment for corporate expansion even with thousands and thousands of ill-considered regulations (‘red tape’), this is no longer the case. Companies (and I might add young, qualified people, many of them French) increasingly have other places they can go, which aren’t encrusted with as many rules and restrictions. This makes Europe uncompetitive, and it’s important to emphasize that this is a process which has hardly even started yet.

    Tightening up sensibly on company regulation would involve something like introducing a new regulation and at the same time dumping four or five old ones. I don’t see ‘old Europe’ as being anywhere near ready to do this!

  8. Jerome,

    You are right! There is absolutely nothing wrong with France/Old Europe. Their economies are the envy of the world! Every country in the world is trying to emulate your supposed success.

    You can sit there and try to justify that there is nothing wrong with your economy. While you do this, China and India will continue to catch up with the Old Europe economies. The United States will continue to out grow you.

    Your welfare systems are not sustainable. Your populations will start shrinking in the next couple of decades. How will your countries continue to support the bloated welfare systems? Will the governments cut the welfare state? I doubt it. There would be strikes that would shut down the country. The other option would be to allow huge increases in immigration, but this would bring bigger problems down the road. Your Muslim immigrants are not assimilating right now. There is no reason to think that they will assimilate in the future. Your governments are storing up trouble for the future.

    The United States is not perfect, there are many things that could be changed for the better. But I can’t think of another country in the world where I would rather be living.

  9. I’m sorry Jerome, I agree basically with ZF I think this post is ridiculous.

    ““reform” has come to mean only one thing: less regulation of corporations, lower wages, fewer rights for workers, and weaker unions, i.e. the elimination of anything that can impede corporations’ freedom to make profits in the short term.”

    This seems to be the heart of your argument. As such it is a straw man (or better said, straw person) and of course these are easy things to knock down. You define the only thing ‘reform’ can mean, you define it as something silly, and then you destroy your own definition. Fine, if it makes you happy.

    But does that mean Europe doesn’t need to reform? I hardly think so. We have been having a debate on Afoe over the past few days about the Senegalese workers coming here to Spain, European migration law doesn’t seem adequate to the situation, some of us feel that we should reform because Europe NEEDS unskilled migrants. Does this kind of reform seem so stupid to you?

    Also Europe has ageing populations, and with changing dpendency ratios, low fertility and longer life expectancy people are going to have to work longer, and probably accept lower pensions and inferior health systems. The reform process in this case is commonly known as the Lisbon agenda, which is the most important reform programme we have on the table in the EU right now,is this kind of reform not to your taste?

    Also we have an ongoing problem with international trade. Developed societies subsidise argriculture in ways which is plainly detrimental to the interests of many poorer developing economies, don’t we need to do something about this, and reform our system of agricultural subsidies?

    What is interesting is that in the third world this debate about ‘reform’ also exists, and we notice something odd. Those countries where the idea of reform is unpopular tend to get stuck, while those coutries which begin to reform themselves – China, India, Brazil, Thailand, Turkey, Chile (the list is now pretty long) – seem to start to grow rapidly. Strange isn’t it.

    It is funny how thirty years ago many young European people were on the streets actively demanding change and reform. Young people in Europe now take to the streets more often than not in order to try to keep things the same.

    Germany and Italy have to reform, or their social and welfare systems will go bust. France and the UK are luckier, they still have more leverage, but do they really need to wait till they are were Italy and Germany are now before they react? Somehow I don’t think so.

    Obviously the world is changing, and fast. The world economy is no longer pulled by either Europe or the US, the driving force is now in the developing world, and some of their economies are going to be truly massive. This situation presents us with a very special set of circumstances. We obviously have a choice. We can try to ignore all this and hope it will go away, or we can try and do something about it and embrace a process of, well why not, reform.

  10. Alex,

    “demanding better public infrastructure and also lower taxation, as if there was no conflict between these moans.”

    Actually Alex there is no necessary contradiction here. If you can use the investment in public infrastructure to generate growth then you can have lower taxes too. It depends.

    Actually I am reminded here of the fact that Max Weber opposed the old soviet system on the grounds that without fully functioning independent trade unions there could be no meaningful civil society. By a similar process of reasoning mixed market economies need active and independent employers associations. Which doesn’t mean you have to agree with what they say, just that they have an important functional role to play. Personally I often feel ‘a plague on both their houses’, but we need them nonetheless.

  11. In random order

    Europe takes in more immigrants than the US. Also, you might be interested to know that France has positive net inflows of qualified workers, whereas the UK has a large negative outflow. So if people are voting with their feet, that indicator is certainly not favoring the UK, supposedly the poster child of flexible economies (but maybe you put them in the same ‘basket case’ category as the rest of Europe)

    I am not saying that there is nothing wrong with France or Europe, just that it is not the basket case it is made to be all the time (and which you seem to buy despite the facts that I am presenting).

    And being a nice place for entrepreneurs is one thing (even if that comparison were true), but what about the rest of the population. Europe’s crime seems to be to think about the others as opposed to favoring only businesses.

    As to ‘reform’ meaning what I claim it to mean, I can only refer to my numerous posts on European Tribune where this claim is chronicled in loving detail through the analysis of the English-language press

    Just a sample:

    The Economist does not listen to the Economist
    Fighting the ‘New Consensus’ about Corporations vs the State (dKos)
    The New Consensus ™ ‘s new bogeyman: protectionism
    Energy consolidation and nationalism in Europe
    Language deconstruction of the day (vol. 1) (Ghost of August 1914 spooks EU)
    Article Deconstruction (vol. 2) – EU energy regulator
    Debunking the EU official line
    Contrat Première Embûche
    Casual slurs of the day
    Article Deconstruction (vol. 3) – Student protests per IHT
    Article deconstruction (vol. 4): French farce
    It’s the same fight
    Triple Play (US articles on French protests)
    IHT sees the light on French student protests
    French employment and unemployment
    What is wrong with having low energy prices from a competitive company such as EDF? (LTE in FT, 7 April 2006)
    Article deconstruction (vol. 5): French fear
    Four Ways to Fire a Frenchman (debunking the NYT)
    Emerging common wisdom: Villepin reform flawed + my counter proposal
    Article deconstruction (vol. 6): Brown and protectionism
    Blair and Brown’s dirty little secret (on public sector employment)
    Article Deconstruction (vol. 7): “Berlusconi triumphant as he wins narrow victory”
    Article Deconstruction (vol. 8) – Europe ‘has it too good’, needs a crisis
    Reform does not work

    We can ignore the fact that Europe seems to be doing not so badly on most indicators other than pure monetary aggregates (poverty rates, death rates, median income as opposed to average income, trade balance, foreign indebtedness) with a much more sustainable model (energy consumption, carbon emissions, etc) as compared to other economies.

    Of course things are not perfect. That’s true everywhere.

    I note, of course, that Adam Smith’s word were ignored.

  12. “ZF – if you’re so sure of what you say, how do you explain the following:”

    Actually Jerome the whole gist of this argument seems strange to me, since it assumes that the US doesn’t need to reform itself. Obviously it does, US manufacturing companies are not up to competing with Japanese and German ones in many third markets, they need to address this, as the trade deficit indicates.

    I mean this isn’t a France vs US soccer match. The US has already introduced a higher retirement age and they are discussing social security reform, but there is still a lot to do, especially since it is the US more than anyone else who will be affected by the arrival of China and India, as well as by the imbalances situation which the differential ageing is producing.

    “France has created more private (note that word: private) sector jobs than the USA or the UK over the past 10 years.”

    The point is again, what is happening in the US and the UK seems to me to be irrelevant to what people in France need to do, France may have produced the most private sector jobs but it still hasn’t produced ENOUGH jobs, since the unemployment level is far too high however it is measured. Otherwise why do people have such an issue with immigration? If there was plenty of work surely people would be happy for migrants to come and do all the dirty low paid jobs. Those societies with plenty of work simply don’t have an issue with immigration. Ireland, the US, the UK and Spain would be good examples of course, and please note Spains unemployment rate is also badly measured since many of those figuring in the stats are obviously working in the informal economy, in this case with complicit employers using the unemployment system to get the state to assume responsibily for the social security contributions.

  13. “it is not the basket case”

    Jerome. You seem to have an obsession with this. No-one on this site has ever used that term to my knowledge. It has nothing to do with the argument.

    “I note, of course, that Adam Smith’s word were ignored.”

    Didn’t you read my comment to Alex, that was what the whole point about Max Weber is about. I’m in favour of deregulating what can be deregulated to advantage (like trade, undue bureaucracy) not each and everything. I think you are again stalking straw people. The Lisbon Agenda is a form of development planning, you need an efficient central administration in Brussels to implement it, you need a strategic technology policy. At the end of the day ‘deregulation’ is all about strategic regulatory frameworks.

    Look at the housing boom in the US, in part this is driven by building permits and financed in large part by Fanny Mae and Freddy Mac who are, of course, state regulated institutions and not private banks.

    There’s a lot of ‘baloney’ talked about ‘free markets’ IMHO.

    As for Adam Smith, I’m not a great admirer on some counts, for one his hidden hand obviously cannot generate stable population structures, but we are learning about this very late in the day unfortunately.

  14. “But I can’t think of another country in the world where I would rather be living.”

    Well Tom, you could come and try Spain for a bit, it’s great here :).

  15. I would say neither the US or France has produced enough jobs — and certainly not enough jobs that match the wage expectations of their native-born population — over the last few years, despite a similar housing boom. in france that shows up in persistently high unemployment rates, and, i suspect, in a tendency to stay in school a bit longer than is required just to create human capital (lots of folks seemed to do several DEAs while looking for a job back when I studied in france). In the US, this shows up in a falling employment to population ratio.

    that said, i thought the post was brilliant — the term “reform” has been hijacked … its meaning has completely shifted in the way Jerome highlights.

    that doesn’t mean change isn’t necessary, both in the US and in Europe. But it does mean that the term reform (as in structural reform or labor market reform) now carries a lot of baggage. it was orginally meant as a positive, and i think it is still carries that connotation in the us (“reformer with results”) but its connotation is increasingly right leaning and in much of the world, its connotation is very negative.

    One other point. Edward writes:

    “The world economy is no longer pulled by either Europe or the US, the driving force is now in the developing world, and some of their economies are going to be truly massive.”

    I am not sure that this is the case — if “pulled by” means “sources of demand growth”, over the past few years, it has precisely been the US (03-05) and Europe (05-06) that have been the engines of global demand growth. Both have expanding current account deficits, unlike the emerging world.

    demographics will create massive emerging economies, tis true. but they haven’t (yet) emerged as self-sustaining engines of global demand growth. Here’s hoping they do.

  16. “has a much better standard of living than ordinary young people in France.”

    Actually ZF I think you need to be careful here, since there is no ‘culture independent’ measure of standard of living. This in part was my joking point to Tom, normally people tend to think that where they are is the ‘best’. And good luck to them.

    Difficulties with deciding what ‘standard of living’ means is one of the reasons why the UN has the Human Development Index, it’s an attempt at an intercultural measure.

    Obviously one way of doing it is to measure by the level of your bank balance. This is normally the way of doing it in the US, and again, why not. If people are happy with that as a measure of existential success, then great. But I think it is a mistake to assume that others don’t use a different scale.

    Take the UK to go no further. I think one of the reasons Ms Thatcher untimately failed was that she tried to raise the importance attached to money in UK society to the US level. Essentially people resisted this.

    Basically all this is to do with what Milton Freedman would call preferences, and normally economists are agreed that they have little to say about how these are arrived at.

    So I think we need to be aware that one meaning of ‘diversity’ is that people have different cultural values, and the important thing is to respect those differences.

  17. Hi Brad, nice to have you around 🙂

    “I am not sure that this is the case — if “pulled by” means “sources of demand growth”, over the past few years, it has precisely been the US (03-05) and Europe (05-06) that have been the engines of global demand growth.”

    My argument here is a pretty simple one. Global GDP growth 2006 is forecast to be around 5%. Of this the US has about a 3.5% rate, Japan about 2.5%, and the Eurozone possibly a touch over 2%. So to make the global 5% someone else must be doing a hell of a lot of heavy lifting. This is a big change from 1995-2000 when the US was clearly pulling the train. Obviously 2000-2005 the US consumer has been playing quite a part, but as housing turns down this may no longer be the case, as I think you and I would both agree. Japan and Germany have definitely been being pulled by the new growth ‘giant Pandas’. All this will I think become a lot clearer after the next downturn as the new engines consolidate.

    The problem is this may increase and not resolve the imbalances since a lot of the new growth may be export driven, in which case we all have a connumdrum. As the Chinese would say, we are about to live in interesting times.

    Incidentally, while I’m on, the big ‘ommission’ I am noticing in all the US commentary on this dimension is that they aren’t taking on board the significant level of fiscal tightening which is about to come in many parts of the eurozone and Japan. Rogoff noticed it and said it was perplexing, unfortunately it isn’t perplexing, but rather, for reasons I have already explained, entirely in the logic of things.

  18. Brad, aslo this: “i suspect, in a tendency to stay in school a bit longer than is required just to create human capital”

    This would seem to be a rerun of the young and ‘overeducated’ argument first run by Lester Thurow some years back (I suspect it may also be connected with Easterlin’s version of cohort theory). I don’t really agree with all this. The argument was also run recently by a McKinsey report on Sweden.

    This interpretation may have been valid in the US in the 70s but it isn’t clear that it is the case in Europe today where there are small and not ‘boomer’ cohorts. One of the probelems is that no-one really knows how much education you need. US thinking seems to veer towards the lower end of the band, and then let the markets decide the rest, but as people from Paul Romer to Alan Greenspan have been arguing, the market mechanism seems to be resulting in an under-educated US population, heavily dependent on importing qualified labour.

    One of the points I am arguing is that Europe should fill the low end labour market needs with unskilled migrants (while at the same time addressing some of the population pyramid problems) and concentrate on increasing the quality of labour market entrants, which means more education and a later start.

    The situation with first time permanent contracts is indicative here. In Spain people don’t really get ‘qualified’ permanent contracts till 28 or 29. Up to that age it is more or less temporary contracts and lots of short-courses. This is also part of the fertility situation, since it means people don’t start having children till they are in their early 30s.

    Now if Mincer was right and the earnings curve reflects productive value, then people are still ‘learning’ till their late 20s, and there isn’t really that much ‘overeducation’. Certainly you can’t in any way blame lack of labour market reform, or the absence of a dynamic jobs market, for the late start in Spain, and I suspect this is more general.

  19. We can ignore the fact that Europe seems to be doing not so badly on most indicators other than pure monetary aggregates (poverty rates, death rates, median income as opposed to average income, trade balance, foreign indebtedness) with a much more sustainable model (energy consumption, carbon emissions, etc) as compared to other economies.

    Unfortunately, some places in Europe do very bad in the public debt/GDP category and in maintaining stable populations. These need to be right for a system to be stable. If debt always grows faster than the ability to pay, you’ll go broke.

  20. I’m sorry to be dragging the France vs Anglo-Saxon comparisons so much, but a big point I am making is that we are brain washed on a permanent basis that France (or “Europe”, meaning usually continental Europe) is rigid, stagnant, business-hating (sometimes with ugly undertones that we are being nasty to our Muslim minorities, breeding terrorist to whom we’ll surrender soon).

    My point is that all of this is quite and simply bullshit.

    It is not to say that France is perfect, but that its problems are not demonstrably worse than elsewhere, and that its model, which incorporates features alien to the financial markets driven anglo one, does not need to be ditched.

    We’ve provided on eurotrib statistics that show that its labor markets are just as flexible as the USA’s, that its growth rate per capita is essentially the same as the USA’s, and even that unemployment statistics need to be used carefully if you want to really compare similar phenomenons (in particular, definition of the active population that makes up the denominator of that ratio).

    The example of the energy sector is typical. France has a system which is provably the cheapest around, for very simple macro reasons (it’s considerably cheaper to finance oneself at sovereign rates over 40 years than at commercial rates over 15 years, especially if you choose investment-heavy and running-cost-light technologies, even if you pay outrageous holidays and perks to your workers). And yet we are brain washed into policies that have only one goal: break up that system in the name of competition, which is supposed to lower costs – provided that you force EDF to rise its so as not to abuse its position. And the Economist writes that the deregulated British system is “naturally” superior and “of course” brings cheaper prices right next to a graph on the very same page which shows French prices being lower than British ones!

    So it’s a very ideological fight for unfettered unregulated corporations driven capitalism versus a more regulated, union friendly model, and it so happens that the French model (like the German one, in different ways) is very close to what “they” want to get rid of.

    So it is essential to demonise the French model to show that nothing good can come out of a system with unions, State interventionism, labor rules, etc… and that corporate-friendly rules must prevail. Thus I am defending the French model, and focusing on indicators like poverty rates, inequality and yes, growth rates per capita to prove that the ongoing assault is false and ideology driven.

    The damages of the corporatist model are becoming clear even in the USA, where median wages are stagnating despite supposedly comfortable growth, where the healthcare system is a huge mess (much bigger than the corresponding messes in Europe), and where the savings rate, trade deficit and povery levels all show that what is going on is not wealth creation but wealth capture – or looting – by a small fraction of the population.

    The model is unsustainable, but everybody mindlessly repeats that Europe needs to adopt it not to be outclassed by everybody else. I’m just saying: we’ll see. The next few years will be interesting.

  21. Edward: “Also Europe has ageing populations, and with changing dpendency ratios, low fertility and longer life expectancy people are going to have to work longer, and probably accept lower pensions and inferior health systems. The reform process in this case is commonly known as the Lisbon agenda, which is the most important reform programme we have on the table in the EU right now,is this kind of reform not to your taste?”

    You complain about my definition of reform and then describe the exact same thing to a word “work more, lower income, less public services”. In the past 30 years, we went from pensions at 5% of GDP to 10% without a strain (well with lots of strains, but somehow all countries managed). Why couldn’t we go from 10% to 15% in a similarly slow transition. Or are you saying that productivity grwoth will not be sufficient for us to afford this. I am highly suspicious of claims to the contrary, which seem to have as sole purpose, like with US Social Security, to get the fianncial industry’s hands on a very big pile of cash.

    Edward: “Also we have an ongoing problem with international trade. Developed societies subsidise argriculture in ways which is plainly detrimental to the interests of many poorer developing economies, don’t we need to do something about this, and reform our system of agricultural subsidies?”

    This is a whole other debate, but it would seem that the only winner of the proposed drop in subsidies would not be the poorest countries, but rich or intermediate countries (mostly the Cairns group) with powerful agribusiness corporations. I see this benefitting very few people in any country, and especially not in the poorest countries, who benfit today from privileged access to the European market.

  22. “Or are you saying that productivity grwoth will not be sufficient for us to afford this.”

    Yes, of course I am. This to me is obvious.

    Look, before I start up again, you jumped to the eroneous conclusion that I am some kind of free market wingnut. Just in case you still have this view, check out this post (and comments) I had earlier in the week on the Indian Economy Blog about the idea of setting up Special Economic Zones. As it happens you will see I use France (and in particular Tolouse) as an example of a good way to do things. This is not the issue.

    The question of SEZs in India is interesting, since the traditional left oppose them because they imply deregulation, and the free market right oppose them since they involve planning and (meta)-regulation. Given this opposition I find the case for SEZs very compelling indeed in the context of a developing country.

    Now productivity.

    My viewpoint is not at all against having a good welfare state, if you can pay for it and create jobs at the same time. The problem is that all our pension and health systems (including the US one, the whole modern pension idea was really invented by Roosevelt) were based on PAYGO, and PAYGO is fine if you have the generations coming behind to pay for those who went before. But we don’t, and by mid-century virtually noone will, so we are all presented with a problem.

    But this is only half the story. While one part of the world is getting old, another part is growing up, and coming online in the global economy. And what we have now, and doubly so after the arrival of the internet, is a GLOBAL and not a local, or a national, or even a continental economy. This means that prices of many things are now set globally. This is obvious, I think, with energy. It is also true of money. Greenspan had to struggle hard against the flow – often pushing against the risk of yield curve inversion – to get the Federal funds rate up, the ECB is obviously also having a very hard time of it, and may well have to turn back and start going down even before they get up if Germany (as I fear) starts to fall back into recession next year. It is also true of wages and salaries, and this seems to be one of the main points that is getting to you. In the main this is currently affecting unskilled labour , but as the new arrivals themselves move up the value chain it will gradually affect ever higher skill levels. There is just no way that hundreds of millions of workers can come online in a globalised economy without this happening.

    Obviously currencies can help offset to some extent with the euro, the yen and the dollar trending down, but – as Brad S will remind you – we are a long way from that now. In fact the euro is being pushed up, and the only ones who are really managing to trend down at present are the Japanese, and they are going to have words with them about that at the forthcoming G7. But of course if they do cede and start pushing the yen up again then it will be ‘here we go with deflation’ one more time.

    This world is just sooooo interconnected.

    Now in principle all this downward drift in wages isn’t so bad if prices move down at the same time, but it won’t be that easy.

    As I said energy is constrained. So if we are going to have say 3 billion people with EU per capita levels of energy consumption instead of just 1 billion, then energy (and possibly other commodity) prices are going to be higher. This is the so-called inflation threat, since apart from this it is hard to see where the inflation is going to come from in the developed economies. Especially if, as you suggest, we are all going to be busy trying to raise productivity. So this is the first structural problem we need to address.

    The second structural problem (and probably this is the biggest one) is how we handle the question of inter-generational fairness in the light of the age structure changes we will be having.

    Now you are right, if we could sustain relatively high levels of economic growth then we could to some extent ‘burn’ this problem off. But this may not be possible. The older European societies – Germany and Italy – are having distinct problems maintaining positive rates of economic growth. The next two or three years will make all this a bit clearer.

    What is not clear is how, in a world of ever faster technical change, you can boost productivity in a greying population. What you get are mismnatches in skill sets, and the older you are the more challenging it is to update skills. One of the features of the ageing process is the gradual loss of function, and the loss of speed. And with many new technologies speed is premium. So there is an issue of stocks and flows here. The larger stocks are going to be in the older groups.

    And this is the whole point about the importance of recycling and participation rates in the 55 to 65 age group, or as it may soon become the 55 to 70 age group.

    OK, that’s probably enough. I don’t have any issue with France, in fact I live only 150 km away by road and I love your country. But that isn’t the issue. It’s reform that this is all about.

    In fact, since I do care about France, I think you should look carefully at where German is now, and think very hard about how you are going to avoid being there in 2020. This is the issue. You have the opportunity to do something, so don’t waste it.

  23. To Brad:

    I just saw this:

    “The Federal Reserve reported Friday that consumer borrowing rose at an annual rate of 2.8 percent in July, down from an increase of 7.3 percent in June.”

    “The slowdown was led by a sharp deceleration in credit card debt, which rose by just 3.4 percent in July after gains of 13.2 percent in June and 13 percent in May.”

    This is what we could call a second stage event. This now has all the hallmarks of a classic domino chain, although it still isn’t clear how far it will reach (all the way to Shanghai??). I am not at all convinced that investment in the US will take up the slack given what we know about fixed capital investment in China, and given the way capacity in things like machinery and equipment has just been ramped up so much in Germany and Japan.

    Watch out everyone in 2007.

    Basically the whole Greenspan/Bernanke hand-over was bungled, they should have had one token pause back in November, then Bernanke wouldn’t have had to prove his inflation fighting prowess so, and advance over what seems to have been a bridge too far. (I was in fact arguing this back then).

    Also the central bankers collectively should carry some of the can, if what looks like it might happen actually does, since all this ‘inflation fighting’ jargon has really been quite stupid. As Rogoff has been arguing, what we really have is a change in the terms of trade.

  24. Brad, thanks for your comment! For once it’s nice to see fact-based economics analysis, in Europe it seems to be mainly based on ideology and anecdote to push some interests at the expense of others, as examplified once more by this discussion…

  25. public debt and foreign debt are not quite the same thing. I’m talking about foreign debt.

    Basically, both have to be payed or there will be repercussions.
    It used to be the case that you could inflate away internal debt, but thanks to the Euro, this is a thing of the past.

    In the past 30 years, we went from pensions at 5% of GDP to 10% without a strain (well with lots of strains, but somehow all countries managed).

    Have we, or have we neglected investment, in particular children and public debt? The US managed to balance the budget within the last decade. It is true that the US borrows a lot from abroad. But it does so financing a war and low taxes.

  26. This is a whole other debate, but it would seem that the only winner of the proposed drop in subsidies would not be the poorest countries, but rich or intermediate countries (mostly the Cairns group) with powerful agribusiness corporations.

    And our consumers. Everybody eats. The poor would benefit especially, financially and in terms of health. In South America animals grow on a meadow eating normal vegetation, not in stables eating grain and antibiotica. And they don’t cover whole regions in greenhouses.

  27. How did this get to be a debate about the CAP? What counts, surely, are the sectors that make up the other 90 per cent of GDP. Yeah, I’d kill the CAP tomorrow, but in the end its biggest importance is political – as a barrier to net-contributor acceptance of the EU and as a payoff to rightwing constituencies in France and the Mediterranean that would otherwise skew anti-European. It just isn’t that much money as a percentage of GDP.

    I’ve made the point before right here on AFOE that it is a myth to imagine French and German industry as rather like the UK in 1979. France especially did the hard work of restructuring its key industries for the post-mass production world back in the 1980s, whereas the UK decided to shut them down. Countries do not compete – companies do, and the balance of payments figures show that German metalbashers, French and Scandinavian electronics, and British banks actually compete very well.

    I think there’s a degree to which we are talking at cross-purposes here. Edward’s biggest concern is demography and public debt, and Jerome’s is industrial economics and trade. Ed is right that much of Europe faces a declining population and has lots of government debt. Jerome is right that Alcatel et al will blow your socks off.

    The problem is that the solutions the centre-right consensus wants do not address this situation. Instead, they assume that it is quite safe to run up tons of private debt living like Americans – growth will pay – and EU workers produce next to nothing and must be fired. In terms of John Boyd’s OODA loop, they have observed but have mis-oriented themselves, and therefore their decisions and actions will be wrong.

    In fact, the solutions they propose are counter-productive. Why would anyone imagine that increasing the public’s job insecurity would make them more likely to have children? Why would cutting their wages and hiking their pension contributions make them consume more, for heaven’s sake? It’s positively deranged!

    PS: Edward, and if we built the new public infrastructure and financed it out of growth ascribeable to it, and gave everyone a pony, wouldn’t that be better?

  28. ET isn’t knocking down strawmen, they’re knocking down pervasive flawed arguments in punditry. IME, they don’t spend nearly as much time engaging less easily refuted, but less pervasive, opposing arguments. That’s a valid choice, not necesarily less valuable than other approaches to blogging.

  29. Jerome is right that Alcatel et al will blow your socks off.

    Still our unemployment is too high. Maybe some other places underreport it and theirs is too high, too. Nevertheless, the big economies of continental Europe have an unemployment problem, not a generic lack of competitiveness. (In Spain just wait till the bubble bursts)

    Why would cutting their wages and hiking their pension contributions make them consume more, for heaven’s sake?

    Indeed. So wages overall can’t be cut. Yet we have unemployment. However we seem to have a labor shortage, as we are importing immigrant labor and have an informal sector.

    So I’ll put it bluntly, is there another explanation rather than wages in Europe being too equal?

    What counts, surely, are the sectors that make up the other 90 per cent of GDP.

    How much pressure does it put on low wages?

  30. “How did this get to be a debate about the CAP?”

    Because I introduced the topic I suppose Alex. I put it there because this is an EU weblog and this post is about reform, and on my reading the post ends up being about why we don’t need to reform, and to suggest that what we don’t need is reform and that the the Lison process isn’t about progress. That is why I described the post as ridiculous since I think we need reform more than ever, and get to the next decade we will be needing even more reform and so on. So I gave some examples of reforms I thought were necessary to see if Jerome would agree with me, and he obviously didn’t.

    I think where the debate in Europe is at at the moment is what kinds of reforms we need and want, and here there are many legitimate points of view. What I don’t find coherent is the idea that “all that is real is rational” to take a quote from Hegel (who John Emerson in the post above says is quite accesible to people) in the sense that really the problem we have can’t be a problem after all since it can’t exist.

    My choice of this quote from Hegel isn’t entirely accidental since it was really the watchword of early 19th century conservatism, while it seems ‘reform is a dirty word’ has become the by-word of an early 20th century conservatism that masquerades as radicalism. Really the divide between left and right has always been an absurd one, since the left was always a coalition of people who didn’t want to change anything (no machines please, do save our mines, the common market is a bosses market) and those who wanted change, modernisation, and internationalism instead of nationalism, and a right which equally had those who wanted to conserve (the agricultural lobby, save our values, no immigrants, protectionism) and those who wanted free-trade (thank you Oliver), global movements of goods, capital and labour, efficient markets instead of rentiers, industry (and now of course the internet) over agriculture etc etc.

    But we are where we are today because of the reformers in both camps and because those who didn’t want to change (in both camps) normally lost. Lets just hope history repeats itself, and not as tragedy, or farce.

    “Edward’s biggest concern is demography and public debt, and Jerome’s is industrial economics and trade.”

    Yep, but unfortunately there is a missing link here, and it isn’t Piltdown man. Jerome is right, it is taxation.

    Basically to have jobs you need companies, and if you want companies you need either to create them or import them, and preferably both (or transform old ones into new ones, which is something the French *are* rather good at – Eaux de France). Now to do both of these first two you need a regulatory environment which facilitates this, and you need taxes and social security contribution levels which make it attractive for people either to come or to start up.

    Now let’s, for the sake of argument, say that France has this situation right now (just for the sake of argument), and that the regulatory environment and the level of SS contributions is the ideal one for creating the maximum number of jobs possible (Jerome is saying that, isn’t he?).

    Well fine, but here comes the rub, and this is where the demographic thing comes in, this balance is now about to change (well it has been changing, but not that much in France yet) so there will have to be a realignment where less people working are going to have to pay for more older and non-working people (ie the dependency ratio is about to shift, and to keep shifting). That is what the Lisbon Process and the Stability and Growth Pact are all about.

    The outcome of this is that you have less income from taxes and more spending on social welfare. This is inbuilt. So I don’t think anyone is going to be cutting taxes in any systematic way in the future, the idea that they are going to be able to do that is an illusion (an illusion often propagated by the right, viz Berlusconi, but just look at the public debt).

    Germany and Italy are pretty clear cases here. They are both trying to juggle the books on corporate taxes, but it isn’t going to be easy, and I don’t really think they’ll be able to do much before the reading on the guage starts moving south.

    What has been happening in Germany is quite instructive here since the coalition has had to back-track all over the place on this. Of course this year is a bumper year (thanks in part to the success of German companies in the international arena made possible by their reforms, and thanks in part to construction activity which has been brought forward from 2007 to avoid the 3% VAT hike). But some of this boom is going to be paid for next year due to some of next years consumption having already occured and due to the impact of the tax hike on consumption (not to mention any secondary effects which may follow the end of the US housing boom, an effect which might reach Germany via China, if overcapacity leads to a sharp cutback in fixed investment).

    So what I think we are going to see is a process of ongoing tax hikes and reductions in key spending, and this is really why taxes are the missing link in the argument, since if we are (following Jerome) currently on the tax optimum point then this process is going to move us away from the optimum (and create employment problems, which will be another of the growth impediments), and keep moving us farther and farther away from it with time, unless we do something about it, and that something that we need to do has a name, and it is called REFORM.

    It isn’t only me who is saying this you know, this idea was the substance of the recent Pébereau report, the most exhaustive examination of French public finances to have been conducted in recent years. What was it Pébereau said: “The debt is “asphyxiating””, or Thierry Breton: “Unbeknownst to them, our children are already financing part of our standard of living.” Or let us not forget that other able Frenchman, François Rabelais, who pointed out some centuries ago just how debt and self-deceipt are almost invariably inextricably linked.

  31. “That’s a valid choice, not necesarily less valuable than other approaches to blogging.”

    Fair enough David, but is this debate about blogging , or about the future of the health and welfare systems in the EU? Of course I have no-issue with ET as a fully legitamte part of the EU blosphere, and I am very happy that Jerome has posted what he has, I think debate is healthy, and the debate is up to Afoe’s normal standards (ie no trolls, yet: sorry Laurent I don’t think this is all about ideology, unless, of course, pragmatism has suddenly become an ideology. Perhaps we should ask John Emerson 🙂 ).

    Indeed I would like to thank Jerome for not only posting, but for fielding comments as he has. In this sense his post stands out among all the other guest posts. He must have been aware he was always going to get a bumby ride from somewhere when he put the post up.

    “Maybe some other places underreport it and theirs is too high, too.”

    I don’t follow all this over-reporting, under-reporting unemployment stuff. Economic issues are always dogged by measurement and comparison problems of this type, but normally there are other measures which you can use as proxies. I would say in this case the key proxy is whether or not unemployment is perceived as being a priority problem or not. In the UK, Ireland, the USA and Spain it isn’t perceived as a major political issue, and this, as I say, despite the fact that nominally the levels of unemployment in Spain are similar to those in France and Germany. The evidence for the fact that unemployment isn’t a priority problem in the voters heads: these societies are largely immigrant friendly since the voters can see that the labour market needs the people.

    Using this kind of measure Germany and France have an unemployment problem, not because some wingnut or other says they do, but because the voters in those countries perceive unemployemnt to be a problem, and so I believe them. It must be.

    And of course these countries are not immigrant friendly despite Jerome’s protests, the we need more unskilled immigrants canditate won’t win the 2007 presidential, and neither France or Germany have been able to accept free access to their labour markets for workers from the EU accession countries, who are, let’s never forget, fellow EU citizens who are effectively being denied their basic rights (here’s another urgent reform we need).

    Now having said that unemployment is not the same universal problem everywhere, the issue which Jerome raises of downward wage drift for unskilled workers is much more universal, but this, as I’ve suggested, is not a product of low corporate taxation, but rather of the fact that many poorer developing countries are finally (thank god) getting to see the benefits of globalisation. As Alex suggests France’s future is in things like Alcatel (although they did nearly go bust after the internet crash) *not* in T-shirts, and of course, and I’m sorry if this wrankles, in getting acces to the English language business services market. Desolé, mais c’est comme ça.

  32. It is getting a bit annoying that you pretend that I am saying that all is well in France, and that no reform is necessary.

    Again, I am saying that

    (i) France’s problems are not worse, overall, than those faced in other ocuntries, in particular in the USA or the UK;

    (ii) the “reforms” that are being proposed have only one goal, increasing short term corporate profits, and thus they are debasing the word if their goal is, presumably, to improve things for most people.

    I am not saying that companies should not be making profits. I am not saying that the bureaucracy is perfect in France. I am certainly not saying that the CAP doesn’t need reform (I was just reacting to the one particular “reform” which is peddled in that respect).

    Pushing me to the extremes by claiming that I say that all is perfect is a well-honed discourse technique, but it’s still disappointing.

  33. “Pushing me to the extremes by claiming that I say that all is perfect is a well-honed discourse technique”

    Sorry if you feel that this is what I am doing. This wasn’t my intention, my intention was to give you the benefit of the doubt, as in “let’s say France has an income tax-social security-employment optimum”, so we could explore the more important argument. Giving your oponent the benefit of the doubt is, of course, a “well-honed discourse technique”, but it is normally not ill-intentioned one, it is often an atempt to avoid useless argument and concentrate on what is important.

    “the “reforms” that are being proposed have only one goal, increasing short term corporate profits”

    No this is not the explanation for the Lisbon Agenda, and I’m sure being as well informed as you are you must be well aware of that.

    Anyway, we agree something needs doing about the CAP. We also agree I presume that the retirement age needs steadily raising.

    Now what about the welfare system? As Pébereau, I , and the Lisbon Agenda suggest there are two main choices (i) raise taxes or (ii) reduce pensions and health care levels (or of course a combination of the two).

    Now imagining you would prefer (i), what do you think the impact on growth and employment will be?

    “France’s problems are not worse, overall, than those faced in other ocuntries, in particular in the USA or the UK;”

    This isn’t quite the case, these two have already made provisions to start raising the retirement age, they have begun to reform their pension systems, and, as I say, they have got the unemplyment situation sufficiently under control so as to become relatively immigrant friendly countries, and of course in the short term those immigrants will provide more tax and social security revenue. So what we need is a reform agenda in France to try to get all this changed.

    All I’m trying to do here is take your statement that ‘refom’ has become a dirty word, and demonstrate that it hasn’t, that all EU countries badly need reforms, and that suggesting they don’t is rendering a disservice to the French people.

    OTOH, if all you want to say is that simplistically suggesting that lowering taxes and letting companies make more profits is a wonder-drug re-juvenating remedy, then I probably would agree with you. Only fools could believe that, which doesn’t mean there aren’t some notable fools knocking about. I repeat, taxes in the EU are bound to rise – as we are seeing in Germany – not fall.

    Those who simplistically applaud the new EU states for lowering taxes don’t have a clue what is actually going on. Liuania (one of the front runners here) is already experiencing population melt down. Hungary, which is at the other extreme (ie it hasn’t ‘slashed’ taxes), has a ballooning govt deficit, and could get currency melt-down.

    In this sense Austria has made an important short term error by letting itself be pressured by Slovenia into slashing corporate taxes. Low taxes in Slovenia are unsustainable in the mid term just as much as they are in Germany because Slovenia have huge demographic problems themselves. So these tax advantages aren’t going to last long, and investors who are in for the longer haul must surely be aware of that. They will not be like Ireland, the demographic dynamics are very different.

    Really the level at which you set corporate taxes shouldn’t be that complicated a technical economic problem, you want the level which maximises revenue. If you raise them and as a result more profits are ‘booked out’ in another country then you haven’t really gained much.

  34. ‘“Or are you saying that productivity grwoth will not be sufficient for us to afford this.”

    Yes, of course I am. This to me is obvious.’

    Why?

  35. David

    ““Or are you saying that productivity grwoth will not be sufficient for us to afford this.”

    Yes, of course I am. This to me is obvious.’

    Why?”

    Fair question, but hard to answer easily. I gave some of the reasoning before but here is some more.

    Firstly ageing as a physiological process. One of the reasons I eased up blogging over the summer was because I hit a problem with the research I am doing – something to do with the traditional evolutionary theory of why we age. There was something in the theory that didn’t seem to me to make sense any more to me in terms of recent work in comparative genomics and molecular biology, and I didn’t know enough basic science to run with my hunch. Now I know a little bit more, and we are about to see if a little knowledge really is a dangerous thing 🙂

    Anyway over the coming weeks and months I will be posting quite a bit here and at DM about what I have learned, because some of it is really quite surprising.

    Now the question needs to be approached on two levels, the physiology of ageing, and the actual in-situ performance of the individual.

    The interesting thing about the physiology of ageing is that there is a lot talked about the topic, but we really don’t know too much. I mean this in the sense that we get old on two levels, we get old in terms of calendar ages (every day we are one day older, this is the same for everyone) and we get old in terms of our physiology, there is an ‘ageing process’ going on (and this ageing process differs from one individual to another). Some people “burn the candle at both ends” (especially if they drive themselves with stress) and they, unsurprisingly, age more rapidly. On the other hand some people are able to relax more, take things as they come (have more holidays, work less) and these people more than likely age more slowly, as long as they don’t do nothing, you need a certain sufficient level of stress.

    Anyway, you are getting the message, we need to think about how fast we age (at the population level, or if you want jargon at the expressed phenotype level) in relation to how our calendar ages run.

    We are all living longer. But is that life-course expanding proportionately as our expectancy rises? A lot of our economic futures depends on this.

    Unfortunately things don’t look too good, since it appears that what is happening is that we still age as rapidly as our parents do/did (in the 19th century there was a real jump, but this is another question) – female age at menopause hasn’t moved, for eg, but improved medical care as we age now means we can push the envelope out a bit further. But of course what this means is that ‘our decline is more protracted’ rather than that we can work in highly productive jobs for any greatly increased length of time. It is not surprising in this context that in the UK where people are now increasingly starting to take at least part time work in the 65-70 age group, this is mostly doing things like petrol pump attending or in supermarkets rather than designing new mobile phones.

    In Japan where they hit this problem a bit earlier than the rest of us, and where they have managed to keep their most technologically advanced and high value enterprises highly competitive, they put virtually everyone out at 55, no matter what, and then offer a second career doing less skilled work.

    One of the great beneficiaries of this has been China, since a lot of redundant Japanese managers and technicians went to help new enterprises in China. Since Chinese technology was obviously way behind the curve, even their dated knowledge was really valuable. So this can offer many a solution on the individual level – going to work on projects in the third world taking skills and expertise with you – but it hardly resolves the problem in our local economies.

    So back to the problem. Basically we know that function reduces both physically and mentally after the late 40s, what we really lack are biomarkers for this ageing. Quantifiers of how rapid the process runs. This would make the whole debate a little more ‘objective’ as it were. Basically we have two candidtates for biomarkers (at least) that are near to coming on-line. One involves something called telomere length (let’s not get too technical, but telomeres are strands of DNA at the end of the copy of the genome in each cell of your body, and they are basically there because of technical problems with DNA copying). Now each time a cell replicates itself the telomere length shortens. So this is a kind of measure of ageing, since a given cell can only replicate so many times before it runs out of telomeres and is switched-off as part of a process known cellular senesence.

    So the exciting thing is that they have now developed techniques for measuring telomere length. They have shown for example that smoking reduces telomere length by so much per packet/day year. They have also, and unsurprisingly, found huge social disparities in health at this level, with people in certain social classes being estimated to have 6 to 7 years less life expectancy by the age of 50 (on average , of course, and yes, I will post on all this) as indicated by the length of their telomeres. Incidentally, if people in the US work so much longer, then all this work could provide some solid scientific explanation for the life expectancy differential, as well as for ‘French exceptionalism’ in terms of some of the diseases of ageing. Taking life a bit easier is definitely better for health, (red wine also contains resveratol from the grape skins, which is part of this story), and so if you are willing to trade a bit of money for being a bit more healthy, then you can. (There you are Jerome, I’ve handed you an argument you can use 🙂 ).

    As well as telomeres there is the whole question of cellular senesence itself. One very interesting line of work here involves examining muscular tissue as people age, and seeing how many cells have been switched off by the cellular control mechanism. This number increases as we age, and is basically the core of the bodies anti-cancer mechanism.

    So, after all that, what I am saying is that once we have some objcetive measures of ageing we will be able to give much better economic foreceasts, since we can literally read the telomeres rather than the tealeaves. We will then have a yardstick just like the proverbial leaden metre in Paris or whatever. In fact David, they will be able to ‘benchmark’ you just as they can the processor in your PC.

    I mean obviously the impact of ageing varies from job to job. Central bankers and judges notoriously have long working lives, but let me ask you, if Alan Greenspan had been a brain surgeon, would you have wanted him working on you in his last year of work? At the other end of the scale footballers peak early, although they can obviously follow up with seceond careers related to sport or whatever.

    Clearly the highest attritition rate on the productive value of the economy is likely to be among the knowledge workers, and it is really on this band of people that the economic future of a society rests. But even in the case of the lower skilled, it isn’t clear that with the higher ageing rates many of these are likely to experience for lifestyle, nutrition and stress reasons, they will be able to be as active labour market participants in such huge numbers in the higher age groups as some people are assuming.

    Basically productivity isn’t such a mystery really, the greater the proportion of people in the 35 to 50 age group you have in your society the more productive you are. France has such high per hour worked productivity precisely because participation rates in this age group are very high, and the years of study internalised before they reach 35 is very high. As I said to Brad earlier, I’m not that convinced that it is so critical whether or not someone of 22 or 23 is working, or repeats a year of study, probably in the long run the latter is a better social outcome.

    Well, you asked me why, and there you have (at least some of) it.

  36. Oliver, I wonder why is everyone is talking about public debt which are 40-70% of GDP, whereas for the USA for example total debt (personal, corporate and state) is more than 200% of GDP.

    (Not even talking about comparing what you get in form of public infrastructures in return from your public debt)

  37. “I wonder why is everyone is talking about public debt which are 40-70% of GDP”

    Well a number of reasons I guess. Firstly in Greece and Italy (we are talking about reform in the EU here, so we could leave eg Japan out) the figure is in the 105-110% of GDP region. But even this isn’t really the point. The thing is that if you keep running deficits on an annual basis this will only rise and rise. Especially as the dependent population increases (2010 – 2020 period especially)and as the tax base you draw from reduces. So – as Pébereau pointed out – in the French case it isn’t so much where you are now, as where you are headed.

    And its worse, since as Jerome has indicated, France has had comparatively goood growth over the last 5 years, so there was really no excuse for running the deficit. Now we may be about to reach the peak of this cycle, and instead of being able to increase the deficit in order to counterbalance, many EU economies may be doing fiscal tightening as the global economy slows.

    “whereas for the USA for example total debt (personal, corporate and state)”

    The point is Laurent we are talking about public rather than private since this has to be paid back in the future using taxes (or by cutting spending) and this has undesireable consequences for employment, among other things.

    Of course US private debt also has to be paid off, and that was in part my point about the reduction in the rate of accumulating credit card debt in the US. The way private debt has been increasing there may well not be sustainable either. But two wrongs don’t make a right, and this isn’t an international football match.

    Obviously the German economy has benefited somewhat from the expansion in private borrowing in the US, directly by selling to US customers, and indirectly by selling to China who pay them with money, in part, earned by selling to the US. France has, in part, benefited from the lift this has given Germany. We are all in the same boat. Simply pointing your finger at the silly thing the other guy is doing really doesn’t get you anywhere.

    But the point is, one of the things which has fuelled the level of private indebtedness in the US has been the fact that globalisation now means the Fed has less control over interest rates which are, to some extent, set globally. This was a point I was making earlier. This is why there has been so much pressure on Japan to end ZIRP. We are now about to get to see what happens when they do.

  38. Oliver, I wonder why is everyone is talking about public debt which are 40-70% of GDP, whereas for the USA for example total debt (personal, corporate and state) is more than 200% of GDP.

    Because the debt is too high. Or, to be precise, in some member states it is going always up, rarely down, not even in times of robust growth.

    If the US collapses under its debt, we’ll be in deep shit, as we’ll have just lost a major trade partner.

    The debt means that public spending has to be limited, while some spending has to be redirected to child care for demographic reasons. Doing so requires policies furthering economic growth at the expense of the poor, whether we like it or not. We are in trouble of our own making, not in a p*ssing match with the US.

  39. Edward, Oliver, to me public and private debt are mostly substitute (eg: government can borrow to provide cheap housing to rent, infrastructure to business), talking about only one of those two debts is meaningless, and talking about the smallest of the two is even more disturbing. And the state debt is the cheapest since the rates are lower for sovereign states.

    Oliver, I’m not questionning the consequence of too much USA debt, but just in the range of potential measures to be taken, public debt is less than a quarter of the problem, and given rate spreads, increasing the public debt to reduce private debt might reduce total debt.

    For example, in France oil dependance (thus trade deficits) is lower due to state taking public debt for nuclear and public transportation.

    Is it wise to say that the USA should not do so while it’s still possible?

    I’d be happy to hear about economists studying the total debt and ways to curb it instead of talking about one quarter of it.

    And credit card debt don’t seem to be going as advertised here, see Dean Baker:

    http://www.prospect.org/deanbaker/2006/09/consumer_debt_and_the_housing.html#006234

  40. Laurent, I don’t think we are going to see eye to eye on the public/private debt issue, I think we’ll just have to wait and see what happens in the US and what hapens in Italy to get a better ‘fix’ on who may be right.

    “And credit card debt don’t seem to be going as advertised here”

    I think there is a confusion here Laurent. There is no inconsistency between the link and what I am saying, except on a point of detail. I agree that as people struggle with reduced disposable income as interest rates rise (and this is the only real way to slow the expansion of private debt, but you can hardly blame them in the US if Japan had 0% rates) and their mortgage payments go up, then they normally go to the credit card first.

    You should try shopping in a supermarket in Spain these days, as just about everyone in the line is living off their card. So this is the first stage.

    But the thing is this hits a wall at some point, that’s the next leg down in the process, when the thing really starts to bite, and instead of trying to maintain their level of spending by using the credit card, they decide its time to make a reduction. That’s when the pain starts to be felt. This data indicates that we may well be there, and that the downturn may well have begun. Consumer confidence reading also tend to confirm this.

  41. talking about only one of those two debts is meaningless, and talking about the smallest of the two is even more disturbing. And the state debt is the cheapest since the rates are lower for sovereign states.

    But public debt has to be paid. Private debt can be written off. Companies go out of business and houses are auctioned off. Most countries have ways for private citizens to get rid of debt.

    All of this is bad for the economy, but a sovereign default is worse by far.

    For example, in France oil dependance (thus trade deficits) is lower due to state taking public debt for nuclear and public transportation.

    But public investments are a small part of public expenditures. Consider how much goes to pensions and health care and how little to public works.
    Even public works are not necessarily beneficial. Highway construction with public funding has caused much of today’s dependency on oil.

  42. In France we’ve had a notably corrupt and inefficient government for the past four years, it probably can’t be worse so it will be better starting in 2007 :).

    I’m not talking about Italy…

    Will see what happens next, but my bet is that economists will have to revise their textbooks and stop focusing on only one quarter of the debt issue sooner than later. May be central bank will start looking at M3 for real and use “alternative” ways of controlling monetary expansion (fractional reserves, more serious regulations for debt product sold to consumers, credit derivatives, etc…).