Monday, April 27, 2009

The paradoxical culture of thrift

(title inspired by Bob Hancke)

David Cameron made a big speech yesterday:

He is offering us a 'culture of thrift', to replace Labour's 'spendaholic' government. Where do I start?

First, as I've pointed out in a previous post, the last thing we need at the moment, with debt deflation lurking around the corner, is thrift. What we in fact need is profligacy, both private and public, to avoid more jobs being destroyed and companies bankrupted. Designing a political campaign around the notion of 'thrift' may be a smart move politically, but if it has any effect at all on the economy it will be to make the recession worse (because of the effect of the 'paradox of thrift' identified by Keynes - individually we may have an interest in cutting our spending to rebalance our household finances, but as a society we should do the opposite).

Second, it doesn't even make that much sense in the long run. The projections on government borrowing suggest our national debt will hit around 80% of GDP at its peak. That would be good enough to get us into the Eurozone, since Italy, Belgium, and Greece all have much worse levels, and France and Germany are barely any better. So why do we have to strain every sinew to get debt back down to 40% of GDP? 40% is a purely arbitrary figure. It's better to have less debt than more, all else equal, but Japan has a ratio of 180% and still manages to sell treasury bonds and pay for bullet trains without too much trouble.

The only sense in which the 'thrift' idea works is the one which Cameron doesn't talk about - restricting the activities of the financial sector to avoid another meltdown, and reducing the spendaholic ways of the managerial class that has almost sunk our economy. No mention of that. Encouraging more saving, and in particular cutting spending on new cars and cheap flights, would be a fine idea. But any sign of slapping punitive taxes on petrol, SUVs and air travel? Nope.

I don't expect politicians' slogans to be consistent with the most basic concepts of post-Hoover economics all of the time, but it would be nice to hear some serious suggestions on how to rebalance our economy, increase productive forms of investment, and give people the skills they need to earn a living and make us all better off in the process.

Thursday, April 23, 2009

Socialism: The Sickening Reality

All my blogging about the virtues of social democracy may start to get tedious after a while, so here's a critical report to balance things out:

(courtesy of Mark Blyth)

Wednesday, April 22, 2009

Hoy me siento flex, #2

Just a little graph to develop the point about social trust and flexicurity. The countries with highest EPL (here using a World Bank measure, low scores = high EPL) have the worst reputations for corruption on the Transparency International index (high scores = low corruption).

The same countries also have mostly low replacement rates and/or non-universalistic unemployment coverage.

This suggests flexicurity is not going to work beyond Scandinavia, since the countries most in need of it have precisely the kind of weak institutions which will stop it working properly. In fact, there is a long history in Southern Europe of unemployment and other social transfers being distributed according a political-clientelistic logic, rather than in accordance with social need. This makes 'protecting the worker rather than the job' hard to achieve.

Tuesday, April 21, 2009

Inequality, again

A new name for my blogroll - Ezra Klein (under American Prospect with another favourite, Dean Baker). Great article on inequality, talent and luck here. Maybe you're bored of hearing about inequality, but until it goes away....

Flexicurity rules!

Back from Lisbon, where indeed it did rain all week. Weather forecasts are not so bad after all - they certainly lick social scientists for predictive power.

Anyway, the talk in Lisbon - at least in my group - was all about 'flexicurity'. What does this mean? Well, it means combining labour market flexibility - loose regulation of hiring and firing - with security - generous welfare payments for the unemployed. The idea is that flexibility is a good thing, because it creates lots of jobs, and security is a good thing, because... well, because being out of work is bad enough without having to starve as well.

The appeal of income protection for workers is obvious enough, but of course generous unemployment coverage has been under fire for years now, on the grounds that it is expensive, and disincentivizes the unemployed from getting back into work. The same line of argument - most powerfully developed in the OECD's 1994 Jobs Study - is often accompanied by criticism of laws restricting dismissal (employment protection legislation, or 'EPL'), on the grounds that they disincentivize firms from hiring, therefore creating more unemployment than the market would generate.

But those clever people in Denmark have apparently overcome this dilemma. In Denmark, hiring and firing legislation is very loose, yet unemployment benefits are very generous. So generous in fact that workers receive a high proportion of their previous salary for some time after losing their jobs. But because of the liberal labour market which creates many new jobs, Danish workers can easily find work after being sacked, so unemployment is low and benefits are affordable.

So, it's a free lunch! We can have labour market flexibility and low unemployment, without the nasty drops in income associated with unemployment.

Is this too good to be true? Well, there is another crucial part to this story. Denmark has a very well-resourced and efficient set of institutions responsible for 'activation' - placement services matching available jobs to available workers, and training schemes to develop the necessary skills for workers to change jobs. Most countries lack this, so flexicurity may work less well elsewhere.

Moreover, Denmark has other advantages - very high GDP per capita, an efficient revenue service and sound fiscal position, and high levels of social trust, so that people tend not to abuse the system by avoiding work when it is offered.

Flexicurity is a great idea, but would it work in other places? The European Commission thinks so, but there are a number of reasons to doubt its effectiveness in the countries I study.

In Britain, we have flexibility without much security (let's call it 'flexinsecurity'): unemployment benefits are very low, so losing one's job is bad news, unless you can find a new one quickly. Our flexible labour market does generate lots of jobs, but not always the right ones to meet the needs of the unemployed. So jobs are destroyed in the industrial parts of the UK, and new ones are created in the South-East, where living costs are so high that moving to where the jobs are only makes sense for immigrants prepared to put up with uncomfortable living conditions. Our jobs boom of the last decade and a half has seen massive immigration but the persistence of unemployment in many regions.

In Southern Europe, we have more rigid labour markets, with strict EPL, but weak welfare institutions - let's call this 'insecurigidity' (OK, I'm not a poet). So, some workers are very protected (ironically, those benefiting from strong employment protection tend to be the ones who would get most unemployment benefit) - the so-called 'insiders' - whilsts others have neither secure jobs nor generous welfare provision - 'outsiders'. Unemployment tends to be high, but poverty is quite high too. Not a great combination.

So how do these countries with their disfunctional arrangements become like the virtuous Danes?

Britain would need to improve training and drastically increase unemployment benefits. This could have a disincentive effect, but it could be averted by linking generosity to work history, thus incentivizing fired workers to get back in the labour market without penalizing them for losing jobs. Our current arrangements make no distinction between the newly unemployed and the permanently unemployed, which disincentivizes the latter from joining the workforce if they can't command a high wage in the labour market. This kind of reform, of course, requires big improvements to our education and training system, and an increase in spending on benefits. A + B = tax increases, never popular around here. The other problem is that Britain has created lots of jobs, but many of them are not that attractive - fruit picking in the fens, serving in coffee bars in expensive central London. Is a low-skilled unemployed person in Caerphilly realistically going to be 'activated' into these jobs?

In Southern Europe, problems are similarly intractable. The inadequacy of unemployment compensation acts as a political obstacle to serious EPL reforms, yet does little to bring the unemployed into the workforce, since 'outsiders' are often protected by strong family structures and therefore only take jobs which suit their living arrangements. The other big issue seems to be the 'social trust' question - most Spaniards or Italians would find the prospect of unemployment benefits of Danish standards a recipe for permanently high unemployment and fiscal crisis.

So, the big question ultimately remains: why do Danes work when being unemployed is such a good deal?

Answers on a postcard please.

Monday, April 13, 2009

Lisbon Story

Just heading off to Lisbon for the ECPR Joint Sessions, where I'll present the paper I mentioned in my previous post. My Easter blogging break will therefore continue.

The weather forecast for Lisbon?

Monday, April 6, 2009

Regulating the labour market: Italy and the UK

Here is a link to a paper I've co-authored with Elisabetta Gualmini of the University of Bologna:

The Political Economy of Labour Market Reforms in Italy and the UK: Convergence for Different Reasons?

It's a comparison of labour market and welfare reforms in Italy and the UK over the last couple of decades. Although the two countries have very different labour market traditions, they have become steadily more similar over recent years (they also share a strong upward trajectory of inequality and poverty). We assess these experiences in the light of two fashionable interpretations of labour market reform in the recent period: the 'convergence' thesis, focused on the impact of globalization and/or European integration, and the 'divergence' thesis which emphasizes the functional logic of different configurations of economic institutions. We find that neither is satisfactory, and that these reforms instead are best understood in terms of the domestic political agendas of elected politicians and the competitive electoral environments they face.

Comments welcome!

Wednesday, April 1, 2009

Beckham to take over at RBS

David Beckham is to take over as chief executive of troubled banking giant Royal Bank of Scotland, sources close to the megastar confirmed this morning.

'David feels that he can easily fit in these duties between photoshoots, shopping for his wife, and playing for both LA Galaxy and AC Milan, and after all, could he do a worse job than Fred Goodwin?' said his agent. 'David is reaching the end of his playing career now, and it's only natural for him to start thinking about a management role once he retires'.

Beckham himself was unavailable for comment, but City experts claimed this could be the start of a wide-ranging overhaul of personnel at the top of Britain's financial institutions. In the midst of the worst financial crisis since 1929 and corruption scandals on the scale of Bernie Madoff's $50 billion Ponzi scheme, there is a clear shortage of greedy individuals whose reputations remain intact. The only astronomically overpaid profession left is Premiership football, so competition for top talent is focusing on the beautiful game.

'There is a global market for talent out there', said F. April, an economist at Chase Merchant BackFour in London. 'Financial institutions are desperate to pay over the odds for that person who will go the extra mile, and only footballers can seriously ask for 150,000 quid a week these days'.

Skeptics point out that footballers have no experience of the intricacies of world financial systems, but others suggest this could be an advantage. And perhaps the worlds of football and finance reveal unexpected parallels beyond their taste for generous compensation. 'After all, football managers are rewarded or sacked on a more or less arbitrary basis, and so are managers in the financial world', says Arthur Moustiers of KPMG. 'Avram Grant was fired just because one of his players missed a penalty last year, whereas Arsene Wenger is still in a job even though he hasn't won anything for years.'

Sources close to Manchester United suggest that Rio Ferdinand could be in line for the CEO spot at Barclays, whilst Didier Drogba is in talks with BNP-Paribas and Cesc Fabregas is already a non-executive director of La Caixa.