Defunct Economist

by Henry on April 14, 2006

The Economist gives us yet another rendition of “Western Europeans have it too good to realize how badly they need reform.”

Another great week for Europe: Things must get more hellish in Italy and France before they stand any chance of getting better
THEY are two seemingly unconnected events, but they yield a common, depressing conclusion. The events were the decision by France’s government to tear up its controversial law creating a more flexible job contract for the young, and the razor-edge outcome of Italy’s rancorous election. The conclusion: the core countries of Europe are not ready to make the economic reforms they so desperately need—and that change, alas, will come only after a diabolic economic crisis. … their voters are not yet ready to swallow the nasty medicine of change … too many cosseted insiders … The real problem, not just for Italy and France but also for Germany, is that, so far, life has continued to be too good for too many people: there is not yet a general consensus that their economies are in serious trouble … There is one depressingly certain way to remedy the failings in the core European countries: to bring on a more serious economic crisis. This week will surely have brought that a lot closer.

This combines a few arguments that are true and important (there are problems of equity with sclerotic labour markets that discriminate against the young) with much that is quite bizarre – the claim that Europe’s fundamental difficulty is that “life has continued to be too good for too many people.” Would that we all had such problems. Most interesting, perhaps, is the mode of analysis that the Economist’s editorial writer employs – the suggestion that what we need is a really nasty crisis to alert people to their real interests. Which is a dolled up version of the old Marxist trope that we need (as David Lodge’s Fulvia Morgana puts it) to ‘eighten ze contradictions’ if we are to bring through the revolution. Keynes famously quipped that those “who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” The Economist, which appears to believe that there’s no intellectual debate to the left of the New Republic owes rather more to defunct Marxist theorists than it imagines.

{ 44 comments }

1

Jaybird 04.14.06 at 2:06 pm

I don’t exactly read it that way.

I see them as assuming “Anything that cannot go on forever, won’t” and also assuming that this cannot go on forever *AND* if the course is not changed beforehand, the cessation of this thing that cannot go on forever will be much more painful to more people.

Maybe those assumptions are not warranted… but they’re not foolish for making the assumptions they’re making.

2

Richard Bellamy 04.14.06 at 2:13 pm

I don’t exactly read it that way.

I do. Looks like a call to move to Colorado with Dagney Taggert to me.

3

abb1 04.14.06 at 2:34 pm

But why can’t it go on forever? OK, with minor adjustments. What happened to “why fix what’s not broken?”

4

Brendan 04.14.06 at 2:36 pm

Now that people really are having that ‘crisis’ in Iraq, does this mean that the Iraqis will start voting for the ‘right’ candidates too?

5

lemuel pitkin 04.14.06 at 2:36 pm

Your undrlying assumption is that the Economist ideal outcome is the one that yields the ebst life for most people, and not, say the greatest growth rate of GDP or greatest aggregate capital income. It’s not obvious to me that this assumption is correct.

Also, just for the sake of discussion, suppose an argument (in The Economist or elsewhere) resembles those that Marxists used to make. What’s wrong with that?

6

roger 04.14.06 at 2:58 pm

Interestingly, the Economist’s dream economy, the U.S., has mortgaged its future much more heavily to maintain an economy in which the people who have it good have it really good, and the people who don’t are basically, collectively borrowing their wage raises from the credit card companies. How many of the G-8 economies are really not thriving on inertia and short sightedness?

7

Jim Harrison 04.14.06 at 3:27 pm

If the world economy is facing a general contraction over the next 50 years or so, as I expect it is, countries with strong traditions of social solidarity–fraternity if not equality–may do a better job at sharing out the pain of the retrenchment than places like the U.S. dominated as it is by an I’m-All-Right-Jack mentality. In a crisis situation, esprit may be more important the efficiency.

8

Jake 04.14.06 at 3:32 pm

I’m disturbed that I know that Richard misspelled Dagny Taggart’s name.

9

Jaybird 04.14.06 at 3:38 pm

“But why can’t it go on forever?”

Demographics, mostly.

10

DC 04.14.06 at 3:39 pm

If you’re right, Jim, one shudders at the sort of political and social phenomena to come in the US in the next half-century. But then one was already doing that somewhat.

11

Lukas 04.14.06 at 3:51 pm

Your undrlying assumption is that the Economist ideal outcome is the one that yields the ebst life for most people, and not, say the greatest growth rate of GDP or greatest aggregate capital income.

Actually, the Economist recently reported on some initiatives to redefine GDP. It spoke approvingly of ideas to incorporate measures of income inequality into the calculations. From the 9 Feb 2006 edition:

The OECD has made a brave attempt to adjust GDP for the distribution of income. To most observers, a country where a few families enjoy huge wealth but most live in abject poverty would have a lower level of well-being than one with the same GDP but less poverty…

…it is true that neither the adjustment for inequality nor that for leisure alone overturns America’s economic superiority. However, if both adjustments were made, then on certain assumptions, the gap between the United States and several European countries could vanish.

This does not mean that Europe can afford to abandon economic reforms. Leisure time is valuable, but it will not pay for future pensions. Nevertheless, the OECD is to be congratulated for being the first mainstream organisation to challenge the conventional GDP numbers. Its task now is to encourage governments to start producing more relevant statistics.

And in conclusion, nyah nyah nyah nyah nyah.

12

Henry 04.14.06 at 4:04 pm

lemuel – I think that it is a given that the _Economist_ is mostly going to be on the side of capital. Naturally enough it’s going to identify the best of all possible worlds for capital with the best of all possible worlds more generally, but in fairness, I don’t think that the _Economist_ is the only commentator out there to suggest that the general interest is best served by changes that would benefit the narrower segment of society that it’s concerned with. Nor, despite several recent posts criticizing the _Economist_ in particular, do I think that this is a position that is at all devoid of interesting and important things to say. On heightening the contradictions – I’ve no problems with Marxist influenced thought – and indeed have cited to Marx many times on this blog – but I do think that the “heightening the contradictions” claim was at best dubious, and at worst provided cover for a lot of fishy behaviours. As Lodge’s fictional character amply illustrates. But more generally – I don’t think many people buy the specific economic account that underlies these claims anyway – how many people buy into the idea of a declining rate of profit? I don’t personally think that this is what was valuable about Marx’s thought and arguments (although I recognize that the man himself would have vehemently disagreed). Anyway, my point was fairly straightforward – that the Economist, without realizing it, was aping the rhetoric of people who they would most definitely have considered to have been on the other side.

13

a 04.14.06 at 4:22 pm

“Demographics, mostly.”

Well working harder now isn’t going to help demographics. The European economies are currently in better balance than the American – so they’re working about as hard as they need to. If in five years they need to make a choice between working harder or consuming less, then let them make that choice in five years, not now. And don’t bet that they will choose to work harder; not everyone thinks owning an IPod or a plasma TV or an SUV is the highest good in life.

Working harder now would, by the way, almost surely make the demographics problem worse. France has succeeded in having a birth rate almost at replacement level because it offers generous maternity (and paternity) leave conditions. Make them work a la Anglo-Saxon and the birth rate will drop.

14

Andrew 04.14.06 at 6:09 pm

The point that a collaspe will be required for reform is salient, even if the idea that life is too good for too many people seems a bit odd.
Compare to Japan’s lost decade. Most of the people over 30 in the 1990s were fine. Some of them did lose their jobs and couldn’t find new ones, but they all seemd to happily move into Ueno park, or under some bridge, and lived under blue tarps. So why was reform needed? The majority of the electorate was still fine, the LDP stayed in power and the status quo was preserved.
But it was the ones under 30 who had a tough time finding real careers and ended up living in their parent’s house until they were 35 or 40. There is a remarkably large group in generation of Japanese between the ages of 30 and 40 that worked part time jobs as “freeters” until they were 30+ and are strugggling, now that the economy has finally improved, to compete in the work force with those 10~15 years younger than them.
Even now real reform is only beginning to happen there. The Japanese economy has only picked up in the last few years because of increased exports to the China and to a lesser extent the US.

If France waits too long to reform, they may end up with a lost generation as well.

15

P O'Neill 04.14.06 at 6:18 pm

To be fair to The Economist, perhaps more than it deserves, there are some neoclassical economists who also use this “it takes a crisis” type analysis — Allan Drazen has several papers on it. And at some level, it’s a hypothesis that has to be right. Would George Bush be able to run deficits of $400bn a year if interest rates reacted the way they used to to deficits of that size?

On the other hand, what’s showing in the quoted article is just a hacktacular version of whatever solid reasoning might actually underlie the crisis-reform idea. In particular, the lumping together of different types of structural problem. Italy and France differ on the demographics, as #13 notes, and Germany in its lumbering way is actually accomplishing some reforms and its export industries have far better prospects than Italy’s. The mag also assumes that a 50:50 election= timid government. US experience says otherwise.

16

radek 04.14.06 at 6:44 pm

This talk of “changing GDP”, whether to adjust for equality, leisure, quality of environment or whatever just don’t make sense. GDP measures what it’s supposed to measure – how much stuff gets produced. If you want to measure something else, like inequality, then you use a different measure.

(Sure, there’s a bit of a problem with some people thinking of GDP as a be-all and end-all measure of human welfare or in a ‘my country can pee further than your country’ contests. But that’s not GDP’s fault.)

17

rd 04.14.06 at 7:11 pm

You could say the same thing about health care in America as the Economist does about Euro labor market policy: For most people it seems pretty good, despite all its problems, inequities and perverse outcomes. It will take a substantial further detioration to produce impetus for serious reform.
Recognizing this doesnt make you a pseudo-Marxist believing “the worse the better,” it just makes you a realist.

18

Kerim Friedman 04.14.06 at 9:01 pm

Liberal Communists?”

Not that I completely agree with Zizek. (I don’t.)

19

abb1 04.15.06 at 4:07 am

Kerim:

it is easy to make fun of the idealism which leads people like Bill Gates and Thomas Friedman to believe that the harshest aspects of Capitalism can be so easily tamed by nerds armed with computers. I’m not so sure that we want to cast these people as the enemy. More naive than the students marching in the streets of Paris, yes, but not the enemy.

Bill Gates is more naive than students marching in the streets of Paris? Please…

What about automatic inclusion of union representatives into companies’ boards of directors, as it’s already done in some European countries? And then gradually increasing their level of representation. Wouldn’t this be a positive political economic model?

And then, when workers become in effect owners of their companies, then most, or at least some of these reforms the Economist likes – like this controversial French law, for example – may become completely non-controversial and pass without any problem whatsoever.

20

y81 04.15.06 at 5:37 am

I think the Economist is speaking not so much for the interests of capital, but for the interests of elites. Life is frustrating for European politicians, academics, commentators etc. because their countries have so little international influence. The reason they have so little influence is that, with per capita GDPs 30% lower than that of the U.S., they don’t have the money for a fancy military, their large companies don’t girdle the globe, access to their markets isn’t a major bargaining chip etc. Obviously politicians etc. would be better off if their countries were richer, because they would be more powerful.

21

Bob B 04.15.06 at 6:38 am

With the surely authoritative illumination of the OECD Factbook 2006, I am unclear as to quite where the notion of “per capita GDPs 30% lower than that of the U.S.” comes from.

http://titania.sourceoecd.org/pdf/fact2006pdf/02-01-02.pdf

A further relating thought is that I was most encouraged to read the many news reports of President Bush’s inspiring leadership in response to those whining calls from the Military for the resignation of Defense Secretary Donald Rumsfled.

Strong leadership from the Leader of the Free World is just what we need in these interesting times. Sack the Military instead to show who is boss.

22

Steve 04.15.06 at 7:01 am

“A further relating thought is that I was most encouraged to read the many news reports of President Bush’s inspiring leadership in response to those whining calls from the Military for the resignation of Defense Secretary Donald Rumsfled.”

How is this a relating thought?

Steve

23

soru 04.15.06 at 7:24 am

Maybe I am missing some sarcasm or pedantry or something, but the link you posted gives 2004 France GDP per head as 29711, USA as 39653, about 33% higher.

24

abb1 04.15.06 at 7:35 am

Hmm, I’m not an expert, but it appears that 29711 is about 25% lower than 39653.

25

Bob B 04.15.06 at 7:48 am

Quite so. And by the reckoning of most, France is not the only country in Europe and nor is it the richest country in terms of GDP per capita in Europe. By the reckoning of a source based in Washington DC, the narrative on what has happened to average real earnings in America since 1973 looks rather grim:

“As the US economy was becoming increasingly globalized, the gap widened between the wages paid to more-skilled and less-skilled workers as measured by educational level. In 1979, for example, male college-educated workers earned 30 percent more than their high school-educated counterparts. By 1995 the premium for college-educated workers had risen to about 70 percent.

“The effect of this increasing wage disparity among American workers has been compounded since 1973 by a fall in average real wages. US average real weekly earnings peaked in 1973 at nearly $320. They then fell to under $260 by the mid-1990s and recovered to only $280 last year [2000]”
http://www.iie.com/publications/papers/paper.cfm?ResearchID=408

26

eudoxis 04.15.06 at 7:59 am

This is rich coming from you Henry. I read a distinct glee over the possibilities of political change that hurricane Katrina could bring, especially the posts discouraging people to donate directly to relief efforts.

27

Bob B 04.15.06 at 8:55 am

If living standards in America are so good compared with Europe then why is average life expectancy at birth in America so low compared with the majority of other OECD countries?

For comparisons, try:
OECD Factbook 2006: Life expectancy at birth:
http://puck.sourceoecd.org/pdf/fact2006pdf/10-01-01.pdf

28

Daniel 04.15.06 at 9:28 am

I’m disturbed that I know that Richard misspelled Dagny Taggart’s name.

I’m disturbed that both of you have forgotten that Dagny Taggart was the one who didn’t move to Colorado.

29

Tim Worstall 04.15.06 at 10:44 am

“France has succeeded in having a birth rate almost at replacement level because it offers generous maternity (and paternity) leave conditions. Make them work a la Anglo-Saxon and the birth rate will drop.”

And the Anglo Saxon US is at or above replacement?

“You can quickly see the result of an increasing wage disparity and a falling average wage: sluggish to negative real-wage growth for most US workers. The lower the skill level, the greater the fall in real wages. Only workers in the top 10 percent of the overall wage distribution received higher real wages in 1998 than in 1979; earnings for the remaining 90 percent fell or stagnated. This development is radically different than the situation from 1948 through 1973, when family income for the lowest quintile grew faster than that for the highest.”

Sorry, I simply don’t believe that. Unless they’re using the average of all workers and not controlling for the rise in part time working. Which, indeed, one of the BLS sets of figures does do.

If what is meant is “average wages in one week of all those working” then yes, it might be true. If it is “average wages in one week of all those working full time” then no it isn’t.

The difference is the huge expansion in the employment of women, most especially those with children at home …..and they tend to work part time.

30

Barry 04.15.06 at 11:36 am

Tim: “And the Anglo Saxon US is at or above replacement?”

Shhhhhhhhhh. When one is bashing European countries for low birth rates, one is supposed to conveniently forget that immigrants and their children are pushing up US population growth rates.

31

y81 04.15.06 at 1:13 pm

bob b, my point is that higher per capita GDP translates into greater national power, so of course the elites in any country would find it important. This point isn’t affected by whether the per capita GDP is distributed fairly or not, and it certainly isn’t affected by pointing that France’s per capita GDP is only 25%, not 30%, lower than that of the U.S. It’s still the case that no one listens to Chirac because he doesn’t have an effective military, an important domestic market, a hugh foreign aid budget, French corporations with global clout etc. If the EU countries were 30% richer, they would have those things. It appears, however, that the average EU citizen doesn’t want those things, which presumably makes members of the EU elite unhappy. The Economist is chanelling their unhappiness.

32

MDP 04.15.06 at 2:27 pm

soru: Maybe I am missing some sarcasm or pedantry or something, but the link you posted gives 2004 France GDP per head as 29711, USA as 39653, about 33% higher.

abb1: Hmm, I’m not an expert, but it appears that 29711 is about 25% lower than 39653.

39653 is about 33% more than 29711. 29711 is about 25% less than 39653.

33

abb1 04.15.06 at 2:39 pm

We all understand this, Michael.

34

MDP 04.15.06 at 2:42 pm

P O’Neill: Would George Bush be able to run deficits of $400bn a year if interest rates reacted the way they used to to deficits of that size?

How did interest rates used to react?

35

MDP 04.15.06 at 2:53 pm

abb1, if you understand it, then what was the point of your response to soru?

36

MDP 04.15.06 at 2:57 pm

nm, now I see that ball got rolling with y81’s “30% lower” comment.

37

Bob B 04.15.06 at 3:15 pm

#31: “my point is that higher per capita GDP translates into greater national power”

That is not very convincing – in my opinion, I hasten to add. By the OECD stats, Luxembourg – a rather small, tax haven in the EU – has a higher per capita GDP than America but few believe Luxembourg has much international political clout beyond the EU.

OTOH, by world standards, China’s per capita GDP is not very high but, by reports, China has recently overtaken Britain to gain the status of the world’s fourth largest economy in terms of GDP. China is not only a nuclear power but it has put up orbiting, manned satellites. Pundits are saying that by the mid 2020s, China will likely have the world’s largest economy even though its per capita GDP will not have overtaken America’s or Europe’s. Sheer size of GDP brings clout. A small share of a large national GDP is sufficient to fund a national space programme. We are going to have to adjust our perspectives on global clout, I think.

The larger, mainland European economies undoutedly have serious problems – sluggish GDP growth, ageing populations, birth rates below replacement level and unsustainable fiscal commitments to fund social welfare programmes – although Schroeder’s government in Germany did push through many genuine reforms of welfare entitlement and employment protection which seem to be yielding positive employment benefits.

The Economist is almost certainly right in its observation the extent and causes of Europe’s problems are not widely appreciated in Europe – and nor is the dynamism of the American economy. However, there are features of European economies which may surprise casual spectators. It would be wrong to jump to a conclusion that the European social model – with generous welfare benefits and employment protection – is to blame for Europe’s economic problems.

The paradox is that the Nordic countries in Europe have among the highest tax burdens as well as strong historic traditions of state intervention to manage national economies but they also have among the most dynamic and least sluggish economies in Europe. It seems probable that countries with smaller national populations are better able to generate and sustain a popular consensus about the course of policies necessary for statist management of national economies than is feasible in the large economies – hence the recent riots in France and the election result in Italy showing the electorate almost evenly split.

On European social models, this is worth reading:

Andre Sapir: Globalization and the Reform of European Social Models – Background document for presentation at ECOFIN Informal Meeting in Manchester, 9 September 2005
http://www.bruegel.org/Repositories/Documents/publications/working_papers/EN_SapirPaper080905.pdf

Summary and commentary here: http://www.euractiv.com/Article?tcmuri=tcm:29-146338-16&type=PolicyNews

38

Richard Bellamy 04.15.06 at 3:19 pm

Obviously, my copy of Atlas Shrugged has been long-since returned to my local, publically financed, lending library.

The irony of that is not lost.

39

yabonn 04.15.06 at 3:27 pm

The Economist is chanelling their unhappiness.

Mmhhmm. And that envy of the u.s. explains other things too? Just curious.

40

james 04.15.06 at 9:02 pm

the mantra is firmly embedded in the media narrative

while listening to NPR this morning i heard the venerable daniel shorr say that western europe continues to resist giving up it’s social policies to satisfy the requirements of the market economy

41

Tim Worstall 04.16.06 at 5:53 am

30. Interesting to note as well that France has a substantial immigrant population (I think we’ve heard that somewhere recently, haven’t we?) and no, we don’t know whether it is those immigrants having the children or not. France simply doesn’t collect such figures (at least, so I’m told).
Well known that first generation immigrants have more children that second and so on.
This might have something to do with Sweden’s high birth rate…a larger percentage of the population are first generation immigrants than in the US.

42

Isabel 04.16.06 at 2:53 pm

Some 2 decades ago, if I remember well, Sweden was in the demographic bind that affects mostly Southern Europe nowadays. They turned it around with extremely generous benefits for families in terms of time off to raise their children. It paid off.

43

Z 04.16.06 at 7:55 pm

and no, we don’t know whether it is those immigrants having the children or not.

Actually yes, we do know. It is not “those immigrants”. The information is easily collected by crossing birth rate and revenue (not to mention dozens of demographic studies on just that topic).

This might have something to do with Sweden’s high birth rate…a larger percentage of the population are first generation immigrants than in the US.

Again, we do know that it is Swedish people in general, not only immigrants and their offsprings that are responsible for Sweden relatively high birth rate.

44

lemuel pitkin 04.17.06 at 8:40 am

Thanks for the reply, Henry. y81 (at 31) makes my point better and more clearly than I did.

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