Not everyone is quite so fascinated as I with CDS spreads on Greek sovereign debt. However, the issues raised by the Greek debt difficulties and the urgent discussions in the Eurozone over a possible bailout, attendant moral hazard, and the like are far more than merely fiscal or monetary questions. Rather, this crisis is one of those instances in which the deep economic and financial problems directly reflect the questions of founding political design. Political economy in its purest sense. Regardless of what one thinks the right policy for the EU, Germany, Greece, and others, is at this moment, economist Otmar Issing’s Financial Times comment today (Tuesday, February 16, 2010) lays out a lucid statement of the foundational political issue of monetary union without political (or fiscal) union:
It seems that quite a number of observers have forgotten what Emu is, and what it is not. The monetary union is based on two pillars. One is the stability of the euro, guaranteed by an independent central bank with a clear mandate to maintain price stability. The other is fiscal solidity, which has to be delivered by individual member states. Member countries are still sovereign. Emu does not represent a state; it is an institutional arrangement unique in history.
In the 1990s, many economists – I was among them – warned that starting monetary union without having established a political union was putting the cart before the horse. Now the question is whether monetary union can survive without such a political union. The current crisis must be handled in such a way as to produce a positive answer. The viability of the whole framework – nothing less – is at stake.
By joining Emu, a country accepts its rules. Greece, moreover, also knew that adopting a stable currency that was not controlled by its own central bank implied a total break with the past. Devaluation of the national currency and an inflationary monetary policy were no longer options. A single monetary policy is implemented by the European Central Bank and it is the responsibility of each country to adjust its economic policies so that this one size fits all.
The fundamental political problem is a collective action problem – the “responsibility of each country” to adjust its fiscal policies to comport with a single monetary policy. The collective benefits, including those enjoyed by Greece, of a single monetary union with a currency widely trusted are enormous, starting with a lowering of borrowing costs – lower costs of which, however, could have been used either to lower public debts to put/keep Greece in line with the levels of fiscal policy of the monetary union, or leverage the savings to borrow ever more. Greece promised the former and went for the latter:
The benefits of joining a stable economic area are greatest for countries that were unable to deliver such conditions before. Thanks to the euro, Greece has enjoyed long-term interest rates at a record low. But instead of delivering on its commitment at the time of entry to reduce public debt levels, the country has wasted potential savings in a spending frenzy. The crisis with which it is now confronted is not the result of an “external shock” such as an earthquake, but the result of bad policies pursued over many years.
I myself believe that the sanitized language of economists on display here tends to hide, below a veneer of ‘sense’, a much more palpable ‘sensibility’ of “spend” that went with joining the monetary union. It isn’t just that Greece and its public saw an opportunity to free-ride on the euro. I’d say (from experience living in Spain and other poorer countries of the “old” EU) that joining monetary union was seen as joining the lifestyle of the richest countries in the EU. It was a powerful behavioral signal toward living like northern Europe, not toward seeing virtues in lowering the borrowing costs of the public fisc. My strong impression of what many Spaniards in traditionally poorer parts of Spain thought the EU meant, when I lived there on sabbatical in the mid 2000s was that to “be European” mean to have a “European” lifestyle, based on a Euro income. And, moreover, that the reason why the EU showered particular regions of Spain with money for so many years was not simply in order to promote economic development or political stability – both of which it did – or to purchase regional loyalty to the EU even over national solidarity – it did that, too – but, from the inhabitants’ view, tomake them “European,” which meant, ultimately, to consume like Europeans were supposed to, and did, even if it was financed on debt-fuel. This is another of those instances in which the sensibility – even though hard to document and measure – is hugely important and perhaps as important as the economic sense.
The EU is, from the standpoint of this sensibility, about equality, and it is unjust that there should be rich regions and poor regions. Again, from the standpoint of this essentially EU citizenship=consumer sensibility, if you didn’t intend that the EU should be gradually moving not so much closer to political union as egalite, then why on earth did you create a euro, the point of which, from a consumer standpoint, is to put everyone on an equalized playing field? I realize this sounds strange from the standpoint of economic sense, but that’s not what I’m talking about. The great sociologist Zygmunt Bauman once remarked, in an essay in Telos in the late 1980s, that the fundamental condition of poverty in our age is not that it is a class as such. It is that to be poor is to be a “flawed consumer.”
The euro, understood from this sensibility, took poor people who were poor because their countries were poor – a status that described whole national societies – and made them poor people within a unified social environment in which their poverty was no longer the condition of the country, but rather them as individuals who, within Europe, were now “flawed consumers.” Small wonder, as a matter of sensibility if not sense, that they concluded that the point of the euro was to make them … not poor. Small wonder that their governments responded in kind. Which is why the conclusion of this FT article, so economically sensible, lucid and compelling – it gets my complete agreement as a matter of policy – misses the fundamental point from the standpoint of euro-sensibility.
This moment is a turning point for Emu, and for the future of Europe. Most observers point to the high risks – which cannot be denied. However, any crisis also presents an opportunity. This is a big chance – probably the last for Greece, and others – to adapt fully to a regime of stable money and solid public finances.
For Emu, the crisis represents a final test of whether such an institutional arrangement – a monetary union without a political union – is viable for an extended period of time. Lax monitoring and compromises when it comes to observing implementation of rules have to stop. Emu is a club of states with firm rules accepted by entrants. These rules must not be changed ex-post. Governments should not forget what they promised their citizens when they gave up their national currencies.
From the point of view of the sensibility of citizens who define themselves as citizens of the EU – at the Union’s own urging – as consumers, identifying “with” the European Union on the basis of the solidarity of consumption, Greece has not forgotten in the least what it promised its citizens in joining the euro. It promised to deliver them from the condition of merely “flawed consumers” among the wealthy of northern Europe.
yankee says:
I nominate this for Understatement of the Decade.
February 16, 2010, 12:35 pmMark Field says:
Your argument, it seems to me, falters on a key point: Spain was running budget surpluses prior to the crisis. The Greeks? Yes, they — or at least the government — were and are irresponsible (is there a bumper sticker that says “please don’t Californicate Greece”?). But whatever the wishes of Spanish consumers, the Spanish government wasn’t giving in to them.
February 16, 2010, 1:00 pmSenatorX says:
This is a big chance — probably the last for Greece, and others — to adapt fully to a regime of stable money and solid public finances.
This will never happen right?
February 16, 2010, 1:23 pmMartinned says:
This was indeed the case, but I’m not sure if that is still true if you include the lower level authorities. Apparently there are quite a few (autonomous) regions and municipalities that are in grave financial trouble, and given the vertical division of power in Spain, this might well add up to a consistent picture of budget deficits if you look at the entire public sector. (According to Afoe, fully half of spending is at the regional and municipal level.)
February 16, 2010, 1:28 pmMark Field says:
Good point, and one I hadn’t recognized. It’d be interesting to see if someone compiled that data.
February 16, 2010, 1:32 pmCDU says:
Does anyone else find the title-cased abbreviation for the European Monetary Union distracting? Every time I read “Emu” I think of a large, flightless Australian bird.
February 16, 2010, 1:33 pmMartinned says:
Well, they’re at least talking the talk. The big question at the moment is whether the government will be able to overcome the resistance from society. At the moment, essentially all civil servants, including customs and tax collectors, are on strike. Apparently, that isn’t out of the ordinary, but if this becomes a big thing, it may make it impossible for the government to do anything. The fact that they’ve only just been elected last year does not give them enough political capital to push this through. (Look at this BBC/Gavin Hewitt blog post, for example, or this story, appropriately named “No tax please, we’re Greek”. Also check out this Charlemagne blog post about Spain for more paranoia.)
February 16, 2010, 1:39 pmMartinned says:
That’s exactly my uncertainty. I don’t know if the data shown so far concerns just the Federal government, or whether it covers the entire public sector. Krugman, for example, doesn’t say.
February 16, 2010, 1:42 pmtroll_dc2 says:
Prof. Anderson, what would you do? How do you change the prevailing “sensibility”?
February 16, 2010, 2:02 pmgab says:
This is a big chance — probably the last for Greece, and others — to adapt fully to a regime of stable money and solid public finances.
Will reducing budget deficits and imposing fiscal austerity even work for Greece at this economic juncture? Seems to me a case can be made that this would lead to further contraction and a spiral that would lead to greater and greater shrinkage of federal revenues. And the result would not be what had been intended but rather just the opposite.
February 16, 2010, 2:05 pmDavid M. Nieporent says:
Where’s Ronald Reagan when you need him? Or Margaret Thatcher?
February 16, 2010, 2:40 pmJoseph Slater says:
CDU:
You might want to avoid Eastern Michigan University.
February 16, 2010, 3:16 pmJoe says:
I lived in (northern) Italy during the run up to joining the EMU. My perception (and those of locals, too) was that the external fiscal discipline was a useful external “club” to drive good behavior on the part of government, civil servants, and the populace. Without that external driver it was felt that there was nothing to break through the logjam of Italian politics (perhaps I should delete “Italian”!)
Now it seems, at least in Greece, that nothing really changed. That’s probably true of Italy, too.
As a side note, the back side of my apartment in Milan looked over the old folks home that was run by Mario Chiesa and that kicked off the mani pulite campaign.
February 16, 2010, 3:25 pmKevin says:
I wonder what how this applies to dysfunctional state and municipal finances in the US – California, Illinois and New Jersey have been in the news a lot recently.
February 16, 2010, 3:57 pmOren says:
That’s precisely what I was thinking. Striking tax collectors? Have they gone totally mad?!
February 16, 2010, 4:05 pmpetB says:
AFAIK, Eurostat requires that reported public debt include all public debt, including debt of state-owned companies, debt of social security system and health providers (if guaranteed by state) etc. Debt of municipalities belongs there for sure.
February 16, 2010, 4:09 pmJoseph Slater says:
Actually, most other countries permit public employees to strike. Heck, 11-12 states in the U.S. have public sector labor laws that permit some-most public employees to strike. Federal sector employees are not legally allowed to strike in the U.S., hence PATCO. But most countries we would call advanced democracies allow most public employees to strike.
February 16, 2010, 4:10 pmRowerinVA says:
Martinned makes an excellent point about the autonomous regions of Spain.
Spain is, governmentally, a very unique country within Europe. Some Spaniards don’t accept the term “Spaniard” at all, and see Spain as a confederation rather than as a country — something like the Articles of Conferation in North America, pre-1789. When I traveled in Spain for research, I was quite suprised to discover this and was amused to see that British road maps (which I was using) presented “Spain” as consisting of only the northern principalities, and Andalucia as what appeared to be a separate nation. Britain has a stake in this view, of course, seeing as how it is in a long-simmering dispute over whether its possession of Gibraltar is legitimate. Apparently, the semi-official British view is that Spain isn’t really a country of the normal definition but is a confederation where components are free to join or leave on a moment’s whim. Since the inhabitants of Gibraltar don’t want to (re)join Spain, goes the British thinking, there is no legitimate Spanish claim to Gibraltar. Maybe even, according to the British view, there is no “Spain” that is even capable of having a “Spanish” view.
As compared with a claim that the Spanish present as “we want our penninsula back,” it’s much easier to ignore a claim that’s presented as “Andalucia and its buddies want Gibraltar to leave a British affiliation and affiliate with us instead.”
February 16, 2010, 4:13 pmdearieme says:
Everybody expects a Spanish disquisition.
February 16, 2010, 4:14 pmdearieme says:
Give Gibraltar back to the Moors, I say.
February 16, 2010, 4:16 pmNick says:
I don’t think Jane Austen is going to help us here, and Margaret Thatcher is too much to expect. But the second season of Entourage, or the third season of Ugly Betty, is something Greek viewers could watch. Just play the shows every night. Fashion. Hollywood. Middle class mores.
February 16, 2010, 4:20 pmGlen says:
This is an extremely astute and accurate analysis.
As for “what to do?” I think Prof. Anderson has already given us the answer: there is nothing that can be done. The prevailing sensibilities of the vast majority of “Europeans” will either drive the EMU towards more consumer equality — or it will disintegrate.
February 16, 2010, 4:32 pmMartinned says:
Under the European Social Charter, and similar provisions elsewhere, I highly doubt that a blanket ban on public sector striking would be lawful.
This Afoe post about the creative bookkeeping spends quite a bit of time on Italy as well. Here’s some numbers on their Q4 performance.
Only if you do it very, very carefully. In the same way that a stimulus package stimulates the economy, budget cuts hurt it, at least in the short term. The key is to cut drastically enough to maintain the confidence of the financial markets, but not so drastically that aggregate demand plummets and drags the economy as a whole with it.
February 16, 2010, 4:32 pmFreddy Hill says:
I see a parallel between the US and Spanish approaches to hiding debt. Just as the US has a multitude of governmental entities: federal, state, county, municipal, school district, water district, and a long etc where systemic problems can be hid for a while, so Spain (we are no dummies in Spain) learnt very quickly that the way around the EU limits was not in accounting transparency, but in complexity. Spain as a country can run all kinds of surpluses at the same time that its regions, cities and provinces can all go bankrupt. It’s all a pyramid scheme, which works as long as the Germans choose not to notice, and they choose not to notice because noticing would mean collapse sooner than absolutely necessary.
February 16, 2010, 4:56 pmFreddy Hill says:
You mean Jabal al Tarik? But then the moors would have to give it back to the romans who would have to give it back to the Iberians who would have to give it back to some Cro-magnons who would have to give it back to the Neanderthals who would have to give it back to the gibraltar monkeys… wait, this might actually work!
February 16, 2010, 5:07 pmTatil says:
It seems you are reading way too much overarching philosophy in why euro was established. EU was spending money in poorer regions before euro. The monetary union was needed to remove the risk of the exchange rate fluctuations to reduce cost of doing business, especially in small countries, and to make it easier for consumers to compare prices in different countries. For the poorer countries, it was a sign of pride to be allowed into the euro zone, but I don’t know if anybody expected the ability to personally consume so much more. When the switch was happening people seemed more worried about the retailers hiking prices overall while rounding for euros than contemplating lower interest rates on consumer loans.
February 16, 2010, 5:11 pmTatil says:
Are you sure? I thought all of the public sector debt had to be counted. The hiding was done through other measures, such as counting income from one-off sources, such as privatizations, temporary tax increases or tax amnesties, that resulted in the deficits growing larger the year after the country joined the euro.
February 16, 2010, 5:18 pmMartinned says:
Here’s what the Treaty says, or rather Protocol No. 12 on the Excessive Deficit procedure:
So essentially the entire public sector is taken into account.
February 16, 2010, 5:26 pmOren says:
Just to be clear, Reagan didn’t ban them from striking either. He simply exercised the lawful power of an employer to fire its employees for not showing up at work (provided, of course, that there is an official rule requiring employees to show up).
In fact, since it was firing with cause, they couldn’t even claim unemployment.
On the other hand, if wages drop far enough that manufacturing is now favorable again then exports to the other EU countries will pick up the slack.
That is, “aggregate demand” is not only domestic.
February 16, 2010, 6:04 pmEuro-Sense and Sensibility in the Greek Debt Crisis | Liberal Whoppers says:
[...] the original post: Euro-Sense and Sensibility in the Greek Debt Crisis [...]
February 16, 2010, 6:15 pmA. Zarkov says:
Perhaps not. Let’s remember the tax collectors are striking the government, not the people. If bus drivers go on strike, it makes a lot of people mad. But the tax collectors hit the government where it really hurts. However, Greece has such a large public sector, with so many people getting their pay directly from the tax collector, this strike could be as insane as you suggest. For Greece it’s hard to tell. But here in California most of us would be happy if both the tax collectors and government workers would go on strike. Strike us please. Our taxes keep getting higher, but its hard to notice what we get for this ever increasing burden. As discussed in the book Plunder, the people are California are being ruthlessly exploited by state and municipal workers who are paid better, have better benefits and greater job security than people in the private sector who pay their salaries.
It looks like Greece is in an advanced stage of what troubles California, but I’m not there so this is speculation on my part.
February 16, 2010, 6:30 pmBarbara Skolaut says:
Leftists (that’s pretty much all Europeans) always whine about equality of outcome instead of equality of opportunity.
As usual, it’s gotten them into a jam.
February 16, 2010, 6:31 pmLarryA says:
Sounds like including Greece in the EMU was something like handing a college freshman a credit card and telling him to “Only charge necessities.”
What could go wrong?
February 16, 2010, 6:32 pmMartinned says:
Firing someone for striking is absolutely, positively a violation of the person’s rights. To the extent that certain civil servants are not allowed to strike, and they threaten to do it anyway, the proper remedy is to get an injunction. If they ignore it, the usual remedies are open.
Two things: 1. Since wages are pretty sticky in the downward direction, such an internal devaluation takes a long time. It is, however, what they’re going to have to do, though they won’t actually have to use mass firings to get there. 2. Every country in the world is looking for export driven growth right now. Logically, we can’t all run a current account surplus.
February 16, 2010, 6:37 pmMartinned says:
In our defense, the Treaties do provide for a way of giving them a bloody nose if they don’t play by the (deficit) rules. Unfortunately, that doesn’t work so well if they’re already bleeding out of all orifices as it is.
February 16, 2010, 6:39 pmA. Zarkov says:
Today in the U.S., many if not all federal civil service workers must sign an agreement not to strike. Giving up the right to strike is a condition for your employment. When the Air Traffic Controllers went on strike in 1981 they were in violation of 5 U.S.C. (Supp. III 1956) 118p. I recall that they also had signed agreements not to strike. They went on strike any way. The government got an injunction, but the union PATCO, defied the injunction. The strikers were told they must return to work or they would be fired. They didn’t and they were fired.
Perhaps Europeans have some kind of fundamental right to strike, but in the U.S. they don’t. Any rights along those lines flow from contracts and legislation. When I lived in New York City, I witnessed up close the burden striking civil servants present to the citizens. In the early 1970s the Draw Bridge Operators went on an illegal strike, opened the bridges and then damaged the controls so they couldn’t be closed easily. The entire city went into gridlock. Ultimately the union won, and the workers who destroyed government property went unpunished. They kept their jobs and got a raise. Unfortunately for the people of New York, the politicians have a European attitude towards strikes. Ultimately the out-of-control municipal spending and high taxes caused businesses and hundreds of thousands of people to move out of New York City, myself included. In 1975 the city went into default on its bonds and had to go begging to the federal government.
The more change the more thay stay the same.
February 16, 2010, 7:03 pmJoseph Slater says:
Zarkov basically has the PATCO facts and law right. It is, in fact, specifically illegal for federal sector employees to strike, and sanctions for striking illegally can include discharge.
February 16, 2010, 7:12 pmMartinned says:
I know. I was referring specifically to the European/Greek position. The aforementioned European Social Charter, which is a treaty negotiated under the auspices of the Council of Europe and thus has nothing to do with the EU, states:
A shorter version of this statement is found, for example, in art. 8 ICESCR, which again only makes an exception for the police and the army, and art. 28 of the EU’s Charter of Rights.
February 16, 2010, 7:30 pmSenatorX says:
The key is to cut drastically enough to maintain the confidence of the financial markets, but not so drastically that aggregate demand plummets and drags the economy as a whole with it.
Sweet a Greek Goldilocks! I hope it goes better than ours did.
February 16, 2010, 7:32 pmA. Zarkov says:
I understand, but that’s not a fundamental or “natural right” like self defense. It’s a right created by a treaty, and subject to modification or elimination.
Unfortunately these high minded labor rights can make it very hard to discharge an employee for cause or have a reduction in force. This in turn leads to jobs getting exported to places where labor is cheaper and more flexible. So is no job better than a low-paying, insecure job? Some people think yes, and advocate a “pay to play” policy. As jobs disappear the government becomes an employer of last resort leading to a bloated public sector subsidized by debt, which in turns leads to a debt bubble. Neoclassical economics, the dominant theory taught in colleges, largely ignores credit and debt. It should come as no surprise that almost no economist predicted the current financial crisis. They missed it because they don’t think credit bubbles are of primary importance. Only a handful got it right. Anyone who subscribes to Hyman Minsky’s Financial Instability Hypothesis saw all this coming (as I did and made money off it). From the data in the book This Time it’s Different, it looks like there is some critical total debt (public + private) to GDP ratio that determines the point of instability for a country’s financial system. Greece might be there. If Greece gets a bailout then what about the other PIIGS? How long will Germany and France be willing to subsidize the PIIGS? Who will subsidize the EU or for that matter the U.S.? I think the U.S. might even be close to the critical point soon. Unfortunately Obama’s advisers are neoclassical economists, and they don’t understand what’s happening. Bush’s advisers were even worse, and McCain’s worst off all.
BTW some statistical physicists correctly predicted when the housing bubble would burst. Anyone who followed them knew when to get out of housing. I did.
February 16, 2010, 8:11 pmMartinned says:
Actually, this problem is not that different from the problem that many richer countries are facing: Once you’ve enacted a stimulus programme, how/when are you going to get rid of it again?
I just noticed, in this older Krugman post about the Spanish deficit, that the caption says that the data come from the IMF, not Eurostat. So I still don’t know if the number if for the entire public sector or not.
February 16, 2010, 8:17 pmMartinned says:
I’m not so sure. Or rather, I wouldn’t put it on a par with self-defense, but I wouldn’t discount it as easily as you do, either. Striking is the power the employees have to counterbalance the power of the employer to fire them, it’s what creates some semblance of equality of arms between them. I think a strong moral case can be made that the right to strike shouldn’t be interfered with absent extraordinary circumstances. A good example is the Thatcher era case of Council of Civil Service Unions v Minister for the Civil Service (1985), where Thatcher banned the staff of GCHQ from belonging to an union. I assume they were similarly forbidden to strike, and that seems reasonable to me. (The reason why I can cite it off the top of my head is that it is an important case on legitimate expectations in UK administrative law. It’s also pretty important for the concept of judicial review of crown prerogative powers, but that’s not why I care about it.)
February 16, 2010, 8:27 pmA. Zarkov says:
I’m not discounting it. Actually I’m (within reason) pro-labor and tend to take the worker’s side over management. I certainly think people should bargain collectively with their employers. I have long tried to convince technical workers to organize, but they won’t go for it. What I don’t see is an omnibus right to strike in all situations as somehow flowing from some kind of natural law. I’m all for laws giving and facilitating workers right to organize. I’m just trying to point out that in some cases the whole thing goes too far eventually leading to an economic crisis. That’s what happening at the state level in the U.S. and evidently at the country level in Europe. California (where I live) is about to go over the cliff. I’m guessing the feds will bail them out. I don’t see the state government as having the courage to buck the unions which have gone too far in California. Many people I know think California should just raise taxes, but I don’t think that’s any kind of long range solution. It just delays the inevitable like borrowing. BTW I would dump California municipal bonds sometime this year.
February 16, 2010, 8:57 pmA. Zarkov says:
Krugman to his credit is tending towards Hyman Minsky, but he missed predicting the housing bubble burst. His post brings up DeLong who completely missed everything. If you want to be poor than read DeLong. He’s a good example of what’s wrong with neoclassical economics. It’s like watching alchemists at work.
February 16, 2010, 9:04 pmMartinned says:
How about the rule that slavery is wrong? (How “natural” that law is is a fascinating question in itself, but let’s leave that one for another day.) Technically, it isn’t true that the ban on slavery is why you can’t get specific performance after an employee’s breach of contract, but morally there certainly is a connection. Every worker has the right to walk away.
So that’s not really the question. The question is whether there is some rule against firing someone for striking. If the right to strike means anything, it means that workers can’t be fired for striking. (With, as a runner up, the right not to have your employer hire someone else to replace you while you’re on strike.)
It follows that one’s view of the right to strike is necessarily connected with one’s view of firing generally. Being European, I am – to say the least – uncomfortable with the notion of employment at will. Certain contracts, which are essential to a person’s existence, such as employment contracts and rent contracts for houses, should not be open to being ended at will, at least not as against the person who relies on them. Such contracts should only be ended with sufficient notice and for good reason (there is some trade-off between the two). And exploring “good reason”, we find ourselves necessarily distinguishing between striking and simply refusing to work.
February 16, 2010, 9:17 pmA. Zarkov says:
Can a company go out of business instead of giving into a strike that would destroy the business? How about layoffs, or outsourcing the jobs? Let’s remember that the senior members of a union have little to lose from a crippling strike. They have seniority and will be the last to go in a failing business. The right to go out of business is the the other side of the bargain. Again it comes down to the question as to whether no job is better than a bad job.
The same thing applies to rentals. If the state so encumbers property owners with rent laws then rentals will dry up. We see this quite clearly in places like Berkeley California, Santa Monica California, New York City, and Cambridge Mass before the law changed. These European attitudes towards labor, contracts, rentals etc inevitable lead to some form of socialism. When the landlords go away the state provides housing. I can tell you from New York City that renters hate municipal housing where they are treated much worse than by the usual private landlord bad as they are. At some point one must bridge the gap between ideology and reality.
February 16, 2010, 9:38 pmMartinned says:
Unions are an entirely separate matter. Striking is initially an individual right, albeit one that doesn’t do much good unless many people exercise it simultaneously. If you have a problem with the way union members vote, fix that. In any case, no one’s forced to strike. (At least not over here they’re not.)
You say that as if that’s a bad thing. ;-)
Anyway, the free market analysis of the kind of notice requirement I was talking about before is that it wouldn’t normally affect the supply of housing. Instead, it might cause an increase in the price, and possibly an increased security deposit. (If your landlord has to give you a month’s notice, that alone is reason enough to ask you for last month’s rent up front.)
February 16, 2010, 9:53 pmOren says:
Well, you aren’t firing them for striking, you are firing them because another worker has offered to do the same job at a lower wage. Surely a company has the right to chose the worker that will perform the job at the lowest possible cost — we don’t hire lawyers to mop the floors.
In fact, I would argue that allowing unions to monopolize the labor supply in such a fashion violates the right of all the other workers to find jobs — it is not the employee wronging the employer, it’s the employee wronging all the other workers.
(1) Wages aren’t as sticky in the downward direction as people imagine. Cut cash welfare payments and you will have downward wage adjustment.
(2) Greece, having a large amount of surplus labor can still do better than they are now.
Indeed. And companies will not hastily fire experienced employees if the cost to retrain (and the attendant pain that goes with it) is higher than the requests.
In your version, the employer has not recourse at all — he is completely a hostage to the strikers. He cannot fire them, he cannot hire replacements, he cannot simply lower their wage. It seems he just has to pay whatever they want. This seems to be how Greek civil servants retire at 61 (!) with 6 (!) weeks of vacation a year. This is even if there are 10 people for each striker begging to take the job at the wage the employer wants to pay.
Nuts, it’s just nuts!
February 16, 2010, 10:09 pmMartinned says:
Hardly. While they’re on strike, they don’t get paid.
Retirement age is ordinarily a statutory thing, although collective bargaining can involve arrangements for early retirement. As for the six weeks, I’m not sure why you put an exclamation point there. Sure, not everybody has that many, but even my Dutch academia collective bargaining agreement gives me 240 hours = 6 weeks. (I had to check, since I’ve never come close to using them all.)
Yes, and people starving in the streets.
Not in pretty much any European country you don’t. Collective bargaining fixes the wages in most sectors. Employers can hire the best staff they can find, but not the cheapest.
February 16, 2010, 10:31 pmDavid Nieporent says:
What on earth sort of “right” is there to keep one’s job when one doesn’t show up for work?
I see this was addressed lower down — well, not really addressed, but a treaty was cited. But that doesn’t make it a violation of anybody’s rights; that makes it a violation of a treaty.
No; quitting is the power the employees have to counterbalance the power of the employer to fire them.
February 16, 2010, 11:27 pmMartinned says:
Well, a treaty right, surely? Or is a violation of someone’s US Constitutional right to a trial by jury not a “violation of anybody’s rights” either, but “merely” a violation of the constitution?
Fat lot of good that is.
February 16, 2010, 11:36 pmA. Zarkov says:
How is striking an individual right? Are you saying that if someone is dissatisfied with his job he can just walk off until until he gets a raise? And in the meantime his employer can’t hire someone else? Why should other people be denied the right to a bid for a job? What makes a job someones property? Now don’t you see why investment capital is flowing into Asia? Ultimately Asia will put Europe and the US out of business.
As Margret Thatcher said, “The problem with socialism is you run out of other people’s money.” Why should northern Europe subsidize the PIIGS? What’s in for them? Now we see yet another reason the French and Dutch voted down the European Constitution, while Spain approved it with a whopping majority of 76%. It would have been interesting to see how the referendums would have come out if all the EU countries had voted.
February 17, 2010, 12:08 amOren says:
But he cannot hire replacements to keep production going. Meanwhile suppliers demand to be paid and
I’m all for food stamps — give everyone 3 square meals (or 4 or 5, if they like). Subsidized or even free housing is (nominally) fine to. It’s the cash payments far beyond housing and food (e.g. booze & cigarettes) that I was referring to. Cutting payments 10% or 15% isn’t going to do end in Les Miserables being reenacted on the streets of Athens.
Collective bargaining between whom? A new company is, upon founding, subject to a labor agreement that they did not (as the name suggests) bargain? If so, of course there is downward price stickiness! How could prices ever go down in a situation where the price of labor is not set by the market?
By the way, I was going to quip that an employee whose marginal labor cost over market value (i.e. difference between his wage and the market wage) is less than the marginal value of his performance (i.e. him versus the next guy that would take his job at market wage) is hardly “best” in any sense of the word. This is like saying that a Porsche 911 is the “best” car when you can buy 4 Honda Accords for the same price — it’s not relevant to the question being asked which is how can the company produce goods competitively.
That quip, of course, supposes that the purpose of labor is to produce utility, not to provide jobs. Marginal competitiveness, I’m sure you will tell me, is less important than the social aspect of labor. I can’t speak to the normative claim but I can point out that the cost of those benefits in terms of squandered growth (and hence lower future standard of living) is enormous. Robbing the future to be comfortable now is, well, shortsighted.
February 17, 2010, 12:11 amOren says:
Are you kidding? It’s a great lot of good. My buddy was fired (well, he was asking for it by being willfully insubordinate) and, just to make a point to his boss got on the phone and landed another job while still in his old office. Of course, this applies to workers with relevant skills that are in high demand.
The problem seems to arise when workers with none of those skills demand to be treated like they are (contrary to facts) irreplaceable. If you can’t do something particularly useful for society, why exactly should your every demand be met more than those of everyone else that can feasibly do your job?
It seems the structure that you have presented screws not only the employer but also the desirable employee — bringing him down the everyone else’s level of mediocrity.
February 17, 2010, 12:17 amMartinned says:
Why don’t we add to all this selfishness just a pinch of something else: “From each according to his ability, to each according to his need.”
Viewing each individual’s worth based solely on their ability to contribute is not only seriously immoral and bourgeois, it is also very bad for one’s soul. In case you hadn’t noticed, money doesn’t actually make the world go ’round…
February 17, 2010, 1:50 ampetB says:
6 weeks is quite a standard in Europe.
I can say how in other EU countries, but collective bargaining do not set base salaries here. Big employers use some rules to determine salaries, but collective bargaining in Europe mostly encompasses whole sector, and it is not possible to have the same salary for many different employers.
However, to fire an employee employer must cite a qualified reason, and ability to find a cheaper worker is not a qualified reason. So there is some downward stickiness in salaries.
To get back to Greece – what is overlooked is that grey economy is quite huge in Greece. I have seen an estimate of 30% of GDP – take into account that government spending is 50% of GDP, grey economy may take more then half of private sector. And there is no collective bargaining or wage stickiness in grey sector.
February 17, 2010, 4:04 amTracy W says:
Martinned: you say:
Budget cuts have in the past been followed with an immediate increase in GDP growth. This happened in the United Kingdom when Margaret Thatcher cut government spending, in New Zealand when Ruth Richardson cut spending and in several other cases. See http://www.nzbr.org.nz/documents/articles/0610%20Naive%20Keynesianism%20and%20Other%20Fallacies.pdf
and
http://www.econ.puc-rio.br/Goldfajn/Macro%20III/Can%20Severe%20Fiscal%20Contractions%20be%20Expansionary%20-%20Tales%20of%20Two%20Small%20European%20Countries.pdf
Admittedly it is possible that in all these cases the economy would have recovered faster if the budget had not been cut, but on the other hand you could say that equivaently about any empirical evidence supporting the claim that more government spending stimulates the economy.
February 17, 2010, 4:13 amMnZ says:
The oddest thing about Marxist thinking such as this is how facile it is. Nevertheless, it is presented as deep thinking by highly educated people
How on Earth are you going to get someone to honestly reveal their abilities and needs? The natural incentive for the individual is to understate, underexploit, and underinvest his or her abilities and overstate their needs. The economy simply doesn’t work unless there is a great enough cost to understating abilities and overstating needs.
February 17, 2010, 8:48 amMartinned says:
I’m not a big fan of Marxism for exactly that reason. (I’m an economist by profession, remember.) Nevertheless, it is important not to overstate the conclusion. The science of economics tells you that certain things “simply don’t work”, or at least don’t work well. The question is whether that matters. Economics can tell you about the efficiency of the way we use scarce means to achieve certain ends. It doesn’t tell us what those ends should be, and it certainly doesn’t tell us that we should worship the efficiency of our economic system above everything else.
In my earlier statement, I simply applied the Keynesian equations that underly all stimulus talk. Government spending is a component of the national income, since the national income is obtained by producing things for consumers, for the government, for net exports, and by producing investment goods. From a quick glance, it looks like the articles you cite describe a situation where a sharp cut in government spending encourages consumer spending and private sector investment sufficiently to compensate. In Greece that is simply not realistic.
Greece’s problem is very simple, and many of its other problems are caused by this one: In last year’s Transparency international list, Greece finished dead last of the 27 EU countries, tied with Romania and Bulgaria at a 3,7 out of 10. IIRC, that put them around place 70 on the overall list, below countries like Malaysia. That’s why everybody wants to work for the government, and, on the other hand, it may well mean that those government jobs are themselves for sale. That causes the grey economy problem that petB mentioned. Check out this article that I already linked earlier:
And before my enlightened American friends start explaining that this is all caused by those high socialist tax rates, let me assure you that a) taxes aren’t that high in Greece (this WSJ story mentions that one of the proposed austerity measures is an increase in the maximum income tax rate from about 25% to 38%), and b) this corruption problem has been going on much longer than the socialism. From the same WSJ article:
February 17, 2010, 9:37 amDavid M. Nieporent says:
Because that’s an evil saying, and it is the position that really demonstrates selfishness? Demanding that one be given something one hasn’t earned because one “needs” it is the height of avarice.
February 17, 2010, 10:53 amMartinned says:
[Note, my previous comment is still awaiting moderation.]
1. “Earned” how? Do I “earn” my keep? (Remember, being in academia, I draw a government wage.) The rules of the game are not god given and fixed for all time. We manipulate the rules to achieve a just outcome, meaning that the question of what is a just outcome is a legitimate topic of conversation. What I do is institutional economics, i.e. wondering whether the rules of the game, including the law, are efficient. But, as I noted in my as of yet invisible comment, that is not the only criterion. In many cases, efficiency rightly takes a back seat relative to other values.
2. It is the sign of a civilised society that we give to each at least what they need. We can argue over what that is, and there’s no question that my compatriots set the bar too high for my taste, but the basic principle is sound, and shared even by my American friends.
February 17, 2010, 11:54 amA. Zarkov says:
I’m pretty sure this is tongue-in-cheek, and not at all a serious comment. But just in case, I’ll reply.
Abilities and needs are vague concepts, and a government could use them to justify just about anything. But instead of getting philosophical, let’s look at the likely consequences of a policy based on needs and abilities. Believe it or not people do respond to incentives. There are lots of jobs that would have no takers if they didn’t pay well. Being an associate at big law firm is one of them. Associates start at about $160k and work upwards of 70 hour weeks. They are on call all the time and sometimes have to interrupt a vacation to come hold the clients hand. Often the work is extremely boring and tedious. Getting hired usually requires graduating from one of the top 14 law schools and having done a clerkship helps a lot. Suppose 70% of the associate’s income were taxed away, or the Ministry of Wages put the salary at $48k. How many people are going to put up with that job for $14/hr? I suspect few to none. How many people would want to become a neurosurgeon which requires a six-year residency with a brutal work schedule if the salary were small? How many people would work at all if they could get generous benefits for doing nothing? Even the Communist countries didn’t have a “abilities and needs” policy for all the obvious reasons.
As for selfishness, don’t you think its pretty selfish of the PIIGS to want the northern Europeans to work harder to support them in a more leisurely southern European life style?
This is a strawman argument. An individuals “worth” is also a vague concept. Moreover if money does not make the world go around, then Greece should not want other people’s money and be satisfied with what they can produce on their own.
February 17, 2010, 12:10 pmOren says:
The sum total of everyone’s ability to contribute makes the world go round.
Plus, I’d rather have a 60″ plasma TV and a tarnished soul than a CRT and a pure one. Just sayin …
February 17, 2010, 12:13 pmSoronel Haetir says:
I have to say that the position put forward by Martin appears absolutely nuts. I’ve seen plenty of posts where writers mocking such positions put it forward as the basic European ideal, but it’s hard to believe any such thing is taken seriously. To have an educated person actually put forward such nonsense as being a good thing is madness.
In the employeremployee tug-o-war under a system where striking workers can neither be fired or replaced I fail to see how that leaves the employer any choice but to cave to the employee demands, whether they are sustainable or not. The employee can always (so long as the system survives anyway) fall back on state largess, the employer however risks losing their entire capital investment if their business isn’t open and operating.
I own a small retail store and am not sure at all that I would operate under such conditions. Certainly I would have to be far more careful in employee selection. It’s amazingly difficult to find a competent cashier, even when paying well above the prevailing wage for the region. To couple incompetence with an inability to fire and replace, well, that’s just a bit much.
February 17, 2010, 12:17 pmMartinned says:
They strike, you don’t pay them. See who lasts longer.
Indeed. That is the clear down side that everybody understands. The question is whether it’s worth it.
O, and by the way, in case this isn’t clear: there’s no such thing as picket lines here. When there’s a strike on, anyone who wants to work is allowed to. Obviously, you need a certain minimum number of people to keep the place going, but how many that is depends greatly from one job to another. I, for one, would be perfectly able to do my job even if the entire rest of the university were on strike, and both under the law and under union rules (which don’t apply to me anyway, not being a member), that would be OK. It’s just that my colleagues might not appreciate it. Usually there will be several unions involved, allowing the employer to play them against each other, and if the thing completely goes to hell in a hand basket, you can still try to get an injunction, though in the Netherlands such injunctions, like strikes themselves, are quite rare. The net result is a labour market much less flexible than the one in the US, but with significant offsetting benefits.
I’m sorry, did I give you the impression that incompetent people cannot be fired? That is certainly not the case. You can “fire” them when their contract expires, or otherwise with one or several month’s notice, using a not particularly troubling court procedure.
February 17, 2010, 12:49 pmMartinned says:
BTW, this just came up on an economics Listserv I subscribe to, in a discussion of internal devaluations, monetary areas, etc.:
Geoff,
I don’t even pretend to have an answer to your two questions but I do have a story that might be appropriate. Growing up in the midwest of the United States, with parents who were both poorly educated working class, I understand the results of being part of a giant monetary union. In the US at least we had some support from the federal government. However the support and the life a child growing up in a de-industrializing economy was pretty spectacularly crappy. If the midwestern states of the US had their own currency then the ability to devalue the currency in order to remain competitive would have saved millions of families the extreme pain that was my experience growing up. The midwest of the US has been in a constant state of economic recession for the last 40 years. The results have been destroyed families, destroyed culture and diminishing hope. My family finally wound up leaving the midwest to seek better opportunities available on the West coast. While my family’s economic situation was improved, I found myself removed from my only sense of home and culture. My family became fractured and I missed vital experiences such as not being able to go to my grandmothers funeral since my working class family couldn’t afford it.
What are the benefits of a huge, monolithic monetary and economic union? Even in the example of the US where immigration is easy the destruction of culture that results from the inflexibility of the regions has a real price. The benefits being a few extra pieces of plastic crap that you can pick up at Walmart. Is this simply the result of poor US policy? or is it the result of a massive geographical area being forced to fit within an economic structure that is not flexible enough to deal with the multiple problems of differing regions? I don’t know. However I do know that bigger is not necessarily better. I wouldn’t be so sure that there are long term benefits outweighing the costs of lost currency sovereignty. I always thought the economy was supposed to serve the culture. In my experience of being part of a giant economy it seems that the culture has been destroyed at the alter of the economy. Perhaps a more unified EU would avoid this but I am not sure what policies would have to be put in place to do so.
Any way just a few thoughts
Tim Wunder
February 17, 2010, 12:51 pmShelbyC says:
Of course it is. However, determining how much each individual is entitled to consume based on their ability to contribute is just fine for the soul.
February 17, 2010, 1:14 pmShelbyC says:
It’s always instructive to look at what a system rewards, and what a system punishes, because you will end up with more of the former, and less of the latter.
February 17, 2010, 1:19 pmMartinned says:
Very true and preaching to the choir. You don’t have to convince me of the importance of incentives. But the more interesting question is how much efficiency matters, compared to other values.
February 17, 2010, 1:28 pmDavid M. Nieporent says:
Incidentally, I think there’s some sort of iron law of politics that people who say things like, “Money isn’t everything, you know” are inevitably the people who want your money.
February 17, 2010, 3:18 pmOren says:
I have to agree with this — Soronel is wrong, it’s not ‘nuts’ (contrary to my previous assertion). It is a different allocation of normative weight. In my opinion, it is an incorrect one that sacrifices long term wellbeing for short-term gratification but a society has every right to make that decision.
May the employer offer bonus pay to those crossing the line?
So then one can fire them in order to bring on newer lower wage workers? I’m confused as to how this is consistent with what you told me earlier.
If you can fire your workers at the end of the contract, surely you can write a new contract for lower wages and accept all comers, right? There is a missing piece here that I’m not getting.
February 17, 2010, 3:37 pmOren says:
Of course, the benefit of WalMart is to increase the real wages of the working poor by something like 10%.
February 17, 2010, 3:39 pmSoronel Haetir says:
Depending on exactly when in my cash cycle a strike happened my business would last somewhere between two and five weeks if the doors were closed. The thing to realize is that I have a much greater investment tied up in the store than the employees who work for me so my risks in that game of chicken are much greater. The employees in fact have no ongoing investment in the business whatsoever. And that is part of why saying an employee has an ongoing ‘right’ to their job seems like madness to me. What has the employee put in the pot to earn that right? And don’t say their work, I’m already paying them for that.
In your university strike example where you could come in to work, the question I see is not whether _you_ could come into work, but could the school hire somebody else (assuming they could find someone qualified and willing) to do the work someone else is not performing? And if they did so would the school then be responsible for keeping both when the strike came to an end?
If employers actually held any strong cards during a strike then strikes wouldn’t be a winning labor strategy unless the workers could rally a more general boycott of the employer. The fact that strikes do occur is proof enough that they hurt the employer more than the workers.
February 17, 2010, 4:04 pmMartinned says:
Well, generally there is no “line”. In Greece, most people who are on strike are simply at home enjoying the day off.
Anyway, that’s an intriguing question. I’ve never heard of anyone trying this, but I’m also not entirely sure why it should be illegal. The explanation might be in the answer to your next question:
It’s called “equal pay for equal work”. Collective bargaining will divide and categorise pretty much all positions below management level, and dictate how the remuneration package works. That doesn’t mean that everybody makes the same amount of money, but it does mean that a difference between people’s pay is only allowed within the overall scheme of the agreement, for example because of differences in seniority or experience. My Ph.D. contract, for example, runs for four years, with a significant pay increase at the end of each year. The fact that I would gladly do my job for half the money is irrelevant, the salary is locked in by the Dutch academic “industry”‘s collective bargaining agreement.
Under Dutch law, a pay differential that cannot be explained in this way can be adjusted by the courts, meaning that the person who makes too little can sue for back pay.
As opposed to the employees, who, if they lose their jobs, are just hunky dory? Think about it: if your company goes bust, the workers and you lose their jobs. Why would a reasonable union let that happen?
In Greece, the system is clearly broken. The workers there do not seem to “suffer” enough when they’re on strike. Being on strike is not supposed to be painless. Over here in northwest Europe, on the other hand, strikes are exceedingly rare, because the mechanisms in place assure that the unions and the employers’ representatives are committed to achieving an equitable outcome. The unions understand the employers point of view, even if they don’t agree with it, and where necessary the government will also pile on to keep wages low. The result is (or at least was) a high degree of competitiveness. This is why the difference between Germany and Greece is so big. It’s not just that the Greeks are a bunch of screwups, but also that the Germans have a shared commitment, as a society, towards frugality and competitiveness. In return, the workers get things like protection against unemployment and – in Germany – the right to appoint half the board.
February 17, 2010, 4:36 pmOren says:
Sounds like an absolutely reasonable (maybe not desirable, but that’s irrelevant) provision to have in an employment/union contract. The problem with your answer is that it does not preclude the effective power of the employer to demand a lower wage if market conditions will bear it.
Suppose I own a factory and the collective bargaining contract between myself and the union is expiring. During negotiation with the union, I can try* to lower wage for a particular category because I can find workers to fill out that sector at the lower wage. I haven’t changed the principle of “same pay for same work” — I’m simply lowering the value of that pay. Employees that do not accept the new contract are not “fired”, they are simply no longer employees because they refused the terms.
Like I said, I have to be missing something. Either these rates are not subject to collective bargaining (i.e. they are set by fiat) or there is some limitation on my discretion not to rehire workers when their contract expires.
[ Aside, I have never suggested that employers should be able to terminate employees at will while there is a contract preventing this. My hypothetical is focused solely on the status of the parties at the expiring of the contract. I think I might have been misunderstood on this point. ]
February 17, 2010, 4:59 pmOren says:
But the university can bargain for a different agreement when this one expires, no?
If not, in what perverse sense could this possibly be called a ‘bargaining agreement’ since the university seems to have neither the power to bargain nor the ability to disagree.
February 17, 2010, 5:01 pmOren says:
Happened more than once in the US.
February 17, 2010, 5:03 pmMartinned says:
Of course it doesn’t. In fact, that’s one of the appeals of a higher inflation target. Having a target of 4% instead of 2% gives more people more space to negotiate for a real wage decrease without having to stomach a nominal wage decrease. Nominal wage decreases are psychologically difficult for the union to sell to its members, but during difficult economic times such as now, real wage decreases are not uncommon. When unions and employers negotiate, they can agree on whatever their respective members will put up with.
Actually, the bargain between the union and the employer(s), once agreed and ratified, automatically becomes part of everybody’s labour contract. If a given employee doesn’t like it, they are welcome to quit. (They also have to give notice, btw.) In fact, under the law in most European countries, including mine, the collective bargaining agreement applies to everybody, even people like myself who are not members of a union and can therefore not influence the union’s negotiating stance.
(Technically, the government has to declare the agreement “generally binding” before this is the case, but this is almost always done. They only tend to refuse to make the declaration if the agreement conflicts with government economic policy, for example because the wage increase is too high.)
February 17, 2010, 5:16 pmSoronel Haetir says:
The incentives for the union are to get as much as they possibly can right _now_, whether the contract can actually pay out promised benefits far down the road is of little moment. Look at the US auto industry for a great example of this. Contracts were negotiated with the legal regime being such that the companies could not in fact refuse the union demands. I will not claim that this is the sole problem facing US based auto makers but it is a significant one.
It’s relatively easier for a typical employee to find a new job than for a business owner to recoup their investment while facilities are idle.
So, again, other than going out of business — which is an option that has been exercised in some circumstances, what leverage does the business owner have if striking workers can’t be replaced? Maybe they simply have none and that’s why the chronic unemployment figures from Europe are always so high.
February 17, 2010, 5:40 pmMartinned says:
Not to mention all the crippling inflation, loss of competitiveness and current account deficits that result from giving the workers what they want. Oh, wait…
February 17, 2010, 6:01 pmOren says:
And so we need to inflate the economy because the union members don’t understand that 2% pay increase + 3% inflation is the same as 1% inflation with no pay increase? Tolerating innumeracy is one thing but I see no reason to write policy specifically to coddle it.
Who exactly is “everybody”?
Does it include, for instance, employees at an entirely different university that is not even party to the agreement? If I want to start a new university, must I accept the extant university-professor agreement or may I draft a new agreement (subject to bargaining with the professors, of course)?
That is, if I understand correctly, you saying that all the members of some “industry” must negotiate super-collectively on a single agreement to apply to all the labor. Is that right?
February 17, 2010, 7:19 pmMartinned says:
In this case, I’m OK with something that works. There’s actually another reason for it, too, which is that having a higher “ordinary” level of inflation means having a higher “ordinary” level of nominal interest rates, which means that interest rates can be cut further without getting in trouble with the question of whether a negative nominal interest rate is possible.
Let me be careful: Dutch practice is to negotiate these agreements at the level of an entire industry, with the rules – via the government’s decision making it generally binding – applying to new entrants as well as existing companies. (You can’t just up and start a new university here, since they’re all public, but that’s a different story.) Only a few really big employers have their own collective bargaining agreement.
My sense is that this system is applied in most of continental Europe, but it is a bit too far from my area of expertise for me to be sure.
February 17, 2010, 7:33 pmTracy W says:
Martinned:
I think you are being a bit harsh on Keynesists here, not all of them naively think that government budget cuts means a fall in recession. while statements like “In the same way that a stimulus package stimulates the economy, budget cuts hurt it, at least in the short term.” appears to have become the commonly accepted public knowledge, the more intellectually rigorous Keynesians do take into account the empirical evidence indicating that matters are not that simple.
And of course, repeating the naive idea that budget cuts automatically hurt the economy merely increases general ignorance on this point. Which is why I called you out on it. In other words, you shouldn’t have been so simple.
There are two points here. Firstly, it is an empirical fact that cuts in goverment spending have been followed by a turn around in the economy. The articles I pointed to speculated about why that happened, but the theoretical explanation may not be correct.
secondly, you boldly assert that that is not realistic in Greek, but your explanation of why not is unclear. If I was Greek, with all this talk of leaving the EMU, or expectations of much higher tax rates to pay for the government spending, I would be getting my money out of Greece and putting it in foreign banks. And quite possibly getting myself out and joining a different labour force. It is plausible however that a serious cut in government spending would lead me, at the margin, to be more trustful about the future of Greece – reduce my estimate of the odds that Greece will leave the EMU and reduce my expectations of future heavy tax increases, enoguh for me to bring some money back in and do that consumer spending and private sector investment. Certainly it’s hard to see how the Greek government borrowing even more money would make me more likely to spend and invest in Greece.
You talk about Greece’s fundamental problem being one of the most corrupt countries in the EU. But you don’t try to explain how this implies that the possible theoretical explanation for expansionary fiscal consolidations does not apply. Greece has had corruption problems for decades at least, where did its wealth come from anyway?
February 18, 2010, 3:56 amDavid Nieporent says:
First, the very phrase “court procedure” is inherently troubling in this context. Second, I don’t know about your country, but since we’re making all sort of general comments about Europe: I do know about France because my wife worked for a French software company, and it’s very hard to fire incompetent people there. Most companies will pay bribes to incompetent employees to get them to quit, because it’s so hard to legally dump them.
How can an “industry” “negotiate”? An industry isn’t an entity; it’s a collection of hundreds or thousands of separate entities. You seem to be using words like “bargaining” and “negotiate” and “agreement” awfully strangely, to refer to situations where the participants aren’t actually doing any bargaining or negotiating or agreeing, but someone else is imposing these “agreements” from above.
February 18, 2010, 6:20 amDavid Nieporent says:
That’s a little puzzling, because this Forbes story talks about a top rate of 40%. But then it explains that this is rather misleading:
So, in short, not only are income taxes high, but so are other income taxes that aren’t called income taxes because people pretend that social security is separate. Plus other taxes.
While I haven’t looked at any Greek tax tables to be sure, the WSJ’s stat is less plausible; the government can’t possibly employ a third of the population as so-called “civil servants” without having very high taxes.
February 18, 2010, 6:27 amMartinned says:
Well, an employment contract is still a contract. Pacta sunt servanda. If you want out of a contract that you voluntarily agreed on, you’re going to have to pay some form of compensation. I’m not sure what’s so troubling about a rule that says that, for employment contracts, this will ordinarily require court ruling. (That goes for divorce, too, remember.)
I’m not sure why this is confusing you: on the one hand, there are one or more unions representing the employees working in the industry, and on the other hand there is the industry representative body, which can take any number of forms, but which exists to represent the interests of the industry by lobbying and, yes, by negotiating with the unions. They get together at a nice big table with loads of coffee, and they hammer out a collective bargaining agreement. How is that not a negotiation? How is the result not an agreement freely entered into?
Looking only at the top rate is misleading in millions of different ways. Depending on the point you’re trying to make, the average tax rate can be much more interesting than the marginal rate. Then there’s the distinction between tax rates and tax pressure, the latter also taking into account whatever tax breaks, etc. might exist. If you want to go into even further detail, you can work out how much money people are actually paying in taxes, as a percentage of total income, thus also taking into account many forms of tax evasion. The top rate is only a start, convenient as a short hand, nothing else.
Where did you get the one third number? That’s much higher than anything I’ve heard. A quick google has that number repeated in this NYTimes article, but it seems implausibly high, certainly as a percentage of the total population. This article in the Globe and Mail has 700.000 outright civil servants, and 300.000 more who work for regional and other authorities, for a percentage similar to the 1/11 that I’d heard previously.
Anyway, the CIA world factbook puts the public sector at 40% of GDP, which is not that far away from the average for EU countries. For France, they have a tax burden of 50% of GDP, for example.
February 18, 2010, 8:32 amTracy W says:
Because requiring a court ruling to exit an employment contract increases the cost of hiring someone (there’s the legal costs of getting the court ruling, there’s the time and hassle, and there’s the risk you will lose).
Consequently the cost of employees becomes higher, so employers are more reluctant to hire people. So the people who are not hired are worse off, they don’t get the employment protection, as they don’t have jobs, they don’t get paid, they don’t get work experience.
So the problem with raising the costs of firing someone is that you increase the split in society between the insiders, the ones already with jobs, and the outsiders, the ones who don’t have jobs but would like them.
Raising employment costs has negative externalities. That’s what is troublesome about it.
February 18, 2010, 11:46 amMartinned says:
Indeed. Then again, when you sign a contract, shouldn’t the starting point be that you do as you promised? One of the exceptions to rule that you go through the court is that the contract can be ended at any time by mutual consent. That’s just basic contract law.
In addition to that, and for the reasons that you discuss, the law gives some further possibilities, such as summary dismissal in limited circumstances, and dismissal with notice (and possibly financial compensation) in all cases. As to the latter, CYA dictates that the employer will normally arrange this through the (small claims) court.
February 18, 2010, 12:12 pmShelbyC says:
Wait, didn’t you just say that these contracts are “negotiated” for an entire industry? If I want to hire someone as, say, a software developer, can I voluntarily agree to pay him X amount on an at-will basis? If not, that hardly seems voluntary. Maybe I misunderstood.
February 18, 2010, 12:37 pmMartinned says:
Assuming that this is the kind of job to which a collective bargaining agreement applies: No. But I’m not sure why that changes things. Many (all?) contracts result in some things no longer being possible, that were possible before. If I sign a contract with a no-compete clause, that limits my freedom to subsequently sign any number of other contracts that I would otherwise be free to sign. Examples abound.
February 18, 2010, 1:22 pmShelbyC says:
I’m still not sure I follow. If I don’t sign and agreement not to hire software developers on an at-will basis, but other folks in the industry do, am I free to hire folks on an at-will basis?
February 18, 2010, 1:30 pmMartinned says:
The “at-will” part of your question is impossible because the Civil Code states that pacta sunt servanda, including labour contracts. The manner in which parties can get out of a labour contract are fixed in title 12 of book 7 of the Civil Code, which deals with employment law. Some of the stuff that’s there can be opted out of, but the law on dismissal can’t be.
Concerning matters that are the subject of the collective bargaining agreement, individual employers can opt out. Generally they would sign on because through some mechanism they authorise their industry representation to negotiate on their behalf. However, opting out is of limited value because the crown can – and usually does – declare that the collective bargaining agreement is generally binding. In that case, your objection to the “freely negotiated” point becomes a reasonable one.
In practice, the situation is somewhere in between: CBAs do tend to be made generally binding, but that tends to be fairly irrelevant since the employers’ representatives tend to be authorised to negotiate on behalf of all employers anyway.
February 18, 2010, 2:18 pmSoronel Haetir says:
I’m guessing the practices Martin writes about are so customary that you would in fact be hard pressed to find an employee willing to take such an at-will position even while looking for a position more to their liking. Or you might find someone who would then use the government to convert your workplace to the prevailing set up.
I personally find it hard to believe that employers really think their interests align with other employers well enough to trust industry representatives to bargain such a CBA, but *shrug*. If the government is then going to force such an agreement upon an unwilling employer who has in fact found employees who will do the job satisfactorily at a wage both employee and employer find advantageous the country deserves rampant unemployment.
I know I would have to think long and hard about starting a business in an environment where my labor costs are controlled by already established competitors. This is only a guess but I have to think there is a fair amount of capture of this process by both the largest existing companies and the existing unions to the detriment of startup businesses.
Also what constitutes an “industry”? In the US CBAs as I understand it break down across functional groups rather than industry groups. You might, as a hypothetical example, find a steam works union representing workers in businesses in very different industries, where it sounds like Martin’s school would lump everyone from janitors to professors into one CBA.
February 18, 2010, 2:57 pmDavid M. Nieporent says:
Responding to your points seriatim:
1) I wasn’t talking about a situation where there was an employment contract in place.
2) Even if there is a contract in place, I thought we were talking about the situation where the employer had an “incompetent” employee, not a situation where the employer wanted to fire an employee on a whim. Why would you have to pay “compensation” if the counterparty isn’t performing? And even if you did, why would you need “several month’s notice” and a court proceeding?
It is/was confusing to me because you seemed to imply in several earlier posts that these “industry representative bodies” represented the “industry” rather than the companies in it. You seemed to imply — and now you seem to have clarified that in fact it is the case — that these aren’t really voluntary industry associations, but effectively government created cartels, and that if a particular company tries to choose not to join said cartel, then the government will impose the same contract on the company that would have been imposed by the cartel.
How on earth can there be an “industry representative body”? Competitors have very different interests; how can one possibly speak for another?
I’m aware of all of the above, but you were the one who cited the top rate in the first place. It’s sort of unfair to cite a statistic and then when someone else points out an error (or possible error) in the citation, to say that the statistic is misleading.
Really, tax rates are just a proxy anyway; all government spending is ultimately taxation — present or deferred — so the real issue is government spending as a percentage of GDP. (Except, of course, that in the case of Greece, apparently some spending may involve taxation of Germans rather than Greeks.)
I got it from that very article in the NYT; it actually sounded implausibly high to me, too, but I did some quick googling before I posted in order to try to confirm it, couldn’t find anything one way or the other, and went ahead and posted.
The OECD puts the Greek number for spending much higher — 46%. (Sorry, I don’t know to link directly to the chart; it’s under “National Accounts.”)
February 18, 2010, 3:52 pmOren says:
Because it purports to bind an employer that does not wish to enter into that agreement.
Only if the terms of the contract were freely entered. If I am not free to enter into an employment-at-will contract with my boss, the resultant contract is not of the same moral force.
Moreover, this is a one-sided bargain. If the car industry inserted a term into the worker’s contract that demanded that all employees that quit or become otherwise unable to work must pay an indemnity of $20,000 towards training a replacement, how long would such a contract stand up?
Sure, but it’s very rare that a contract that you sign limits my ability to enter into a contract. That’s the entire point — some industry bigwig and some union bigwig go into a room and come out with a document by which entirely unrelated third parties are expect to abide.
So an agreement to which an employer explicitly declares not to be in his best interest is then held to bind him because some random government functionary decided it should?!
This is start to get surreal even for my tastes.
This is why all my “employees” here in the States (I run a small programming shop on the side) are actually contractors with their own incorporated business. Negotiations between businesses are rarely held to the sort of overbearing standards as employer-employee ones, plus it saves a fortune on accounting expenses and unemployment taxes.
You said yourself that you were keenly aware that incentives matter. If the legal landscape is such that an employee can sell his labor more effectively by incorporating and marketing himself as a contractor, why wouldn’t this be the preferred arragement?
February 18, 2010, 8:20 pmOren says:
Even worse, it fosters homogeneity within the industry.
Take, for instance, the hotel industry — in the presence of a universal binding labor contract, one cannot attempt to set up neither a luxury hotel with exemplary service (for which one would presumably pay more to attract only the best employees) nor a budget hotel with apathetic staff (where one would pay less and pass the savings on). Instead, every hotel is locked into the same labor costs because “equal work is equal pay” when, in fact, there is better labor and worse labor.
Such a system must also wreak havoc on rural areas that normally get a boost from their abundance of cheap labor due to lower costs of living. You can hire an CPA in Kansas City for a fraction of the wage of a NYC CPA because he can buy a similar standard of living for a fraction of the cost. It’s small wonder that Europe has booming cities and anemic countrysides.
February 18, 2010, 8:27 pmMartinned says:
The answer to that question has never been answered better than by the Economist’s Charlemagne, writing about the EU’s Lisbon strategy.
Conclusion:
February 18, 2010, 9:42 pmSammy Finkelman says:
What they would need to do is cut tax fueled spending but at the same time, greatly expland the private economy through sound loans to businesses that will work etc.. The whole point is NOT to cut aggregate demand – it is to get people to do jobs that other people want.
well actually the problem here is that the government is spending, say 110% or 120% of what it collects in taxes. The thing is to get more things done. The idea is or should not be to drop aggregate income..
February 19, 2010, 12:34 amOren says:
Surely there would be at least some takers to a contractor relationship, especially with ~10% unemployment.
February 19, 2010, 12:39 amSoronel Haetir says:
But then someone else would come along and claim that you are somehow exploiting those folks and violating their rights by expecting the job to get done and done right. And then you would get fined and your business turned over to some enlightened social do-gooder and your neighbors would shun you for trying to get ahead. And then you would become a bitter old man staring out over a crumbling city drinking cheap wine and complaining that there’s no justice in the world.
February 19, 2010, 1:22 amTracy W says:
Martinned, I don’t think anyone here has any problem with an employer and employee freely agreeing on an employment contract which can only be terminated by going through a court of law or by mutural consent. The problem is with *requiring* that. It’s one thing for me to do what I promised as part of a contract, it’s another thing for a third party to interpose itself and say “you can’t promise that, you must promise this, etc”. Sometimes arguably this is justifiable, for example if a long-term contract is too difficult to get out of out then some people might resort to killing their contract partner, which is an argument for relatively-cheap divorce, bankruptcy laws, etc.
But whenever a third party does get involved that causes problems of its own (see complaints about rich husbands abandoning their original spouse with three small children), and in the case of employment laws, laws that increase the cost of firing someone hurt those who don’t have jobs but are interested in having them. Employment laws like that create “insiders” and “outsiders”, and benefit the insiders at the expense of the outsiders.
February 19, 2010, 7:06 amOrenNotKerr says:
Exactly the problem.
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