Friday, November 20, 2009

The debacle of European social-democracy

In the elections to the European Parliament held on 4-7 June 2009 all parties of social-democratic inspiration obtained reduced support or were defeated outright everywhere – with the exception of Greece that confirms the general rule – in spite of the financial and real tsunami of 2008-2009 (extended at least to 2010 in terms of labour unemployment). What are the causes of the defeat of the European “Left”, at a time when they should have benefited from the crisis and harvested anti-cyclical electoral consensus?

In our previous post (The Fall and the Original Sin of Socialism, 9 November) we argued that Soviet-type socialism suffered from the original sin of Nikolai Ivanovich Bukharin and Rosa Luxemburg, i.e. their assertion that socialism marked the end of political economy as a science: neglect of economic laws was instrumental in eventually bringing down the entire system and the Wall that was built in 1961 to shelter it. The whole European social-democratic left was also tainted by the original sin of socialism, in believing that, somehow, economic laws could be suspended by socialists. And when, in the late 1990s, with the rise of the Third Way of New Labour and of the German Neue Mitte, social-democracy tried to mend its ways, in some respects it did not change radically enough, in most respects it went too far in embracing the hyper-liberal doctrine. Moreover, together with its old-fashioned economic dogmas, the new social-democracy jettisoned its best traditional political values. The global economic crisis of 2008-9 and the glaring failure of the hyper-liberal model caught the European “Left” on the wrong foot, unprepared to respond, split into litigious factions and voided of its political backbone. Hence its debacle and its abysmal prospects in the short and the long run.

Impossible Demands

The pretence that economic laws can be ignored or suspended under socialism is a common feature of both the extreme left – with Potere Operaio in Italy promising a life as rentiers to all workers adopting their misguided strategy of “refusal to work”, or with the May 1968 Parisian slogan “Soyez réalistes, demandez l’impossible” – and of democratic socialism. For instance, at the time of the Labour Party Conference in Blackpool in 1949, Aneurin Bevan was declaring that "The language of priorities is the religion of socialism", thus confirming the muddled thinking and the neglect of a proper economic assessment of policy alternatives by social-democratic leaders. The notion of “priorities” is of course a contradiction in terms, since by definition there can only be one priority. What is being talked about is targets, not priorities, and the desirable trade-off between targets must be decided and specified. Old-style socialism, including the Soviet version, was generally committed to a plurality of mutually conflicting and often inconsistent “priorities” (see our post on Singular Priorities, 23 September 2009).






















For a long time – until New Labour came to power in the UK (1997) – rarely if ever did anybody in the social-democratic camp ask whether there might be feasibility limits to the welfare state – no matter how desirable; whether and how opportunistic behaviour (more pretentiously labelled “moral hazard” in economic theory) by welfare users should be taken into account; whether an economy characterized by dominant private ownership and enterprises might prosper and grow without profit margins sufficient to both finance and promote investment. Whether an economy open to trade and (both inward and outward) investment flows should not worry about its own international competitiveness. Whether there might be limits – though flexible, but therefore dangerously uncertain – to public expenditure, whether this was financed by rising public debt or by rising inflation. Whether public enterprises have a growth-promotion role not only in the production of energy and steel, but also in that of processed foods and textiles.

Trades Unions found themselves in a conflict of interest with the rest of the population that did not belong to them – representing mostly men and employed men at that – both in countries like the UK, where the Labour Party traditionally is the political arm of Trades Unions, and in countries like Italy where almost every party has its own Union. Not a conflict of interests as blatant and scandalous as that in which the Italian left unforgivably has permitted (especially in 1996-2001) a TV monopolist to rule the country, but a conflict of interests nevertheless. However, Trades Unions (including, indeed especially, Italian Trades Unions) have to some extent redeemed themselves from the original sin sooner than left-wing parties, recognizing that the wage rate is not a/the “independent variable” of the capitalist market economy, but on the contrary it depends on the internal and international factors indicated above, and therefore is subject to a “compatibility” test of Unions’ targets (for a survey of these discussions, in which in Italy Claudio Napoleoni played an important role, see Cavalieri 2006). Trades Unions everywhere are still leaning towards impossible claims, especially in demanding the preservation of jobs in non-viable, even bankrupt companies and industries in the current crisis, but at least they are aware of the economic implications of their negotiating stances.

The excess rebound after the Fall: Third Ways

The Fall of the Wall and the victory, that at the time seemed definitive, of hyper-liberalism, towards the end of the 1990s provoked a late and exaggerated conversion of European social-democracy to such hyper-liberalism, or at any rate to neo-conservatism, first in the transition countries of central eastern Europe by right and left governments alike, then in western Europe under the leadership of New Labour and its Third Way, replicated by the German Neue Mitte (see Blair 1998, Blair and Schroeder 1999, Giddens 1998). By the end of 1998 thirteen out of the then fifteen EU member countries (not Ireland and Spain) had social-democratic or left-wing coalition governments; social-democrats also held a dominant position in the European Parliament, which they promptly lost in 1999.

The new project of Tony Blair and Gerhard Schroeder was committed to traditional socialist values: “Fairness and social justice; liberty and equality of opportunity; solidarity and responsibility to others: these values are timeless. Social democracy will never sacrifice them” (Blair and Schroeder, 1999). However it differed from similar previous attempts in three major respects:

1) Acceptance of the primacy and desirability of markets, fully recognising their global nature in the modern world. “The market is part of the social organisation we desire, not just a necessary means which we reluctantly admit that we need, and need to master” (Karlsson 1999). Social-democratic policies were to be implemented using market instruments instead of direct controls and the management of state enterprises.

2) Rejection of public ownership and public enterprise, supporting private entrepreneurship and continued privatisation. The repeal of the fundamental Clause IV of the old Labour Party Constitution meant not just the removal of nationalization from the new agenda, but a commitment to continued privatization of state assets. “Government does all it can to support enterprise but never believes it is a substitute for enterprise… we want a society which celebrates successful entrepreneurs just as it does artists and footballers – and values creativity in all spheres of life” (Blair and Schroeder, 1999). And, above all,

3) Affordability, i.e. fiscal discipline and monetary restraint, rejecting Keynesian policies of public deficit and debt, and inflationary monetary expansion. “Sound public finance should be a badge of pride for social democrats”. “… deficit spending cannot be used to overcome structural weaknesses in the economy that are a barrier to faster growth and higher employment. Social democrats also must not tolerate excessive levels of public sector debt. Increased indebtedness represents an unfair burden on future generations. It could have unwelcome distributive effects. All the money spent on servicing high public sector debt is not available to be spent on other priorities [sic] including increased investment in education, training or the transport infrastructure”. (Blair and Schroeder 1999).

Undoubtedly these were moves in the right direction, for a socialist economy to become efficient and sustainable. Except that some social-democratic governments did not move fast or far enough in some respects, but by and large, most of them went much too far on the rebound (see Nuti 1999).

Under-shooting

Third Way leaders were still caught in the old ways: Blair and Schroeder do not talk of the costs and benefits of policy alternatives but of “priorities”, just like Aneurin Bevan. The pretence that socialism could suspend economic laws still permeates actual and proposed policies. For instance, Lionel Jospin and Fausto Bertinotti (while in Government) proposed the reduction of the working week to 35 hours by law – without proportionally lowering weekly wages below the level that they would have had without the reduction in hours. The consequent increase in unit labour costs in any open economy unfailingly would have led to a rise in unemployment.

Oskar Lafontaine, then German Minister of Finance, proposed to lower pensionable age from 65 to 60 years, which would have aggravated intolerably the already large and increasing burden of an aging population. An equally expensive proposal in Italy was the subsidised “scrapping” of employees over 50, as long as employers continued to pay social contributions to retiring age. This would have simply moved retiring workers into the black economy, and worsened income distribution by age among pensioners. Third Way policies failed to reckon with the black/informal economy as an effective, organised opposition to any government in general and to social-democratic governments in particular – an-economy-within-an-economy and a state-within-the-state.

Romano Prodi, while President of the EU Commission, proposed that excess reserves of the European Central Bank (ECB) should be mobilised to fund additional public investment. Central bank reserves can only be mobilised through additional monetary expansion, which if desired could be induced without reducing reserves and if undesired should not take place just because excess reserves are available. There was indeed a case for additional public investment concerted at the European level, but this was independent of excess ECB reserves, and was not promoted by the new approach.

The latest instance of the social-democratic belief that the laws of economics can be bent is Gordon Brown’s proposal, at the G-20 Finance Ministers’ meeting of 7 November 2009 in St Andrews, of a global tax on financial transactions. There are no global governance institutions that could introduce it and enforce it globally: it is sufficient for one country not to introduce the tax, for that country to provide the entire world with the opportunity to avoid it. And even if the tax was genuinely introduced as a global tax, it could be avoided by transactions in cyberspace, now much more secure than in 1972 when the tax was proposed by James Tobin. In today’s world, the proposal is a non starter, and it was treated as such by G-20 financial leaders and the world economic press.

Mostly, too much too late

In most other respects, the Third Way internalized and absorbed fully the entire theoretical apparatus of the hyper-liberal model.

Thus privatization found no limits, under-selling the family silver and dissipating state assets in all sectors, as well as mortgaging future state revenues through unrestrained securitization practices and other forms of creative finance. More state assets per year were privatised by Lionel Jospin in France in 1997-98 (25bn ECU in under two years) than by Margaret Thatcher (135bn ECU at 1998 prices in 17 years); large scale privatisations were implemented throughout social-democratic Europe. Public utilities, if not privatized outright, were entrusted to PPP – Public Private Partnerships – that reduce public investment requirements at the cost of guaranteeing attractive safe profits for private investors, and therefore higher prices for consumers, outside market control. Generalized de-regulation, especially in financial markets, instead of the desired competition generates monopolies, corrupts governance and facilitates the rise and diffusion of illegal practices.

New Labour set strict limits to its own fiscal policy, namely the “golden rule” that over the course of an economic cycle the government will borrow only to invest, and a self-imposed 40% ceiling on government debt (Blair 1998) – much stricter than those imposed by the Maastricht Treaty and by the so-called Growth and Stability Pact (a limit soon to be blatantly violated by Gordon Brown). Monetary discipline was sanctioned by Central Banks’ complete independence from government, rooted on the fragile foundations of the theory of rational expectations (that denies the existence of a long-term trade-off between inflation and unemployment thus leading to the delegation of inflation targets to Central Banks). The very first act of the New Labour government in 1997 was to grant independence to the Bank of England and to strip it of financial supervision – something which they regretted but did not seek to reverse in the 2008-9 crisis.

Affordability and long-term sustainability, also labeled “pragmatism”, may and often do mean cutting welfare provisions, pensions, education and health. Of course this approach assumes that alternative opportunities for cutting expenditure (eg on weapons, agricultural subsidies, on the cost of government itself) or raising revenue (eg taxing wealth) have already been exhausted, or are otherwise unavailable. That you cannot have something for nothing is a corollary of affordable social-democracy; citizen rights also involve obligations, work-fare may have to accompany welfare.

Monetary and above all fiscal rigour led to the loss of popular support for the Left, although initially such policies were more widely supported than one might have expected, in the name of either the stabilization of public finances or the sacrifices required by the Maastricht Treaty for those countries that sought membership of the euro-zone.

Competition has been largely neglected by the Left, although greater competition in the market for goods and services would have certainly contributed to create additional employment much more effectively than any increase in labour market competition through the measures of labour mobility and wage flexibility accepted and implemented by the Left. New Labour introduced minimum wage legislation, and signed the Maastricht Treaty’s Social Chapter from which the Conservative John Major had opted out, but at the same time ended free university education, reduced benefits for single parents, raised tax rates on pensions. All these measure grossly reduced equality of opportunities in exchange for gaining trade union narrow goals available only to the employed, and to the detriment of the young, women and the old . The fight against tax evasion and fiscal paradises remained perfunctory and ineffective regardless of the left or right inclination of governments.

Corruption has tainted left wing national and local governments – whether displayed in the Italian traditional left strongholds or through the endemic overclaims of British MPs for expenses. The fact that corruption was cheap made it worse, not better. Unions-backed governments concentrated their efforts in the protection of organized employed workers, neglecting the unemployed, the precariously employed, the self-employed. Old age pensioners, in particular, have been victims of the privatisation and marketisation of pensions provision, through the needless and costly transformation of Pay As You Earn, re-distributive systems, to Fully Funded, capitalised systems whose resources have been decimated by the latest global crisis (See our post "First You Pay Then You Go", 13 June 2009, and the two subsequent posts). Educational and training support opportunities have been restricted - despite 'priorities' and goals - by depriving the poor of support as well as access.

Small and medium size enterprises have not enjoyed much favour with social-democratic governments, while co-operatives have been continuously attacked and, in many countries, often subjected to a perverse process of de-mutualisation that has privatized their social capital to privileged stakeholders. This is another doubtful New Labour’s first, leading to the transfer of over £70bn from social to private ownership in what can be described only as a self-appropriation process by insiders on a scale reminiscent of Russian privatizations in the 1990s.

At the end of the 1990s Germany’s Neue Mitte replicated New Labour’s policies of downgrading the role of the state, de-regulating the labour market, reducing the coverage of the welfare state, endorsing “structural reforms”. In 2003-2004 Gerhard Schroeder’s government promoted Agenda 2010, one of the most ambitious reformist programmes in Europe. It included the reduction of unemployment benefits to favour labour mobility; greater freedom to dismiss employed workers; drastic cuts in pensions and raising pensionable age to 67; a 25% reduction in the basic rate of income tax and other tax cuts; higher health charges. The measures were in line with the market liberal approach of the EU Lisbon Strategy and its 2010 deadline. Unemployment, poverty and inequality rose significantly as a result.

Populist temptations

At the same time, among other reasons, to compensate their electorate of institutional changes that had nothing to do with either social-democracy or modernization, and under the competition of centre-right governments, European social-democrats began to indulge in populist policies. Here “populism” is understood as the adoption of policies which are aimed at bribing selected groups of society for blunt electoral purposes, that are not sustainable other than for a short time and must later be reversed at a cost. Again, the UK leads under Gordon Brown in the promotion of one of most spectacular forms of populism, namely the encouragement of consumption expenditure by the population on credit, whether current consumption through credit cards and bank overdrafts, or the purchase of houses on mortgages, regardless of the borrowers’ capacity to repay. This is a damning responsibility of both the Bush and the Blair-Brown administrations in the genesis of the global crisis of 2008-2009.

Other governments not directly involved in this credit scam – also on the left – have effectively connived through the omission of controls and appropriate checks which were their responsibility but which they abdicated in the hyper-liberal euphoria. Another form of generalized populism – right and left – has been that of indulging in protectionist temptations – which in turn have reduced competition in goods and services and thus, if they have temporarily protected wages and jobs, have also raised labour migration pressures.

The loss of traditional political values

As if this were not enough, the liberal conversion of the left has certainly not encouraged new responsibilities or even the defense of their traditional values. Civil rights were sacrificed, particularly by New Labour, to increase civil management and control but under the pretext of fighting terrorism. The separation of powers, equality before the law, the laicity of the state (especially in a country like Italy) have suffered. Environmental protection and reclamation have been sacrificed to public expenditure savings and private profit; the degradation of urban centres and the cementification of the countryside have continued unabated. A non-negligible share of votes have been lost by the Left to one or more green parties, often available but unreliable as coalition partners.

Instead of promoting peace, New Labour and to some extent other European governments right and left have joined the USA in illegal imperialist wars for the conquest of major resources, particular oil, and to set in place institutional and physical surveillance structures, under the pretext of “exporting democracy”. Moreover Blair, co-responsible for launching the Iraq conflict under false claims, to add insult to injury was touted as a credible candidate for the first Presidency of the European Union, not only by New Labour but also by other left parties such as, to its utter shame, the centre-left Italian Partito Democratico.

International solidarity has paled into insignificance, both in the absolute terms of aid provision to less developed regions, and in comparison with the speed and the scale with which financial resources have been provided for the bail-out of financial institutions in the current crisis. This represents a diversion of welfare support from the population at large to capitalist investors. Inequality of both wealth and incomes has generally increased regardless of right or left governments. Equality of opportunities has been impaired by expenditure cuts and higher fees in higher education; research expenditure has suffered.

Liberty

The worst drawback of the new project was the neglect of traditional social-democratic political values. Dahrendorf (1999) notes that “one word appears almost never – and never in a central place – in all the these [Third Way] speeches and pamphlets and books, the word, liberty”. “This is no accident. The ‘third way’ is not about either open societies or liberty. There is indeed a curious authoritarian streak in it, and not just in practice”. For the UK, Dahrendorf cites the deconstruction of traditional democratic institutions actually advocated by Giddens (1998), with referendums and focus groups instead of parliaments, and the proliferation of agencies and quangos which evade civic control; we could add the creation of cabinets at local authority level which exclude elected representatives from much decision making and pay cabinet members more highly.

Other instances of this authoritarian design are: compulsory saving by workers for the reform of the welfare state, insistence on everyone working (including the disabled and single mothers), compulsory work under threat of loss of benefits. The danger, particularly for the UK, is what Dahrendorf calls “the Singapore syndrome”, whereby “the political class becomes a kind of nomenklatura which remains unchallenged because of the apathy of many, and when those who do not fit are silenced, nobody raises his or her voice”. There is a need to give back to freedom its rightful place in any social democratic design.

Slogans and Soundbites

The lack of a sound intellectual superstructure for the new Third Way was papered over by propounding new formulas and slogans of little content. The “stakeholder economy and society” was supposed to diffuse participation in decision-making and economic performance not only among stockholders but also among holders of other “stakes”, or legitimate interests, which individuals possess in their capacity as employees or consumers or simply as citizens. It was part of the pre-1997-election Labour agenda, but was quietly dropped after the elections – not a great loss, for it was an empty formula (see Nuti 1997).

Other formulas and sound-bites include: calls for modernisation, partnership, de-centralisation, community, technology, responsibility – mostly preceded by “new”; “free but compassionate markets”; Blair’s commitment to bridge “the false opposition … between rights and responsibilities, … between the public and private sectors, between an enterprise economy and the attack on poverty and exclusion” and so on. At least to some extent, these empty or suggestive propositions have been the deliberate product of party propaganda manipulating the electorate by means of the same advertising gimmicks as those used in promoting mass consumption. But as Giddens (1998) recognizes, “A precept of successful advertising … is that image alone isn’t enough. There must be something solid behind the hype, otherwise the public see through the façade pretty quickly” (p. 155). A lot more competence and, not least, imagination would have been needed to flesh out a positive and more appealing New Third Way.
After-thoughts?

An almost exclusive recent exception to the wholesale sell-out of social-democracy is José Luis Rodríguez Zapatero’s Spain, whose future political prospects however are just as grim as in the rest of Europe. Today there are some signs of after-thoughts, especially in Italy and Germany. In his electoral campaign for the leadership of the PD, the former, acting secretary Dario Franceschini apologised profusely to entrepreneurs of North-East Italy for having treated them as exploiters, potential tax evaders and capital exporters, instead of producers deserving attention and respect. The newly elected PD secretary, Pierluigi Bersani, made his victory address at a meeting with Prato artisans. Too little too late, and little credibility. In Germany Die Linke, the social democratic party of the Left founded by Oskar Lafontaine in 2007, in the October 2009 elections has recovered a million voters out of those lost by the SDP (which has has not learned anything from the debacle); the Greens have reached over 10% of the vote; altogether a feasible left wing coalition commands today 46% of the vote against 48% of the government coalition.

Right-wing competition

Since its very beginning the new Third Way was wrong-footed by neo-liberalism – by adopting the private sector with open arms precisely at a time when former neo-liberals were moving towards more critical positions. At the heart of the new Third Way there was “profound pessimism”, an acceptance that: “The fundamental architecture inherited from the neo-liberal era cannot be disturbed; globalisation cannot be controlled or tamed; growing inequality can only be at best mollified. We are, in short, at the mercy of nature and the market” (Jacques 1998).

More recently, the social-democratic agenda has been subjected to unfair competition by center-right parties. Some of the traditional values of the left, such as employee participation in enterprise profits, and the upholding of tenured employment, have been hijacked (literally scippati) by the Italian centre-right government, that has appropriated them and therefore succeeded in broadening their own consensus. It is disconcerting to see the Economy Minister Giulio Tremonti to exalt the value of employment stability (“il posto”) with Silvio Berlusconi’s blessing, while CISL Trade Unionist Raffaele Bonanni has only just discovered the obvious principle that “precarious” (untenured) employment should be paid more and not less than stable employment; the fact that it is paid less is evidence of a perverse segmentation of the labour market. It is equally disconcerting to see employee profit-sharing schemes being proposed by Labour Minister Maurizio Sacconi with the opposition of the left wing Union CGIL.

In 2008-2009 the massive fiscal stimulus and monetary expansion agreed by the G-20 as a collective response to the global crisis, with the blessing of the IMF now endorsing Keynesian macroeconomic policies – makes the monetary and fiscal restraint advocated by New Labour and its rejection of Keynes positively retrograde. A total of $18 trillion were mobilized globally to bail out banks and other financial institutions since September 2008, while the amount of total development aid over the past 49 years was only $2 trillion, or just eleven percent of the money found for financial institutions in one year (United Nations, 24 June 2009).

A dismal future

Today the European left, including its Italian wing, is completely wrong-footed, isolated, fragmented in countless warring factions due to profound and widespread dissent on the relative weight to be given to militancy and to co-operation, without ideas or proposals, and therefore – barring the unlikely miracle of a large-based alliance eventually coalescing around a radical programme yet to come – the left is condemned to lose and lose over and over again, with a total certainty because of its deep conviction that it will lose. And it deserves to lose.

In order to understand how de-railed is the left today one has only to read what, even in October 2009, an authoritative socialist leader like Lionel Jospin – French Premier 1997-2002 – writes on the current capitalist crisis: “And now let us talk about socialists. Who are they, historically? They are the supporters of a form of social organization in which the general interest prevails over private [particuliers] interests and who, against the injustices perpetrated by capitalism, want to assure by means of reforms the most just distribution of wealth [richesses].”

Wrong, Lionel. No one can claim to know what is the general interest and nobody is willing to delegate to you its definition let alone its implementation. The political problem is precisely the confrontation and composition of individual interests in order to reach, collectively and democratically, after a good fight, the definition of a compromise that can represent a passable form of general interest. And the distribution of incomes and wealth – a distinction that probably escapes both Lionel Jospin and the French Group for the Re-Distribution of Wealth (that has just published a futile Report, see Oro 2009) – will have to take into account not only distributive justice but also the incentives and the efficiency associated with it. Up to a point – which in fairness has not yet been reached – both equality and growth can be enhanced pari passu, but sooner or later a disagreable trade-off between the two necessarily appears, Lionel, forcing unpleasant choices of which you do not seem to be aware. And there is an international dimension that seems to escape you completely.

A new, credible and attractive programme of European social-democracy needs to emphasize economic and political participation at all levels; genuinely restore co-operative and mutual values and institutions; assert a continued commitment to equality of opportunities, possibly by pursuing the notion of a basic income or citizens' income. We can and should debate these and as many as possible other new ingredients.


REFERENCES

Blair Tony (1998), The Third Way: New Politics for the New Century, Fabian Society Pamphlet 588, London.
Blair Tony and Gerhard Schroeder (1999), The Way Forward for Europe’s Social Democrats – A Proposal, The Labour Party, London, June.
Cavalieri Duccio (2006), Scienza economica e umanesimo positivo: Claudio Napoleoni e la critica della ragione economica, Biblioteca Storica degli Economisti Italiani, Franco Angeli.
Dahrendorf Ralph (1999), La Repubblica, giugno.
Giddens Anthony (1998), The Third Way – The Renewal of Social Democracy, Polity Press, Cambridge and Blackwells, Oxford.
Jacques Martin (1998), Good to be Back, Marxism Today, special single issue November/December.
Jospin Lionel (2009), Les socialistes face à la crise du capitalisme, Jean Jaurès Fondation, Paris, October.
Karlsson Mats (1999), Third way, Neue Mitte or Old Wine in New Bottles?, Conference on “Dilemmas of globalisation”, IPPR, Bellagio, 27-28 February.
Nuti D. Mario (1997), Democracy and Economy: What Role for Stakeholders?”, Business Strategy Review, pp. 14-20.
Nuti D. Mario (1999), “Making sense of the Third Way”, Business Strategy Review, Vol. 10, n. 3, Autumn 1999, pp. 57-67.
Oro Stéphanie et les members du groupe «Partage des richesses» (2009), Le partage des richesses et les moyens de corriger les inégalités, 9 October, Paris.

11 comments:

Jerry said...

A powerful and multi-pronged criticism. But you have been much too hard on Blair.

D. Mario Nuti said...

I have not been hard enough. The Chilcot Enquiry on Iraq has now started, you can attend it at http://www.iraqinquiry.org.uk/.

And see today's Guardian, "Former ambassador to US Sir Christopher Meyer says Tony Blair decided on Iraq war a year before invasion".'We had to find the smoking gun. There wasn't one' http://www.guardian.co.uk/uk/2009/nov/26/iraq-war-chilcot-inquiry-tonyblair.

Tony Blair's failure to get elected as President has saved his proponents and supporters from
a huge embarassment. Election to high office would have saved him from exposure and the risk of indictment.

Northern view said...

An informative and provocative read as per usual. Thank you, Mario. However one tiny comment if you permit: John Major only managed to introduce university fees in the UK with the rather obstinate exception of Scotland. Scotland still gives free university education, as far as I understand, as part of its commitment to wealth redistribution and enlightened thinking.

D. Mario Nuti said...

I readily acknowledge Scotland's commitment to enlightened thinking and equality of opportunities.

I was referring to the introduction of top-up fees, which was proposed by Labour Education Minister Charles Clarke and became Law in the Higher Education Act 2004, which came into effect for the 2006-7 academic year.

This enabled Universities to charge up to a maximum of £3,225 a year per student; nearly all Universities chose to charge the maximum top-up fee. The government betrayed the promise made in the Labour Manifesto of 2001, that "We have no plans to introduce University top-up fees, and have legislated to prevent their introduction." The Labour Party justified this decision by the feeble, Jesuitical argument that the Law took effect after the end of the 2001–2005 Parliament.

True, Scottish Universities do not charge top-up fees – to Scottish students. But in the key vote in the House of Commons, in which the Labour government faced a rebellion and obtained an actual majority of only 5 votes out of a theoretical 160 (over a total of 660), the balance was tipped by 46 Scottish Labour MPs who voted with the government.

Surely there is something wrong with the Scottish member from Kirkcaldy and Cowdenbeath, whose party has been resoundingly defeated and ousted in Scotland, deciding education policy in England, Wales and Northern Ireland with the decisive support of Scottish MPs to whose constituents the fees would not apply in Scotland.

chilosi said...

Regarding the disregard of economic laws by the Left, it could be specified as ignoring (or feigning to ignore for populist propaganda reasons) the relationship between quantity and price (or between quantity and cost), together with the fallacy of composition. This has led to the idea that the number of jobs is independent of the burden of pension payments on the economy (leading to the Lafontaine proposal you are referring to, or to the propensity of trade unions in Italy to favour all kind of early retirement provisions of civil servants, with the creation of ample cohorts of baby pensioners burdening for decades the wage costs with the ensuing contributory payments). Another instance is the implicit assumptions, in the proposal for reducing number of hours worked in the week, that the overall number of hours of work demanded by the firms remain the same. Here I have some further comments to make. You write:

“Lionel Jospin and Fausto Bertinotti (while in Government) proposed the reduction of the working week to 35 hours by law – without proportionally lowering weekly wages below the level that they would have had without the reduction in hours. The consequent increase in unit labour costs in any open economy unfailingly would have led to a rise in unemployment.”

Firstly, rather than “unfailingly” I would have written “quite probably”. Theoretically speaking there are two contradictory effects of a regulatory reduction of work hours: 1) the substitution effect between number of employed and hours of work in the week by unchanged production, leading to an increase in the number of the employed, and 2) the scale effect, of the reduction of the scale of production because of increased labour costs, leading to lower employment. To this in the longer run you should add the adverse substitution effect on employment of changing the technology using more capital per unit of labour. All this seems a little bit pedantic, since the possibility of the first effect to dominate the other two is rather implausible but for the most naïve of Bertinotti followers. But the second point I want to make is more substantial: a reduction in wages while maintaining the costs of the hourly wage constant would not be enough for keeping unit costs constant, because it would not account for the quasi-fixed costs of employment, namely those costs that do not depend on the hours of work but on the number of employees, such as the cost of hiring and firing, the administrative costs of managing human resources, and some types of fringe benefits that are independent of the weekly hours, such as the factory canteen or nursery, or medical facilities, or specific kinds of legally compulsory benefits, such as vacations or leave of absence for medical reasons. So in order to keep the unit costs constant the hourly wage should be actually reduced because of the increased per hour weight of the quasi-fixed costs. But the adverse consequences on employment of reducing the weekly hours could be compensated by concurrently augmenting the flexibility in the employment of labour, in particularly by allowing an increase in the number of shifts, so as to increase the weekly use of the plants. And this is precisely what Jospin did in France, revealing himself to be shrewder than at first he appeared to be.

chilosi said...

A couple of further comments.
You write: “sanctioned by Central Banks’ complete independence from government, rooted on the fragile foundations of the theory of rational expectations (that denies the existence of a long-term trade-off between inflation and unemployment thus leading to the delegation of inflation targets to Central Banks)”

Couldn’t instead the theory of the political trade cycle be the theoretical foundation? In a sense whether an independent central bank leads to better results is an empirical issue. In the end it amounts to the issue of check and balances (such as an independent judiciary). Moreover in the long run higher average inflation could be associated to lower, not to higher employment, contrary to what is often assumed. A case in point is the comparison between the post-war development in Italy and in Germany. Germany, with a strong independent central bank, has had on average lower inflation, higher employment and higher growth in the post-war period.

You write: "Competition has been largely neglected by the Left, although greater competition in the market for goods and services would have certainly contributed to create additional employment much more effectively than any increase in labour market competition through the measures of labour mobility and wage flexibility accepted and implemented by the Left."

They did indeed introduce such measures in Italy, where the labour market is excessively stiff. Under these circumstances the working class is divided in have and have not, at the cost of record levels of long term unemployment and employment in the black economy without any rights. It is hardly understandable how such a situation could be considered socially progressive or acceptable for socialists. (But I see now from what you write below that on this you rather agree.) To have introduced some limited measure of flexibility has resulted in the reduction in the rate of unemployment, especially long-term. Of course this does not imply that you should not try to break the power of organized interests and increase competition, as Bersani honestly did in Italy, albeit with insufficient success.

You write: "And the distribution of incomes and wealth – a distinction that probably escapes both Lionel Jospin and the French Group for the Re-Distribution of Wealth (that has just published a futile Report, see Oro 2009) – will have to take into account not only distributive justice but also the incentives and the efficiency associated with it."

Indeed, another persistent fallacy of the Left is the heap principle, the vision of the economic problem as the partition of an existing heap, without considering the relationship between the rules of partition and the creation of the heap to be divided.

Finally a small point to write “New Labour and to some extent other European governments right and left have joined the USA in illegal imperialist wars for the conquest of major resources, particular oil,” seems a bit too reductionist to me. The motives for the war were rather more complex, even if not all quite understandable.

D. Mario Nuti said...

Thank you Alberto, for your many useful comments.

On the 35-hour week at unchanged weekly wage (your first comment), if I understand you correctly you are saying that the rise in unit labour costs is bound to reduce the number of hours worked but, in principle, for a shorter working week this negative effect might still be accompanied by a rise in jobs. I note that you regard this as unlikely in practice, especially in a longer run where more capital intensive techniques might be chosen as a result of the rise in wage costs, and in view of some labour costs being fixed regardless of the number of hours worked. Fair enough.

Could the political trade cycle be regarded as a foundation for Central Bank Independence? I suppose it could, if the only trade cycle mechanism was political and if one wished to avoid cycles at all costs. But the establishment of the principle of Central Bank Independence in the late 1980s was indeed based on rational expectations thery, because of the associated lack of long-term trade-off between unemployment and inflation. Without that trade-off you might as well delegate inflation targeting to the Central Bank, without sacrificing other targets for which the government remains responsible.

A reverse Phillips curve (your interpretation of German and Italian post-war growth)? only as a special case of a long term relationship – though I am not entirely convinced.

Greater competition in the labour market, especially in liberalizing access to professions and the pricing of their services, as Bersani tried to achieve, may yield efficiency gains and improve distribution. But the point is that, as long as there is imperfect competition in the market for goods and services, employers will value the marginal physical product of labour not at the price of that product, but at its marginal revenue – which falls faster than price and can well be negative. At a negative marginal revenue obtainable from labour marginal productivity no additional employment would be generated even if the wage rate fell down to zero. Whereas, starting from from a non-competitive equilibrium, an improvement in competition will raise marginal revenue by definition and therefore also raise employment.

Finally, the causes of the Iraq war may be more complex that I make them, but: 1) war on Iraq was already on the “New American Century” agenda” of Bush, Cheney and Co. long before 9/11; 2) Sir Jeremy Greenstock, Britain's ambassador to the United Nations at the time of the Iraq war, said last Friday at the Chalcot enquiry: "I regarded our invasion of Iraq … as legal but of questionable legitimacy in that it did not have the democratically observable backing of the great majority of member states, or even perhaps of the majority of people inside the UK." http://www.guardian.co.uk/uk/2009/nov/27/iraq-invasion-legitimacy-doubts. Motives may have been complex, but dishonourable – especially for a socialdemocratic government. Do follow the current Chalcot enquiry (http://www.iraqinquiry.org.uk/).

chilosi said...

"A reverse Phillips curve (your interpretation of German and Italian post-war growth)? only as a special case of a long term relationship – though I am not entirely convinced."

The basic reason for an inverse relationship between average inflation and growth, or a direct long run relationship between average rate of inflation and average rate of unemployment may be that higher average inflation could be an indicator of the propensity towards stop and go policies. As a consequence of prices and wages being more rigid downwards and more flexible upwards, the cost of stops in terms of unemployment and of lost production should be higher than the advantages of gos. Of course if a higher rate of inflation were to be maintained relatively constant without stops and gos this would not apply, but it would not be particularly advantageous, but for the inflation tax, and disadvantageous for the distortions induced by its avoidance. Another reason could be that a higher long run average rate of inflation could be a symptom of inflation getting out of hand from time to time, with the usual negative economic consequences both of high inflation and of the ensuing stabilization.
May be the above could apply to the comparison of the German and the Italian cases mentioned in the previous comment.

Janet said...

You argue that the introduction of a 35-hour working week for an unchanged weekly wage would reduce international competitiveness. But this presumes that there are no productivity increases to reduce, offset or even over-compensate the rise in hourly wage costs. Therefore a loss of competitiveness - depending on unit labour costs not per hour but per unit of output - should not be taken for granted.

D. Mario Nuti said...

This is a common objection. I presume only that there will not be extra productivity gains from the 35-hour week as such (why should there be?), and therefore the time path of productivity will remain unchanged. Whatever happens to productivity, wage costs per unit of output – while not necessarily increasing over time, as you rightly say – will necessarily be higher than they would have been without the reduction of the working week at unchanged weekly wages. Hence the loss of competitiveness – again, with respect to what it would have been otherwise.

chilosi said...

Comment to Janet's comment

I did not mention international competitiveness, but employment. Ceteris paribus, if labour costs increase firms' demand for labour, in terms of hours, at least, diminishes. Of course if labour productivity increases, this could offset the increased labour costs per unit of time, as always is the case. Historically, since the nineteenth century, owing to increase in productivity, real wages have progressively grown and the working week has been progressively reduced. But if at any given moment of time you decrease the working week at an unchanged weekly wage, the unit costs increase and labour demand decreases, both because of the scale and of the substitution effect. At least unless you do not adopt some compensatory measure, as the French did by liberalizing the shifts and night work, increasing the time utilization of capital.