Sunday, November 13, 2016

Keynes and the Universal Basic Income

One of the most famous Keynes' predictions is that people could afford to work less hours   and have more spare time for leisure. His Essay 'Economic Possibilities for our grand-children" was written before the Great Depression and published in 1930. But his point seems to be misinterpreted bymainstream economists. His prediction was that, in the long term, say a hundred years, living standards in 'progressive countries' would be between four and eight times as high. The main arugment is that the society would be more productive with technological progress and resulting increased productivity. Hence  "mankind would  have resolved its economic problem".   

A book published  eight years ago by some of the world's leading economists explores the reasons Keynes was mistaken about a new era of leisure. One argument is Keynes' forgetfulness about distribution.  The trend in recent years, though, has been towards more income inequality, between and within groups. The gap between the top 1% of earners and the rest has widened, but so has the gap   among all other sub-groups of society. The rich  spend more as they get richer, which leads to others wanting to spend more as well. Not all of them can afford to maintain the spending habits of those better-off  , and as a result they borrow. The result, contrary to what Keynes may have imagined, has been a collapse in savings ratios in the US and Britain, and a rise in debt levels and bankruptcies. The other main argument is about working hours. There is no country that conforms to Keynes's ideal of a 15-hour working week. However, France has introduced the 35 hour week that right wing governments wanted to scrap and ask people to work longer. Recently, Sweden has voted for a six hour working day for all workers.  The question is why with sustained technological progress, people still work longhours,  in the US 30% more than in Europe.

Over the last 50 years, living standards in developed western economies have seen rapid growth; by 2030 it is likely that they will have risen at least eightfold if there is a strong recovery from the financial crisis.  But rising living standards have not seen people deciding to satisfy their material needs.  People with low wages have no choice but to work long hours. In his essay in 'Revisiting Keynes" , Richard Freeman notes that more Americans than Europeans say that they want to increase hours worked than to decrease at given wage rates, and that's probably a function of a lower minimum wage and stagnant real incomes for all but the highest earners. Furthermore, widening gap in earnings may create an incentive to work longer hours. 

Keynes's  failure might be  to recognise that distribution matters. The economic problem will not be solved while a quarter of the world lives in abject poverty, nor while a good slice of those living in developed countries are not sharing in economic prosperity or feel they need to spend longer and longer on the workplace.

Keynes' view might be ethnocentric but his argument referred to progressive societies such as France or Sweden. It had to be put in context, bearing in mind the accumulation of capital and the wide variety of goods that technological progress offers. What he had in mind is the ' good society' that Galbraith attempted to lay out twenty years ago.

 In our unequal societies,  a greater degree of income equality would indeed help to improve the welfare of low earners. The new frontier is the introduction of a universal basic income (UBI)whatever the form it takes. Y. Varoufakis made convincingly this point :  "A universal basic income allows for new understandings of liberty and equality that bridge hitherto irreconcilable political blocs, while stabilizing society and reinvigorating the notion of shared prosperity in the face of otherwise destabilizing technological innovation". His proposal is to fund UBI not with taxation but from returns on capital, i.e.. profits. This could be an important step up towards a more equal society.

Sunday, October 23, 2016

Neoliberalism and austerity

mainly macro: Neoliberalism and austerity: I like to treat neoliberalism not as some kind of coherent political philosophy, but more as a set of interconnected ideas that have becom...

Sunday, August 21, 2016

The legacy of the the Ventotene Manifesto

Tomorrow, the Italian PM Renzi will meet French president Hollande and German Chancellor Merkel in Ventotene to discuss  the path of future European integration. The location is highly symbolic: Ventotene is where Altiero Spinelli, a founder of the federalist movement elaborated (along with Ernesto Rossi and Eugenio Colorni) a manifesto for the United States of Europe (called the Ventotene manifesto) while imprisoned during the second world war.

In his historical speech at the university of Zurich in 1946, Winston Churchill advocated for the United States of Europe. He pronounced words which may seem today those of a convinced European federalist like Altiero Spinelli who wrote a few years before   his manifesto of Ventotene. He said: The structure of the United States of Europe, if well and truly built, will be such as to make the material strength of a single state less important. Small nations will count as much as large ones and gain their honour by their contribution to the common cause. (...) If we are to form the United States of Europe or whatever name or form it may take, we must begin now.

The seed was sown and was actually picked up by three personalities that even for this became part of European history: Schuman, Adenauer, De Gasperi, from France, Germany and Italy, who adhered to the Ventotene Manifesto and founded as a first concrete step the coal and steel Community, which was followed soon after by a common  authority in Rome and the signing in 1957 of the European Treaties. Starting with a European Parliament with relevant institutions that culminated in a real confederation of states: Italy, Germany, France, Benelux (Netherlands, Belgium, Luxembourg). Then Spain, Portugal, Austria and so on. The result is known in both the positive phase as   in the negative, until the acceding States became 28 and among them 19 joined the single currency called the euro, created and put into circulation between 1999 and 2002

Today Europe is very different from what the manifesto called for more than 70 years ago. It is confronted to unprecedented problems : waves of migrants from South Africa  and the South East Europe; secular economic stagnation ; emergence of populist movements and xenophobic parties, populist, against the common currency; Great Britain withdrew from the Union; wide spread Islamic terrorism led by Isis  leverages social peripheries of the whole world and finally on the visible decline of the European sentiment that is spreading across the continent and casts doubt even the current supra-national institutions thereby making distant and doubtful the transition to the Federation which was at the heart of Spinelli's Manifesto.

Tomorrow Italy, France and Germany will meet precisely in Ventotene to curb this situation nothing short of desperate. What will come out of this meeting between the three powers which now represent a kind of triumvirate born to indicate (certainly not to impose) the future of European path without the United Kingdom?

It is expected that the informal talks will serve as a springboard for action when leaders of the 27 meet in Bratislava in September. If it delivers a 'credible response' , the summit could lead to a new 'political pact' (as Gozi, the EU secretary for Eu affairs called it in an interview to the FT on 18 August) to be launched on the 60th anniversary of the Treaty of Rome, which founded the European Community in 1957.  As Philippe Aigrain put it, the call for further EU integration that Italy  supports with more pooling of sovereignty , especially on issues of economic policy, migration and security may be opposed by France and Germany. Italy's narrower objectives for further integration include boosting the Juncker plan, with more funds for infrastructure and support to businesses. It also  envisages more funds for youth unemployment, cultural exchanges as well as for the integration of migrants and deportation of those not eligible for asylum with readmission agreements with countries of origin.

While the federalist project is still regarded as old fashioned, Europe inarguably needs change to respond to its many crises. Either Europe finds the strength and determination to respond to the threats that are endangering its existence or it will vanish. None of the urgent problems can wait: we need  to govern the migration flows and combat terrorism with the unification of intelligence services, legal provisions and the creation of common defense systems.  How long can Europe last with unsustainable inequalities within and between countries.

Guy Verhofstadt's book (Le Mal Européen) precisely addresses these issues and makes concrete proposals in a federalist perspective. More than ever, what was regarded as a utopian project becomes the only realistic solution for the salvation of our continent.

Sunday, June 5, 2016

Rethinking IMF's role

Keynes concluded his General Theory with the famous sentence: "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist". Economic ideas  are  often undervalued but they influence the life of  people  . This helps to understand the last three decades and maybe future ones.

The most important economic institution, the International Monetary Fund (IMF) is now struggling with itself and its intellectual legacy to design strategies for the global economy. Indeed, there is a 'fil rouge' linking the economic policies experimented in the 80sby Thatcher and Reagan, the resurgence of the right ideology and  the so-called 'Washington consensus'. The IMF was instrumental in imposing a package of  structural measures during the 1998 Asian crisis: liberalization, privatization, austerity, balanced budgets, export based competitiveness,  wage cuts, unregulated capital flows . This agenda is also applied, with some variations, in Europe, after the financial crisis, particularly in Greece, Portugal and Spain.

In recent years, the IMF has attempted to review its doctrinal positions, starting with the 'mea culpa' on fiscal multipliers in Greece - which led to unnecessarily harsh austerity measures and its softening stance on debt relief   in the Greek crisis management. 

The IMF has issued an article signed by three senior economists in one of its main journals " Finance and Development" with an appealing title ' Neoliberalism : Oversold" . Although the authors exclude to undertake a comprehensive review of the Washington Consensus, they question two main pillars of neo-liberalism.  

The first one is free movement of capital. Even without market confidence, direct investment is going fine while financial and speculative investments can be harmful, and should be strictly controlled.

Secondly, austerity has not reaped any benefit in terms of growth and have actually increased inequality and social costs which have jeopardized sustainable growth. Maybe austerity would be inevitable for countries with high debt levels but it cannot be the remedy for all. Trying to secure the benevolence of markets in reducing debt and deficits has higher costs relative to benefits. In general, it reduces gross output and increases unemployment on average of  0,6 percentage point. Spending is thus a better solution for those who can.

Germany has probably reacted strongly to this paper forcing the authors to take a more prudent view. But this is what the Greek experience has taught to any reasonable economist. For once, the IMF has behaved with common sense acknowledging its own responsibility in the management of the Greek crisis. But now it calls for responsibility on behalf of the creditors (EU and governments) to agree on cutting the Greek debt as a compensation for the cost of their errors.

Yet, the IMF should demonstrate the same coherence for its own credits vis a vis the Greek government. This would be the best way to reconcile with itself after all these mistakes on austerity policy.

Saturday, April 30, 2016

The relevance of Okun’s "Equality and Efficiency: The Big Tradeoff"

Extract from his book still relevant today :

American society proclaims the worth of every human being. All citizens are guaranteed equal justice and equal political rights. Everyone has a pledge of speedy response from the fire department and access to national monuments. As American citizens, we are all members of the same club. Yet at the same time, our institutions say “find a job or go hungry,” “succeed or suffer.” They prod us to get ahead of our neighbors economically after telling us to stay in line socially. They award prizes that allow the big winners to feed their pets better than the losers can feed their children. Such is the double standard of a capitalist democracy, professing and pursuing an egalitarian political and social system and simultaneously generating gaping disparities in economic well-being. This mixture of equality and inequality sometimes smacks of inconsistency and even insincerity. Yet I believe that, in many cases, the institutional arrangements represent uneasy compromises rather than fundamental inconsistencies. The contrasts among American families in living standards and in material wealth reflect a system of rewards and penalties that is intended to encourage effort and channel it into socially productive activity. To the extent that the system succeeds, it generates an efficient economy. But that pursuit of efficiency necessarily creates inequalities. And hence society faces a tradeoff between equality and efficiency

Sunday, April 24, 2016

Swiss initiative for a basic income

The idea of giving everyone in society a Universal Basic Income (Ubi) has been getting a lot of attention recently. The Finnish government is planning  a big experiment where up to 100,000 people could get about $1,100 a month. Four Dutch cities will also experiment this idea  this summer. And several other cities and states, from Canada to Spain, are interested.

Next 5th June,  Swiss citizens will vote for an unconditional basic income  equal to  2500 Swiss francs per month (about 2000 euros) that each adult would receive from the State each month as a financial safety net for the population.

This initiative has been launched a year ago by three committees, drawing inspiration from the French socialist Charles Fourier (1772-1837). This is a sign of growing public activism to combat pay inequality. The organizing committee collected more than the necessary 100 thousand signatures for the popular initiative - which under the Swiss law will be turned into political action if the initiative gets a majority of votes. The Committee B.I.E.N, at the origin of this initiative, considers that the basic income should replace the social security safety net  and the bureaucratic controls imposed to beneficiaries   

The initiative  is opposed by the government ( which fears that it would put in peril the national budget) , the  Swiss patronat which believe this would create a situation of rentier , discouraging people to go to work and trade unions which see the risk that workers will be paid less than their actual wages for 40 hours a week. Sergio Rossi, an economist from Freiburg, member of the referendum committee , argues that the basic income could be financed by social insurance system through a different redistribution system or a revenue tax.

As of today, more than 40% of the population is set to vote favourably to the referendum and it is rapidly growing which means that the initiative could go through and force the government to pass a bill on national basic income.

Philippe Van Parijs, of the Basic Income Earth Network  is promoting the idea worldwide based on academic studies and research. This debate shows that the idea of basic income is gaining momentum to tackle the inequality gap which has hit all major economies, with resulting absolute poverty. This mechanism would contribute to bridge the gap between high and low revenues and finance consumption. In current economic conditions, It is as much the general interest of society than the particular interests of the rich and the poor.

Sunday, April 17, 2016

An EU migration compact

Europe is disintegrating rapidly as attempts to seek solutions fail on national egoisms .  Re-nationalization of Europe becomes more evident, with the return to national confines abolished by the Schengen Treaty.

Austria has accomplished the last violation of this pact , which for many is difficult to understand for a country far from the sea and being not a main destination for mass immigration to Europe.  The paradox is that this country is governed by a socialist party which is  adopting the same policy as the far right party. But this happens in other countries such as Hungary, Poland and Slovakia.

Italy has still an European agenda - it supports the creation of an EU Treasury minister and now calls for a  'migration compact' to transfer powers to the European Union to handle the crisis. The proposal foresees a set of actions and  special forces both in origin and transit countries of the migrants with refugee camps  in the southern Mediterranean coasts for migrants .

Such policy deserves wide consensus among EU countries but its effective application would require the creation of  special police forces  to protect the external borders and on the political level a much stronger coordination between the Interior ministries , and eventually the creation of an EU Interior minister. This would mean, in practice coordinating intelligence services and fight against terrorism.

The main issue of contention lies with the necessary funding to support the migration plan. The Italian proposal includes the issuance of eurobonds which is vigorously opposed by Germany which prefers an oil tax paid by citizens to the European coffers.

This plan will not be implemented readily and will require an agreement at the next European Council. But it is a positive step forward toward greater unity to halt the return of nationalism which is currently putting Europe in grave danger.    

Friday, March 25, 2016

We need a visionary hope

        One of the most famous quotes in economic theory to be read and re-read ...

          John Maynard Keynes (1936): The General Theory of Employment, Interest and Money:
…Have they insufficient roots in the motives which govern the evolution of political society? Are the interests which they will thwart stronger and more obvious than those which they will serve?
I do not attempt an answer in this place…. But if the ideas are correct… it would be a mistake, I predict, to dispute their potency over a period of time…. The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas….
There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Friday, January 1, 2016

Europe's dilemma

Over the last 30 years, globalization has shaped our societies for good or bad. We may be discontent about it and try to limit its adverse effects on wages and social protection. Technology has also shaped globalization; the emergence of new economic powers has conferred a new political structure. Those countries which will not have a continental dimension will become politically irrelevant. Like in a chess game, the pawns can move one step at a time, in one direction, but against them the knights, the towers, the Queen move in all directions .Imagine if Europe transforms into the United States, it would become a tower.

Europe is the richest continent of the world, technologically advanced, more populated than the United States, Russia or Brazil, but lacks political power. The paradox is that it does not seek for more powersmainly due to its internal divisions. Yet it cannot by itself provide economic stability,  resolve migration issues, bring legality and peace in our Mediterranean confines and to turn into a federal governance in order to address the problems increasingly posed by globalization. 

Those who want and fight for the United States of Europe know that there is no other way in the global economy if it wants to bring much needed stability and security to its citizens. Last June, an open   letter signed by more than 200 academics was forwarded to Heads of State and government. It indicated some of the necessary reforms to make Europe work better, in particular the completion of the eurozone governance and called for a " clear roadmap and timetable to complete the banking union and to reach the fiscal, economic and political unions by the end of the European legislature .

Citizens need a vision and a way forward to a Europe based on democracy, solidarity and subsidiarity. Nothing else can win back their trust towards the Union. The alternative is the spread of the social perception of an inevitable and irreversible decline, which fosters the rise of populism, nationalism and xenophobia. Leadership implies responsibility towards the citizens of today and tomorrow"

To be or not to be, that is the question. Hamlet chose not to be and had the end that Shakespeare has told us. We, Europeans are making the wrong choice and if we do not remake our Europe we'll have the same end.  Yet, Europe has the potential to shape its economic and political future as it did in the aftermath of WWII.