lecture 5 The European Social Market Economy

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Unformatted text preview: Professor Kelemen Professor Kelemen Social Policy and Politics: Lessons from Europe Spring 2011 The European Social Market Economy Lecture Outline Lecture Outline What is the European Social Market Economy? Who cares / what difference does it make in people’s lives? Where did it come from? More details on Social Market Economies: How do they work? Two varieties of European ‘welfare states’ How does this all compare with the American model? Why is America so different? New York Times January 11, 2010, Op­Ed New York Times January 11, 2010, Op­Ed Columnist Learning From Europe, By PAUL KRUGMAN As health care reform nears the finish line, there is much wailing and rending of garments among conservatives. And I’m not just talking about the tea partiers. Even calmer conservatives have been issuing dire warnings that Obamacare will turn America into a European­ style social democracy. And everyone knows that Europe has lost all its economic dynamism. Strange to say, however, what everyone knows isn’t true. Europe has its economic troubles; who doesn’t? But the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. Actually, Europe’s economic success should be obvious even without statistics. For those Americans who have visited Paris: did it look poor and backward? What about Frankfurt or London? You should always bear in mind that when the question is which to believe — official economic statistics or your own lying eyes — the eyes have In any case, the statistics confirm what the eyes see. In any case, the statistics confirm what the eyes see. It’s true that the U.S. economy has grown faster than that of Europe for the past generation. Since 1980 ­ when our politics took a sharp turn to the right, while Europe’s didn’t ­ America’s real G.D.P. has grown, on average, 3 percent per year. Meanwhile, the E.U. 15 ­ the bloc of 15 countries that were members of the European Union before it was enlarged to include a number of former Communist nations ­ has grown only 2.2 percent a year. America rules! Or maybe not. All this really says is that we’ve had faster population growth. Since 1980, per capita real G.D.P. — which is what matters for living standards — has risen at about the same rate in America and in the E.U. 15: 1.95 percent a year here; 1.83 percent there. What about technology? In the late 1990s you could argue that the revolution in information technology was passing Europe by. But Europe has since caught up in many ways. Broadband, in particular, is just about as widespread in Europe as it is in the United States, and it’s much faster and cheaper. And what about jobs? Here America arguably does better: European unemployment rates are usually substantially higher than the rate here, and the employed fraction of the population lower. But if your vision is of millions of prime­working­age adults sitting idle, living on the dole, think again. In 2008, 80 percent of adults aged 25 to 54 in the E.U. 15 were employed 80 percent of adults aged 25 to 54 in the E.U. 15 were employed (and 83 percent in France). That’s about the same as in the United States. Europeans are less likely than we are to work when young or old, but is that entirely a bad thing? And Europeans are quite productive, too: they work fewer hours, but output per hour in France and Germany is close to U.S. levels. The point isn’t that Europe is utopia. Like the United States, it’s having trouble grappling with the current financial crisis. Like the United States, Europe’s big nations face serious long­run fiscal issues — and like some individual U.S. states, some European countries are teetering on the edge of fiscal crisis. (Sacramento is now the Athens of America — in a bad way.) But taking the longer view, the European economy works; it grows; it’s as dynamic, all in all, as our own. So why do we get such a different picture from many pundits? Because according to the prevailing economic dogma in this country — and I’m talking here about many Democrats as well as essentially all Republicans — European­style social democracy should be an utter disaster. And people tend to see what they want to see. After all, while reports of Europe’s economic demise are greatly After all, while reports of Europe’s economic demise are greatly exaggerated, reports of its high taxes and generous benefits aren’t. Taxes in major European nations range from 36 to 44 percent of G.D.P., compared with 28 in the United States. Universal health care is, well, universal. Social expenditure is vastly higher than it is here. So if there were anything to the economic assumptions that dominate U.S. public discussion — above all, the belief that even modestly higher taxes on the rich and benefits for the less well off would drastically undermine incentives to work, invest and innovate — Europe would be the stagnant, decaying economy of legend. But it isn’t. Europe is often held up as a cautionary tale, a demonstration that if you try to make the economy less brutal, to take better care of your fellow citizens when they’re down on their luck, you end up killing economic progress. But what European experience actually demonstrates is the opposite: social justice and progress can go hand in hand. What is the European Social Market What is the European Social Market Economy? A economic system that is capitalist (ie market based) but that provides for various forms of government intervention to protect people against hard times and to reduce inequality Best examples found in Germany, Austria, Switzerland, Belgium, Netherlands, Denmark, Sweden, Finland and Norway… But other European countries (even the UK) are still more ‘social’ than the US. Who cares? Who cares? The world isn’t divided between laissez faire capitalism and socialism as some would have you believe Rather there are a number of ‘varieties of capitalism’ or models of capitalism The European Social Market economy provides a model – very different from the US variety of capitalism – that successfully combines market capitalism with greater social equity And this matters for ordinary people in very real ways… Working Working Europeans work less than Americans… much less! Less hours per week Less weeks per year (mandatory paid vacation) Jobs are more secure Employment comes with far greater benefits and social protections Working Hours Working Hours Working Hours Working Hours Europeans haven’t always worked less… Job Security Job Security Co­determination / ‘works councils’ Employee representatives on management board Take into account worker input/ perspective ‘Stakeholder’ control as opposed to only ‘shareholder’ control Stricter labor market regulation (harder to fire) But that has down sides… where it is harder to fire, companies are reluctant to hire. Flexicurity Flexicurity New popular model: Flexicurity Flexicurity=Flexible labor market + social security Pioneered in Denmark Keys = portable benefits and active labor market policy (retraining & placement services) Active labor market policy costs: Denmark spends six times as much as US on worker training programs Family & work­life balance policies Family & work­life balance policies In US, conservative politicians talk about ‘family values’. What policies do they back to support them? US has no legally guaranteed parental leave Attacks on gay marriage? Abstinence only education? They oppose policies that would use tax revenues or regulations to support families Family and Medical Leave Act = 12 weeks unpaid (at companies with 50 or more employees) Only 16% of companies offer paid maternity leave Child care? Subsidies for child care limited to the very poorest Childcare spots can cost up to $1400 a month (ave=500) Think about impact of that on choices of low & middle income families No paid sick leave: Would you like flu with your burger? Family & work­life balance policies Family & work­life balance policies Parental leave Child care All European countries offer paid maternity/paternity leave Sweden is most generous: 1.3 years at 2/3 of normal salary Publicly funded or subsidized childcare is widely available Fees based on proportion of income (ave approx $130) Paid sick leave? Of course Other social policies / benefits Other social policies / benefits Unemployment in US: Unemployment in Europe Less than 40% of workers qualify for unemployment benefits Typically capped at 50% of salary for 6 months (though Congress can extend) Workers lose health care (can extend it through ‘Cobra’ Europeans enjoy much higher unemployment benefits! Typically 70­80% of salary for a year or two Keep health care coverage ‘Active labor market policies’: job retraining / placement Education… a topic for later Health care… a topic for later Of course all this must be paid for somehow… more on that next lecture. Background of the European Social Background of the European Social Market Economy Pursued as a ‘middle path’ or ‘3rd way’ between socialism and laissez­faire capitalism Socialists want: Substantial public ownership of industry and government planned economy Significant redistribution of wealth Laissez­faire capitalists want: Minimal (or no) government interference in markets Minimal (if any) social safety net Background of the European Social Background of the European Social Market Economy In post­War Germany, a group of economists (called Ordo­liberals) led by Ludwig Erhard calls for a middle path (3rd way): The Social Market Economy (Soziale Marktwirtschaft) They are liberals (in the Adam Smith tradition) and believe in capitalism and oppose socialism But they see that unfettered capitalism can have disastrous social and political consequences They are mostly Christian Democrats (who place high priority on Catholic social teaching / protecting the vulnerable) Background of the European Social Background of the European Social Market Economy Architects of the Social Market Economy (first in Germany and later in other European countries) seek system that: Relies on market capitalism as engine for growth Allows government to regulate/ stabilize markets Provides for social protection through labor regulations and various social insurance schemes Social Market Economies… Social Market Economies… in more detail Two variants of continental European ‘Welfare’ or ‘Workfare’ States Christian Democratic Social Democratic All these countries have more ‘coordinated’ market economies Christian Democratic Welfare State Christian Democratic Welfare State Origins: Conservatives fending off socialism Coverage tied to main breadwinner (historically dad) Aim: Maintaining status, not redistributing income Minimal public services. Instead, encourage Church, Unions and social organizations to provide services. Higher taxes/ substantial "social contributions" from employers. Link to economic policy: Strict worker protection rules + high wage costs discourage service industry jobs, and make labor market more inflexible. Discouraging female labor force participation increased ratio of beneficiaries to contributors Germany, Spain, Italy, France, Netherlands, Belgium Social Democratic / Universal Welfare State Social Democratic / Universal Welfare State Origins: Social Democratic parties working with unions Aim: Comprehensive/ Universal coverage for all citizens: ‘decommodification’ of labor High income replacement rates. Extensive redistribution and public services. Little or no stigma to receiving benefits High taxes. Link to economic policy: extensive public services (such as child care and elder care) encourage female labor force participation (which increases labor supply and # of taxpayers) and helps reduce wage demands. Economic Coordination in Social Economic Coordination in Social Market Economies Coordination between firms unions, banks, government and other actors. Labor: strong unions, powerful ‘works councils’, unemployment protection greater job security Worker Skills: greater union/employer collaboration in training for industry specific skills Finance: Most financing from banks, not stock exchanges. Less sensitive to short­term profits. Inflexibility? Stakeholder Capitalism Examples: Germany, Sweden, Austria, Belgium, the Netherlands, Denmark, Finland. How does this all compare with the How does this all compare with the American model? US, along with UK & Ireland, fits model of ‘Liberal Market Economy’ and Anglo­Saxon (‘poverty relief’ welfare state) Anglo­Saxon Welfare State Anglo­Saxon Welfare State “Welfare” = Poor­relief and stigmatized Benefits = need based and means­tested Modest universal transfers & social insurance schemes Most "social insurance"/ care left to free market Employment related benefits / pensions (i.e. health care) Employment Low taxes? Depends who you are. Link to ‘Liberal Market Economy’: Low minimum wages + little worker protection + minimal safety net encourages workers to accept low wage jobs and encourages labor market flexibility. Examples: US, UK, Ireland Liberal (Laissez faire) Market Liberal (Laissez faire) Market Economies Labour: Weak Unions + weak unemployment protection, low minimum wages and local bargaining = Flexible Labour Market Worker Skills: flexible labour market firms have little incentive to invest in training. Workers have incentive to invest in ‘general skills’ Finance: Large, flexible, transparent stock markets Focus on short term profits. Only 7% of private sector workers = unionized Shareholder capitalism or ‘Wall Street Capitalism’? Examples: US, UK Ireland, Canada, Australia, New Zealand Summing up US – European Differences: Summing up US – European Differences: they have bigger government Gov’t spends more on social policy Gov’t spends more on social policy Public Pensions (social security) Public Pensions (social security) provides better coverage More pensions data More pensions data Differences with US have grown over time Differences with US have grown over time Lessons from Europe? Lessons from Europe? Why is America so different? Could we introduce some of these European policies / approaches here in the US? Why America’s approach to the Why America’s approach to the welfare state is so different? Culture? Ideology? The Cold War and framing any progressive social policies as leading down the road to ‘socialism’ or ‘communism’ Racism Reagan add for American Medical Reagan add for American Medical Association against Medicare Palin in Debate: “It was Ronald Reagan who said that freedom is always just one generation away from extinction. We don’t pass it to our children in the bloodstream; we have to fight for it and protect it, and then hand it to them so that they shall do the same, or we’re going to find ourselves spending our sunset years telling our children and our children’s children about a time in America, back in the day, when men and women were free.” Sarah Palin, Sunday 19 October Sarah Palin, Sunday 19 October in New Mexico “Barack Obama calls it spreading the wealth,” she said. “Joe Biden calls higher taxes patriotic. But Joe the plumber and Ed the dairy man, I believe that they think that it sounds more like socialism. Friends, now is no time to experiment with socialism.” Racism and Social Welfare Policy Racism and Social Welfare Policy Racism and social welfare in America Racism and social welfare in America Racism and social welfare in America Racism and social welfare in America It isn’t just race: It isn’t just race: Diversity and social welfare And what impact does all of this And what impact does all of this have on… Inequality, poverty, risk (see below) Economic growth, wealth (next lecture) Poverty Rates in OECD Poverty Rates in OECD Child Child Poverty, Unicef Share of total income held by richest Share of total income held by richest 10% Jacob Hacker, The Great Risk Shift Jacob Hacker, The Great Risk Shift (in US) ...
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