Unformatted text preview: Professor Kelemen
Lessons from Europe Spring 2011
Redistribution and growth in Europe Lecture Outline
Lecture Outline Reviewing the European Social Model
Sounds too good to be true? How do they pay for it all? Are taxes higher?
Isn’t all this bad for business? For the economy? Doesn’t it kill jobs?
What is the impact of the Social Market Economy on… Growth rates and wealth
… and inequality Summing up: Lessons from Europe Reviewing the Social Market Economy
Reviewing the 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
Keys: Economic Coordination: Powerful employers associations & powerful unions engage in collective bargaining backed by govt. (corporatism). Also, structure of corporate finance helps firms work together.
Extensive employment protection and extensive social programs How do they pay for it all?
How do they pay for it all? Paid maternity leave and subsidized childcare Universal medical coverage More generous pensions Etc, etc… Do Europeans pay higher taxes?
Do Europeans pay higher taxes? In short, yes of course! You don’t get something for nothing.
In US, most people pay approx 28% tax In Europe, most people pay between 36 and 44%
All pay more taxes, and wealthiest people face substantially higher taxes. Average Worker’s Taxes
Average Worker’s Taxes Highest Marginal Tax Rate
Highest Top marginal personal tax rate and
Top marginal personal tax rate and full statutory corporate tax rate, OECD30, 2005 …but tax picture isn’t so simple either Though federal income taxes are lower, Americans pay state and local taxes (e.g. property tax) that can be very high
US households pay 31% ($2.3k/year) health costs out of pocket
Americans spend 3x as much private money as Europeans for old age care.
In Europe, you don’t need to save for your child’s college tuition. Universities are publicly funded (i.e. by tax revenues)
So, what is the difference between paying tax and getting service vs. not paying tax, but then having to buy that service?
‘Overtaxed’ French and Germans have far higher savings rate than Americans (1214 % vs. 0% in America prior to recession) & Americans have far higher credit card debt, college debt and borrow against houses. So are they being taxed to death? You get what you pay for…
You get what you pay for… When it comes to things run by the public sector, you get what you pay for…
Infrastructure Education Public Health Military Police, Fire Which do you think costs more?
Which do you think costs more? Which do you think costs more?
Which do you think costs more? French TGV (High Speed Train) Train I take to work ( http://www.youtube.com/watch?v=luDpjj3149g Septa averages under http://www.youtube.com/watch?v=eG7Y1FSUwGg European intercity trains. Routinely ave. over 150 mph 30mph
Amtrak (philly to NYC) a whopping 68 mph But there is a difference between a But there is a difference between a watch and a train… A watch is a consumption good.
Trains, roads, schools, a public health system… these are different because they support the infrastructure, levels of education and health that enable the economy to function efficiently.
They are better viewed as investments than simply as consumption or spending Guess what this is a map of?
Guess what this is a map of? It is a map from National Highway It is a map from National Highway Safety Administration of Structurally deficient bridges… 750 in New Jersey
72,524 in the US as a whole You get what you pay for! http://www.fhwa.dot.gov/BRIDGE/defbr07.cfm Equality vs. Efficiency?
Equality vs. Efficiency? Is all this bad for the economy?
Do European countries with Social Market Economies experience slower economic growth? Are they less wealthy? Do they have higher unemployment? In short, is there a tradeoff between pursuing greater social equality and achieving greater prosperity?
Most Americans certainly think so: Krugman, Jan 10, 2010 OpEd, “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.” Are Europeans less ‘wealthy’?
GDP per capita in Europe is only 70% that of the US US, US, Bureau of Labor Statistics, GDP per capita 2009 But hourly worker productivity is almost identical. So how do you explain difference in GDP per capita? GDP per GDP per hour worked, Bureau of Labor Statistics Europeans workers work less hours! …and less Europeans work. More are unemployed (looking for work and can’t find it) And a lower percentage are employed. (US employment/population ratio in Blue, EU in Red) But among people in prime working But among people in prime working years employment ratios are similar
US – Blue
EU – Red
France Green Midlife Europeans work as much as Americans. Young and old less so. Employment Rates
Employment Rates SMEs and economic growth?
SMEs and economic growth? US GDP growth since 1980: 3% / year
EU GDP growth since 1980: 2.2%/year
But that is mostly due to greater US population growth.
US GDP per capita growth since 1980: 1.95%
EU GDP per capita growth since 1980: 1.83%
Also, no correlation between social spending and GDP per capita Evidence does not suggest that SME has undercut economic growth and average standards of living. Ave. annual rate of change in per Ave. annual rate of change in per capita GDP How about unemployment? Don’t Europe’s How about unemployment? Don’t Europe’s SMEs have high unemployment? EU had higher unemployment than US in 1990s, but… not anymore.
Unemployment concentrated in France, Italy and Spain (and in Germany due to reunification)
Many SMEs actually have lower unemployment than US
Less ‘job growth’ (creation of new jobs), but not necessarily more unemployment. US vs. EU unemployment
US vs. EU unemployment Unemployment and Underemployment
Unemployment and Underemployment Concentrated in Southern Europe
High levels of longterm unemployment
Very high levels of youth unemployment
Early retirement and permanent ‘disability’
Lower employment rate
Greece, Spain, Italy lack many elements of the “Social Market Economy” found in northern Europe A note on France and Italy
A note on France and Italy France Mostly like a social market economy, but… Less workers are unionized & employers are poorly organized. No ‘corporatist’ style negotiations between labor and management, leading to cooperative solutions and wage restraint. Italy Much smaller, less redistributive social welfare state than any SME Impact of SMEs on inequality
Impact of SMEs on inequality Do European SME’s succeed in reducing inequalities in society more than US does?
Yes. Poverty Rates in OECD
Poverty Rates in OECD Child Child Poverty,
Unicef Inequality in America: Share of total Inequality in America: Share of total income held by richest 10% in US Inequality in America: Share of income held by richest Inequality in America: Share of income held by richest 1% Inequality in America
Inequality in America Comparing inequality in US and Comparing inequality in US and Europe In US wealthiest 10% controls 70% of wealth. In Germany wealthiest 10% controls 44%.
Ratio of CEO pay to average manufacturing employee pay:
US 475:1 UK 24:1 France 15:1 Sweden 13:1 Jacob Hacker (Yale), ‘The Great Jacob Hacker (Yale), ‘The Great Risk Shift’ Americans used to get ‘corporate benefits’ instead of ‘social benefits’ (ie health, pension etc from employer)
But employers are getting rid of those
In 1979 70% of workers got health insurance from employer.
Today less than 50% (approx. 25% for low income workers)
With death of corporate insurance/benefits systems we are seeing ‘massive shift of risk from employers onto workers and their families.’ Hacker Americans face far greater Americans face far greater uncertainty in life Jacob Hacker, The Great Risk Shift (in US) Summing Up:
Equality vs. Efficiency? European SMEs achieved greater reductions in inequality than US? Have SMEs enjoyed less economic growth than US? Yes, by far. Since 1980, US grew slightly faster.
But evidence does not suggest that welfare state has undercut economic growth and average standards of living.
Comparing US and European countries, no correlation between inequality and growth (Figures 9.1 and 9.2) Have SMEs had employment problems? Yes, in some countries (Italy, Spain)
Worse at quickly creating new jobs, but don’t always have more unemployment. European SME’s are European SME’s are internationally competitive
10 Country Switzerland US Singapore Sweden Denmark Finland Germany Japan Canada Netherlands Score 5.60
5.32 World Economic Forum, Global Competitiveness Index 200910
(top 10 countries) WEF
competitiveness rankings back in 2005
(top 25) Which big EU state was not the top 30?
Which big EU state was not the top 30? Italy –the ‘sick man of Europe’?
Also, Greece is a disaster. So how do SMEs do it?
So how do SMEs do it?
How do they remain competitive? Effective public institutions / governance
Education and Training Focus on quality primary and secondary education to improve quality of ‘unskilled’ labor Apprenticeship related training Flexicurity / Active labor market policy – get people back to work
Corporatist bargains keep wages competitive in sectors that face international competition Effective public institutions are Effective public institutions are good for competitiveness Education pays off
Education pays off They have
education PISA, 2007 But they could (and probably need to) invest But they could (and probably need to) invest more in Universities They are good at spreading technologies across society:
They are good at spreading technologies across society:
Diffusion of internet technology World Bank, World Bank, Knowledge Economy Index 2007 Training, technology, infrastructure, health & social supports productive workforce Greater equality & stronger safety net means less severe
Less crime & lower Incarceration Rates Incarceration
Delinquency Summing Up: Lessons from Europe
Summing Up: Lessons from Europe There is no free lunch. You get what you pay for.
In US, antitax & antigovernment ideology/rhetoric is very powerful
Americans pay less taxes… but they get worse infrastructure, weaker schools, and weaker social insurance / support programs.
The American economy is generally better at quickly generating new jobs… but many of those ‘McJobs’ have very low pay and little or no benefits. Summing Up: Lessons from Europe
Summing Up: Lessons from Europe People generally support programs more than they support taxes necessary to pay for them… we’d all like something for nothing.
If you think taxes are used finance programs for ‘others’, then you’ll oppose them.
If you see taxes funding programs/policies that benefit you and yours, your view may change.
Individual impact of European model vs. US model? It depends:
If you are young, healthy, single, employed in a high (or very high) income job… you’ll do better in America.
But if you are working class or are thinking about the entire life course… maternity leave, childcare, college tuition, unemployment, disability, retirement, long term care… you might reach a different conclusion. ...
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- Spring '11
- Social market economy