Monday, October 31, 2016

Will social democracy return? A review of Offer and Söderberg

Avner Offer and Gabriel Söderberg (“The Nobel factor: the prize in economics, social democracy and the market turn”) look at the strange death of social democracy at the hands of market liberalism. That death was accelerated by the role of the Nobel prize in economics that conferred to economics an allure of science and that was used to much greater profit by neoliberal economists to push for their version of economic policies.

Offer and Söderberg define social democracy as a continuation of Enlightenment: from equality before God to equality before law, to equality between men and women and races, to equality of entitlements between citizens. Since each citizen goes through periods of dependency (as a child, as a mother, as unemployed, or as an old person) when he/she cannot earn an income, he has to depend on transfers from the working age population. This life-cycle pattern is shared by all, and thus society, in a form of social insurance, sets a system that provides redistribution from the earners to the dependents.

How does market liberalism solve the life-cycle problem? By positing that everyone is a free agent with his endowments of capital and labor. When he cannot work, he uses the proceeds from his capital (assuming of course that he originally either inherited or saved enough wealth to have a capital). It is not a “society” in a true sense of the word, but a group of “agents” who manage own income over the life-cycle. Since returns are to one’s ownership of labor and capital and there is no redistribution, it is a “just world” society where one gets back what he has put in, and where income inequality is never an issue—precisely because income is exactly proportional to one’s contributions.

These are indeed two different views of the world. As Offer and Söderberg write, social democratic view was extremely successful empirically but was not theoretically worked out much by economists. The neoliberal view has exactly the reverse characteristics: empirically it was not much of a success (look at private pension schemes in Chile), but economists have extensively worked on it theoretically.

Neoliberal view became dominant in the early 1980s as social-democratic model was blamed for the slowdown in growth. The Nobel prize accelerated this shift because it tended to favor neoliberal version of economics. The origins of the Nobel prize are revealing in the same way that a look at the beginning of every great fortune  is revealing. There are there details that are better left unexplored. The prize has all but been bought by the Swedish Central Bank (Riksbank) that had the magnificent idea that a Nobel prize in economics can help it assert its independence from the government by elevating economics to the position of a “science”. The Swedish government let the Riksbank lobby with the Nobel Committee for the introduction of the only prize not envisaged by Alfred Nobel, essentially as a vanity project. The Riksbank prevailed upon the committee by, inter alia, removing some constraints on the financial instruments in which the Nobel Committee could invest and by funding the prize itself. It was a great example of entrepreneurship: buy a prize for yourself. (One wonders if, for example, Apple may not follow Riksbank and buy a prize to award for the most promising technological development.)

There was, according to Offer and Söderberg, another reason why social democracy was abandoned even by the parties that were brought into existence through social democracy like British Labour, French socialists (SFIO) and German SDP. The leadership of the parties passed from social activists and workers into the hands of credential leaders who emphasized meritocracy and in whose eyes redistribution rewarded the “underserving poor”. This is the background to Bill Clinton’s “end of the welfare as we know it”, and Tony Blair’s New Labour. The shift was also helped by the self-interest of the new leaders who in  the process (as the Clintons and the Blairs show) immensely enriched themselves. It could be even said that the parties were to some extent hijacked by their self-interested leadership.

Offer and Söderberg do leave the door open to a possible return of social democracy and see the harbingers of such a change in the increasing role played by the left wings of the social-democratic parties as in the case of Bernie Sander, Corbyn, Syriza and Podemos.

I find the Offer-Söderberg narrative largely persuasive but I do have somewhat of a disagreement in that I think that the “objective” conditions that  played against social democracy are not sufficiently emphasized. This is not only of an antiquarian interest. If the objective conditions have indeed changed, as I believe, then the future appeal of social democracy will also be more limited. In other words, we are unlikely to return to a status quo ante even if the failure of neoliberalism is clear to most (except perhaps to a few economists whose self-interest lies in denying the obvious).

There are four such changes that I see which work against the ideal-typical model of social democracy. (And some of them were mentioned at the recent presentation of the book at the New School in New York.)

The first is multiculturalism. Social democracy was created for ethnically and culturally homogeneous societies. West European societies today are much more diverse than they were sixty years ago. This is the issue on which Assar Lindbeck  (incidentally, the most influential person in the creation and early awards of the prize) has picked early on. If cultural norms differ and if there is a “lack of affinity” between the groups (to use Peter Lindert’s term) then willingness by some to fund transfers for the others wanes.

The second challenge is the end of Fordism. With much more heterogeneous labor, in terms of their skills and tasks; smaller size and geographically dispersed units; the self-employed rather than workers, the natural constituency of social democracy (homogeneous labor assembled in one place) disappears.

The third challenge is demographic. Social democracy was very successful through the use of pay-as-you-go (PAYG) system in the countries where population was increasing and the working age population was large. Many people worked and they could transfer income to the retirees in the expectation that the same deal will apply to them when they become old. But when the population is in the decline and there are too many retirees compared to the working age population, maintaining the integrity of the PAYG system is harder. It is not impossible as the pension age can be raised and pensions reduced, but it is certainly not politically easy to do.

The fourth challenge is globalization. Social democracy operated within rather closed economies  where migration (and thus the challenge of multiculturalism) was minimal and where capital was generally locked in nationally. None of that is true anymore.  Capital is much more mobile, and if heavily taxed to provide funds for social transfers, will flee. Developed welfare states that make sure that nobody is left behind may provide incentives particularly to the low-skilled migrants. Thus “better” social democracy may perversely attract lower quality migrant labor than the much more austere and “mean” systems.

These, and perhaps a few other, elements seem to me to imply that a return to the Golden Age of social democracy is unlikely to happen. On the other hand, there is a realization of inadequacy of the neoliberal model that bequeathed a huge crisis (which did not turn into another Great Depression precisely because the key rules of neoliberalism were abandoned in order to save the system). As many times in history, we are now at the point where neither of the two established doctrines seems to provide reasonable answers to today’s issues. That leaves the field open to new thinking and experimentation.

Sunday, October 30, 2016

Nothing comes for free

There is an interesting interview with Martin Shkreli in today’s Financial Times. Shkreli who became famous (or notorious) when, after purchasing the patent, increased the price of a life-saving HIV/AIDS drug by 5000% clearly enjoys playing the role of a bad boy. He does not at all regret his decision and believes that whatever he did was absolutely correct since it maximized the value for the shareholders. He would, as he says, do it again.

And there is an iron logic in Shkreli’s argument. As I argued here and here,  if there is a capitalist economy, it does not make sense to believe or to argue that companies should pursue objectives other than maximization of profits. If society desires to make some adjustments to that, as it obviously should in this case, then it is incumbent upon the government to either impose market changes (say, to limit the price) or to create a better system of insurance, or to simply subsidize the users of the drug. But it is not Shkreli’s duty to incorporate social  concerns  in his pricing policy. He would behave the same regardless of the product he sells: it could be a life-saving drug, as here, or a pair of shoes: the rules are the same.

In fact, the only sin of which Shkreli seems to be guilty is to have been brutally  frank and not hypocritical. Many companies (especially big pharmaceuticals) do exactly the same thing that he did,  but they do it more discreetly: they may not jack up the price by 5000% and thus attract unwarranted attention, but they might jack up the price by 2000% and pass unnoticed, under the radar of the politicians and opinion makers. They are perhaps shrewder and more careful than Shkreli but not any different. They pay lip service to caring for the (vaguely defined) “stake-holders” but they know, as well as Shkreli, that if they do not focus, above everything else, on profits they would be either out of their jobs, or even out of business (as their companies might fail).

If you have a capitalist economy, you cannot have it both ways: asking for uncompromising efficiency, advocating competition and then, suddenly, in some cases, asking capitalists and entrepreneurs to follow a totally different logic. If you want  outcomes to be different, then the government cannot remain aloof but has to intervene and take an active role.

This reminds me of a similar story I read many years ago when an American basketball player (unfortunately, I cannot remember who it was) refused to be drawn into the position of a role model.  He answered the journalist who criticized him for not being an uplifting model for the kids by pointing out an obvious fact: his role is to hit the hoops, not to raise other people’s kids. And that’s clearly the key point: if you want better children and greater parental involvement, the way to get it is by introducing paid parental leave, or by allowing parents to come later to work (after they have dropped off their kids) or by giving child cash benefits,  not by keeping everything unchanged and then pretending that it is the duty of basketball players to make sure children are raised well.  

In other words, people follow a certain logic of behavior (which reflects dominant social mores and institutional set-up) and if one wants to change that logic in some instances, one needs an activist government. For nothing comes for free.

Friday, October 28, 2016

Bright prospects for global recovery



The Joint report of the International Monetary Fund and the Bank for the Reconstruction of the Formerly Belligerent Areas (FBA), entitled “Bright Prospects for Global Recovery” was released in Beijing today. Due to transportation difficulties and fear of contamination the Article IV consultations, on which the report is based, were conducted, separately, with the representative of the FBAs in Cape Town and Beijing. The report is written under the overall guidance of the key principles adopted by the IMF and the Bank for the Reconstruction of the Formerly Belligerent Areas, namely, the Three Ps (Peace, Progress and Prosperity) and the Two Hs (Happiness and Harmony). The report addresses three key areas: macroeconomic management, labor and social issues, and aid and international debt.

Macroeconomic management. Staff express support to the authorities of the FBA (separately) for their efforts to stabilize the macroeconomic situation. The US Gross Domestic Product was estimated to have increased by 8.2% in the year ending in April 2020 which represents strong rebound from the previous year dominated by the issues of food security.

The food situation indeed remains precarious in all FBAs, and especially so in Russia and the Siberian Republic due to the need to import almost all food and to the severe transportation difficulties aggravated by the global cooling (nuclear winter). The Russian authorities were unable to provide an estimate of GDP, but it is believed that a modest recovery has begun.

In Staff’s opinion, the situation in Europe is somewhere in-between the United States and Russia and the Siberian Republic, with an anticipated growth of 4 to 5 percent. Last Summer’s adoption of Renminbi by Europe, and significant food aid from the countries of the African Union have stabilized, to a degree, the macroeconomic situation. It should be noted, however, that due to the severe difficulties of collection of information and inability of Staff to travel to the FBAs (separately), all National Account data have to be taken with a great dose of caution.  
Macroeconomic challenges abound in all FBAs. They are due to the difficulties of tax collection, low and unrecorded incomes, and continued contamination and very high morbidity rates which necessitate large health expenditures. Estimated fiscal needs of the FBA are discussed in detail in the Annex to this Report.

Labor and social issues. Staff note that in the conversation with all FBAs (separately), it has been pointed out to the massive high-skill labor shortages. In the United States, the number of people with college degree has been reduced by an estimated two-thirds (in line with the overall casualty rate), but the outflow of high-skilled workers to other countries has additionally exacerbated the problem. It was thus estimated by the Bismarck authorities that the US has lost more than 80% of its college graduates. The US authorities mentioned the plan to build a wall which would stop further outflow of skilled labor but the costs of construction (especially given extremely high level of US foreign indebtedness; see below) are prohibitive. Staff also argued that such impediments to the free flow of labor are not in agreement with the spirit of the principles embodied in the 3Ps and 2Hs.

The skilled-labor shortage is even greater in Russia, Tatarstan and the Siberian republic. Such labor shortages, even when the financing from the Bank for the Reconstruction of the FBAs is forthcoming, impede the reconstruction effort. Attempts to attract labor from other parts of the world have proved fruitless. Staff have agreed with the representatives from Iraq and Somalia, who have experience with reconstruction under severe conditions, to provide technical assistance to FBAs (separately).

According to the estimates of the Bank for the Reconstruction of the FBAs, the total number of people living in FBAs at less than $4 per day is approximately the same as in Brazil. Since the estimated combined population of the FBAs is somewhat greater than Brazil’s, the poverty rate is a bit lower.

Inequality levels in the FBAs (separately) have also gone down driven by the “malign” forces of wars, contamination and epidemics. Still Staff note with satisfaction that the last fiscal year’s real growth of GDP has also contributed to the reduction of poverty and inequality substantially below their 2019 levels.

International aid and debt. At the recent meeting in Djakarta, following the principles of the 3Ps and 2Hs, the members of G7 (China, India, Indonesia, Brazil, Vietnam, Nigeria and South Africa) have agreed to provide substantial aid to the FBAs. While the first tranches of aid are of the humanitarian character, the next tranches will be on less concessionary terms until such time when the FBAs (separately) would be able to return to the financial markets.

The ability of FBAs to borrow and service their debt is hampered by their extremely high debt-to-GDP ratios which in the cases of the United States and Europe exceed 450 percent (due of course to the massive shrinkage of their GDPs). Multilateral debt-cancellation can be envisaged for some of the debt, but not all. Even the least indebted countries in Europe (like for example Greece with debt/GDP ratio of under 200 percent) find it difficult to service the debt. For France, Germany and the UK this is quasi  impossible. The Report thus suggests to call as early as possible an international conference at which the problem of the FBA debt (separately) will be discussed in the spirit of the 3Ps and 2Hs.

The problem of debt is aggravated by the strong decrease of international trade and macroeconomic difficulties in China that has over a very short period of time lost its most important export markets. China’s attempts to readjust from export-led to domestic-driven growth, which date from before the WW3, have thus become even more difficult. This too, in view of the Staff, explains the 2.1 drop in China’s last year’s GDP.

G7 are committed, at least in the short-term, to keep on providing in-kind aid to the FBAs without compensation. The amounts of food aid from Africa to Europe have been particularly significant and have helped avoid starvation in Europe in 2019. It is expected that the need for food aid will diminish in the coming years as conditions in the FBAs (separately) normalize.

Conclusion. The Report notes brightening prospects for the global economy and is particularly encouraged by a more stable macro environment in the FBAs (separately). It is expected that the improvements will continue despite the challenges that remain ahead.