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I wasn't able to get to the referenced article without paying, but intuitively I agree with you.  Note I agreed with Drew re: the GI bill, and I agree with you on the intra-regiolnal transit investments,,,,probably rural electrification.  Some of government's spending is appropriate and brings great benefit to people.  In my view of government spending/investment and private investment, there are important roles for both.  

I'm just surprised at the breadth and strength of Drew's comment,

Governments, rather than the people on Wall Street or in the City, are the most important investors on the planet.  That is as close to an undeniable fact as you will ever find in the social sciences,
I would like to see him elaborate on what he means, because as written, it seems incredibly over the top to me.
by wchurchill on Wed Nov 22nd, 2006 at 12:43:45 PM EST
[ Parent ]
On that score, I think Drew is spot-on, not over the top at all. Here's some parts of the article:

One widely-held view is that high unemployment rates in Europe are due to that continent's generous social welfare systems and `rigid' wage structures, or, in other words, to the equality that is the characteristic goal of social democracy. Though this view has lately come under attack, it remains the received wisdom for most economists, for the new policy-makers of the so-called Third Way, and, of course, for the business press. In this view, low unemployment in the United States is credited to that country's `flexible labour markets', willingness to tolerate increasing wage inequality, and high absolute levels of inequality in wages.

This view is strikingly inconsistent with the facts. For example, it implies that, within Europe, countries with more inequality should have less unemployment. It would also appear to imply that countries with high wage levels should perhaps have more unemployment, and certainly not less, than countries with lower wages. But the opposite is true in both cases. Unemployment has always been higher where inequality was greater in Europe. And now, as Europe has integrated, a corresponding transnational pattern has emerged. It was never the case that the richer countries had more unemployment, as a rule. Twenty-five years ago, unemployment across countries in Europe was, in fact, largely uncorrelated with per capita national income; labour markets perhaps cleared, or did not, on a national basis. But, in the late 1970s, a strong and systematic negative relationship emerged which has been sustained ever since. Today, national unemployment rates are systematically lower in the richer and more equal countries of Europe where wages are high and social welfare systems are strong. Meanwhile it is the lower-income countries with the weakest social welfare systems and the most inequality, such as Spain, where unemployment is highest in today's Europe. ((n.b., article written in 1999)

The conventional view also implies that pay inequality in the United States, where unemployment is presently quite low, must be higher than in `Europe`. But, while this is true for comparisons between the United States and individual European countries, such comparisons ignore differences in income levels between the countries of Europe. When these are accounted for--and Europe is today an integrated continental economy--it is not obvious that the United States is in fact less equal. Our methods, which employ measures of inequality that can be `grouped up' to the European level, permit the calculation of a dispersion index that is directly comparable between the us and Europe as a whole; this index shows a higher value for Europe.

Further, the conventional view implies that, in the United States, unemployment should have fallen when inequality rose, in the 1980s, and vice versa in the 1990s. But wage-rate inequality, in manufacturing at least, has risen and fallen in step with changes in unemployment in America, year-to-year and even month-to-month, over virtually the entire century. To the extent that we can measure the evolution of inequality in Europe as a whole, the same appears to be true for Europe in recent years.

We suggest two simple reasons why inequality and unemployment may generally show the positive association that we observe, while the associations between unemployment and income, and between inequality and average income, are both negative. One is that unemployment causes inequality. The other is that inequality may cause unemployment. Regions with low average incomes are marked by large numbers of relatively impoverished people in low productivity occupations, and, thus, by high inequality across occupations, industries, and sectors. Many such people seek any available exit from their status, even if they recognize that the chances a priori of finding a substantially better job are low. In other words, so long as appealing alternatives to low-income employment exist, even--indeed, especially--when they are not widely accessible, people form up into the queues of the unemployed. This does not happen to the same extent in high-income countries. It is true that the lures of the truly high-wage jobs are even greater in such countries. Unemployment insurance and other safety nets are stronger in rich countries than in poor ones. Conventional thinking focuses on such measures of social welfare generosity as benefit replacement rates, and predicts higher unemployment in more generous countries. And, yet, contrary to the views of the anti-labour Right, such open invitations to unemployment are not, in fact, accepted to the same degree. Why not?

One possible explanation might be that the richer countries of Europe lack low-productivity, dead-end, uninteresting jobs, from which people might be seeking to escape. But this is not the case. High-wage countries are characterized by a diverse cross-section of industries and services, including many that are low-productivity and that must compete with low-wage imports and with immigrants. The high-wage countries are, in fact, typically more diverse in their employment structures than the low-wage countries; somehow, they manage to have high wages alongside many low-productivity jobs. How do they do it?

The answer is scandalously simple. High-income countries subsidize and support the pay of low-productivity people. They do not rely on markets. They provide high minimum wages, buyers for farm produce, jobs in vast public bureaucracies, free health care and higher education. As a result, low-productivity people stay put in their low-productivity jobs. They do not migrate in large numbers toward the high-productivity sectors, in the pursuit of higher pay. The pay in such jobs is not so much higher, all aspects of living accounted for, to make the trouble of earning it worth their while. This is the secret, it appears, of fuller employment in richer countries.

This suggests that the real and relevant rigidities of today's Europe are entirely different from those proposed by the conventional view. Indeed, they have nothing to do with supposed inflexibility of relative wages inside any particular country. On the contrary, increasing relative wage differentials would only cause even more low-productivity people to abandon their present employments in favour of the job queue and the dole.

The relevant rigidities are to be found rather in the thinking of Europe's central authorities on two levels. First, these authorities are unable, or unwilling, to foster the development of macro-economic policies that can effectively build Europe's peripheral economies through national programmes of full employment--and that, indeed, once did so in the heyday of national Keynesianism from 1945 to 1970. Second, they have been unwilling to make the vast income transfers, across national lines, that would be required to make rural or service-sector or even civil-service life in Spain as attractive as it is in Sweden.

In fact, present European policy is designed to work in just the opposite direction. Through monetary union and the Maastricht treaty, Europe has moved to restrict the autonomy of both monetary and fiscal policies and to impede the achievement of full employment on the national scale. Meanwhile, barriers to migration and resettlement obstruct the citizens of the European periphery from taking full advantage of the more generous social welfare systems to their north. This concentrates unemployment in Spain, Italy and Greece and reduces the pressure on Northern Europe to pursue full employment policies. And, of course, European fiscal policy places relentless pressure on individual countries to cut back on their welfare states.

In sum, there are good reasons why lower incomes and more inequality should mean more unemployment--and why, therefore, present European policy is a formula for continued failure to reduce unemployment. There is, undoubtedly, a long-term, structural aspect to the European unemployment problem. It does not consist, as characteristically in America, of short-term involuntary displacement--a phenomenon that places unemployment in the causal drivers' seat. In European conditions, rather, inter-regional inequalities cause unemployment. The latter is, indeed, in part a `voluntary' response to an unfavourable set of choices facing low-income people in the low-income countries. Better the dole and the grimy suburb than life in the village or on the farm. But structural conditions are policy- driven; these inequalities are, also, created.

I diaried on this a long time ago and kicked up a shitstorm, I think because I think some of the European posters assumed I was attacking the European welfare state, in part by criticising EU and ECB policy makers andin part by praising one aspect of US macro-economic policy. But of course, the attack was coming not from the direction initially assumed.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Nov 22nd, 2006 at 12:54:14 PM EST
[ Parent ]
This may be semantics, and maybe I'm reading too much into the word "investment", and not taking Drew's comment within the context he meant it.  For me investment is more about allocating funds into economic activity.  So questions like, where should the US economy (or any other economy) invest,,,,the technology industry, the pharmaceutical industry, retail, etc.  And the type of "investment" funds I'm thinking of are spending for research and development, building new factories, building infrastructure to support the businesses, etc. etc.  In my view, these decisions generally, not always, are best made in the private sector of the economy.  There is a role for government, and you and Drew brought up some good examples such as the intra-state highway structure, the GI bill, just to acknowledge a few areas among money where government investing is more appropriate than investment from the private sector.  

And government through regulation can influence the investment decisions made by the private market--higher taxes on gasoline and higher mile per gallon standards for transportations (and not excluding SUV's and light trucks from those standards) are an example of where government has tried to influence investment decisions, but imo, not gone far enough.

Your comment above leads me to believe that I'm not interpretting his comment in the way he meant it, and perhaps you are.

by wchurchill on Wed Nov 22nd, 2006 at 01:23:56 PM EST
[ Parent ]
Hard to say if I am or not.

Assuming I knowing his POV, I assume he thinks of public investment just in the productive, public good sense, and limited only to a heavily prescribed area of production, far more limited than I would find warranted.

I strongly suspect he would disagree with the notion that most Capital allocation should be greatly influenced, if not controlled, by democratic and egalitarian principles, and in this regard, his pov is far more in line with yours.

This being said, regardless of one's political viewpoints, a bad investment is a bad investment, and pork general is one such investment, and an aspect of certain political systems. NPV is simply a math concept, not a statement of political value...

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Nov 22nd, 2006 at 01:47:33 PM EST
[ Parent ]


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