(I should note that most, if not all, of this diary will deal with general ideas and not the specifics of Europe. My purpose is to lay out a basic framework within which I believe the basic goals of both sides can be accomplished reasonably well rather than to go through, point by point, the policies of the European Union or any of the member states. Much of it, I know, will seem to be little more than broad concepts explained in a ridiculous manner, but, as always, I hope it makes some sense....)
I. Why Security is Right
Back during the Great Depression, people were understandably in quite a state. The stock market collapsed. Unemployment reached 25%. Output (or national income) fell by one-third. It was not, as my paternal grandfather -- at the time a skinny kid from a family of sharecroppers in rural Georgia -- could have told you, a nice time to be alive. The picture was even worse in much of Europe. What emergence from the Depression would show us, however, was that we did not have to live with crashes of such magnitude.
(Why the chart says that the peak was 30%, when it clearly shows a peak of 25.2%, I don't know, but whatever....)
The basic theory, as it is taken these days, is very simple: Spending is needed when the economy is in, or is headed into, a downturn. Keynes produced a consumption function, as I noted in my Milton Friedman diary, showing the way in which he believed consumers behaved given an income level. As a reminder,
c = c(y), c'(y) > 0, and c''(y) < 0.
Consumption depends, here, on income; increases with income; but does not increase by the same amount -- thus leading us to the marginal propensity to consume (MPC). Is this consumption function an accurate representation of household behavior? Yes and no. All economic models are, in the end, wrong, because they're based on assumptions that, given the high level of variance we inevitably see in people, cannot hold in all cases. (Demand curves, for example, are generally downward-sloping, since we generally buy less of something when the price rises -- but, yes, somewhere out there is a guy buying a six-pack of Budweiser after a price-hike, fearing perhaps that the price may go up again soon and believing that he should stock up.) What determines good models from bad models is their ability to predict outcomes that provide an answer to the specific question.
On the whole, I think the Keynesian consumption function works well enough (and better than others) for this topic, since it focuses on a piece of the economy that is highly relevant -- indeed, it is the foundation, I think -- to this diary.
Let's assume we're looking at a family. The family earns a decent living -- nothing spectacular, but a decent middle-class living. Daddy walks in one evening and proudly announces that he is being given a raise. How will the family use its new income? Some of it will, almost without question, be devoted to consumption. Maybe they'll buy a new television or something along those lines. But they will not likely -- unless, of course, they're spendthrift Yanks living in the years 2001 to 2006 -- blow the entire new stash on consumer goods. Some of it will likely be saved and/or invested. The proportion of the new income spent on consumption is the MPC.
Now let's assume for a moment that we have a working-class family. The household earns enough to keep the rent/mortgage paid and the lights turned on, but the family, of course, struggles relative to our previous example. Daddy gets a raise, and the family eventually will determine what to do with the money, as in the first case.
Keynes's theory states that the MPC will fall as we move to households higher on the economic ladder, and hence the second derivative being negative. (Negative second derivatives are, again, typically called "diminishing returns" in analysis of production functions and usually apply to capital and labor -- the returns on which can only be changed, in the long run, by technology or some other form of innovation.) If the working-class family spends 80% -- an MPC, obviously, of .8 -- of the new income on consumption, then perhaps the middle-class family will spend (say) 65% of its raise on consumption. Higher-income households thus have higher marginal propensities to save, which, to (I think) a large degree, jibes with reality. So we have from Keynes a view that lower-income households will spend more of a given increase in income.
This, of course, begs the question: If what an economy needs to fight a downturn is consumption, how should we go about ensuring that this consumption is present? Well, in truth, we already have mechanisms in place for exactly this purpose. They're called, in economics jargon, automatic stabilizers. Unemployment compensation is probably the best-known of them, but other transfer payments qualify, as well. When income drops during a recession, more people become eligible for Medicaid in the U.S., for example. The Friedmanite Earned-Income Tax Credit can be seen as another example.
What I am essentially saying -- the big picture point -- is that the social safety net is both economically and (in my opinion) morally correct. Putting money in the hands of those who will spend it into an economy in need of a boost to aggregate demand benefits both the losers of the recession as well as the society as a whole, ensuring that the jobless don't go hungry while also accomplishing the "pump-priming," to use the old Keynesian talk. If the Left is truly to gain an advantage in economic debate once more, we, as members of it, need to spread and further this understanding, among many, many others.
II. Why Flexibility is Right
Competition is not for the faint of heart. It is, in my opinion, brutal. But I also find it incredibly beautiful (cheesy though that may sound), because, in general, I see it as forcing us to accomplish things we would not have thought possible even only a few years ago. My computer, for example, cost me about £535.00 in 2004, but five or ten years ago, it would've cost twice that amount, easily. And it's a hell of a lot nicer than the hunks of shit we were all using back then. (For one thing, I no longer have to live with putting money in Bill Gates's pocket, but I am, as my father likes to say, an eternal Apple Snob.) And, despite its many imperfections, competition works, because people respond to incentives.
Some incentives are produced artificially -- in many cases by governments, as when filing taxes as a married couple costs more than filing as individuals; or if welfare payments reach levels at which they either exceed the wages that would be taken in the labor market, or are below those wages by so little a sum that the disutility of labor dominates the utility gained from that slightly higher income. Other incentives arise naturally, as in the case of increasingly-scarce resources such as oil. (Just ask Jerome on that one.) Either way, humans use prices, in one form or another, -- a "price" does not necessarily refer to money -- as a means to measuring and utilizing incentives.
(When I say, "a 'price' does not necessarily refer to money," I mean that the cost of, or to, social interaction in an infinite number of examples can be thought in terms of a price. If you sleep with your neighbor's wife, and are then isolated by the community, you're paying a price....)
Now I bring up the brutality of competition because of the fact that we are, without question, living in what appears to be an age of near-infinite economic uncertainty. That uncertainty, however, pales in comparison to the uncertainty of other places and times. If Bubba the autoworker loses his job at the Buick plant in Flint, Michigan (to take Michael Moore's typical example), there is, thankfully, a system -- not overwhelmingly generous but still present -- in place to ensure his survival. But uncertainty in other countries, like (say) North Korea, might mean a terrible harvest and starvation, as it did in the 1990s when roughly two million North Koreans died as a result of a famine. The truth is that we are better off today than we have ever been, -- and, yes, I say that even despite the falling wages we've seen in countries like the United States -- and, while I would never deny the incredible benefits government (representing the collective here) has brought us, most of that progress has been driven by incentives in the market economy.
The fact that we are even capable of providing for the poor while also maintaining an astonishingly high standard of living is the result of the incredible gains we've made as people interacting with each other -- allowing us to do things better, faster and cheaper. And by "people interacting with each other," I am, of course, refering to a market. The word "market" is, I think, often thought of as some concrete thing to be accepted or rejected as a form of economic arrangements. This is hideously inaccurate. The reason economists say that markets arise spontaneously is because of the fact that most (initial) interaction between individuals and groups is produced spontaneously. You don't, for example, go out to a bar with the intention of finding a new friend or girlfriend (or boyfriend depending on the case). These simply happen -- similar, as I said to Jerome a while back when he introduced his litter, to cats. No one in his or her right mind adopts a cat. Let's be honest: Cats are obnoxious animals that we would eat if they weren't so fucking nice to look at. (Or "We are all Haitians now," as Nixon might have put it.) Cats just happen.
Ten years ago, everyone was forking over £15/month for AOL's dial-up service. (They're still paying that much in Britain, if I remember the sign at PC World correctly.) I pay £22.50/month today, -- the price is admittedly inflated by the fact that BT runs everything in my section of Nottingham -- but the connection is 5Mbps instead of 28.8Kbps and includes sickeningly low rates on international VoIP calls. That -- again, admittedly inflated -- additional £7.50 buys me an incredible amount compared with yesteryear. It allows me to keep in touch with the family back home, and to download episodes of "Real Time with Bill Maher" -- the latter being quite a blessing given that I no longer own, and don't have any great desire to own, a television but still can't cope without my weekly dosage of intense politically incorrect humor.
My point is that markets generally work and should, in general (not always), be allowed to work. (The oil market is one market in which I think most, if not all, of us would agree that governments need to interfere with market forces -- or rather intensify certain market forces via regulation and Pigouvian taxation.) Efficiency is good. Competition, brutal though it may be, is good, and it is natural.
III. The True Third Way
That's, again, not to say that governments don't deserve any credit. Quite the contrary, governments deserve enormous amounts of credit. Al Gore's work in Congress -- you know, when he invented the internet(s) -- on getting funding for research that would lead to the internet is the classic example. Would the internet have arrived eventually, anyway? Probably. Or, at the very least, something comparable would've emerged. But government funding got it here sooner, sending our economy into the stratosphere during the 1990s -- lifting millions out of proverty; raising productivity so that the Federal Reserve could maintain low interest rates, thus allowing even more investment; and allowing us, for the first time since 1969, to balance the fucking federal budget.
Millions of kids go to college every year in America thanks to money allocated by the federal and state governments. An enormous number of them would not have been able to do so without that money. (I would've gone, with or without that money, but it damned-sure made life a lot easier.) My maternal grandfather is another example of smart government at work. He attended the University of Pennsylvania -- not just a college education but an Ivy League education -- on the G.I. Bill when he arrived home from the war in the South Pacific. When the war ended, it was assumed by the American government and citizenry that, with radical cuts in the inflated government payroll -- the unemployment rate fell to roughly 1% -- that inevitably occurs in a war economy, unemployment would, once again, take off. The G.I. Bill was produced to solve this problem, by providing, obviously, money for college; but also loans for small-business startups, farms, homes, and the like.
It worked, as did other programs on both sides of the Atlantic. Despite the turbulence of the coming years, America and Europe -- the latter of which came screaming back from near-total destruction to resurrected economic superpower -- enjoyed an unprecedented expansion in prosperity.
And there is a lesson in this: 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, and any libertarian or conservative who denies it is either blinded by his or her ideology or is lying about his or her true view. The underlying idea is that, in order to meet our potential as individuals, we, as the collective, must fulfill certain responsibilities. It is fair, and it is right. This, too, jibes with my personal view of the great ideological conflict of the 20th Century -- that being of communism and capitalism, where the former tends to focus too much on the collective; the latter, too much on the individual. It is a balance to maintain.
That balance, between a strong and relatively free market economy and a welfare state that both provides for the needy as well as the collective need, is what will determine the economic success or failure of our societies. Europe, in order to push its social model forward in the 21st Century, would do well to narrow and, thus (in my view), strengthen this balance.