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'Flexicurity': Can the Welfare State Survive in Europe?

by Drew J Jones Tue Nov 21st, 2006 at 06:21:59 PM EST

The lot of us are well aware of the all-out war going on in European politics over the alleged inflexible labor market that -- again, allegedly -- plagues the Continent.  In the editorials of The Wall Street Journal and, albeit to a far lesser extent, The Financial Times, we have the view that Europe must radically restructure its economy, slashing welfare and taking away job security.  On the Left we have the view that this is merely a play by big business and the wealthy, in an age of economic uncertainty (not helped by recent experience in the United States), to shift a larger share of national income into their pocketbooks.  What is frustrating to me, both as an economist and as an American liberal, is the view which, as I said in the Breakfast thread, states that flexibility and security are mutually exclusive in this case.

I call bullshit.

The truth is that both flexibility and security have their strong and weak points -- another of many examples of the world not being not so easily painted in black and white.  But, as anyone who has ever spent more than five minutes in a logic course can tell you, it does not follow that taking one necessitates giving up the other.  (Not only does it not follow, it doesn't even hang out with....)  They are not mutually exclusive.  In fact, depending, of course, on what we mean when we use each word, they are (or should be) complements.  As everyone who has ever read my diaries on economics knows, I am a rather militant Keynesian -- a follower of a set of theories on business cycle management that has been, for the last seventy years, the pillar on which my argument rests.  Here's why.

(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.

I really enjoyed this diary Drew, and am pretty much in agreement with all except I don't think the following policy (which I agree with)
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.
leads to this conclusion
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.
And just to match anecdote with anecdote, I don't think the tremendous pork, and spending, that Senator Robert Byrd has brought home to West Virginia for highways and other projects named after him, has been a good investment.  I don't think it's the "people on Wall Street or in the City" either, but rather individual investors evaluating companies, or funding start-up companies, etc., etc.  (By making this comment I don't mean to imply government should not have the responsibility to modify the competitive market place--it should in all kinds of areas from anti-trust legislation to heavy penalties for poluting the environment.  Nor do I mean to imply that all government spending is bad--the programs you refer to were great, brilliant, and effective).  So there is a clear role for both, but "governments are the most important investors on the planet"?  A bridge too far for me,,,,maybe you could elaborate on that point a better clarify what you mean.
by wchurchill on Tue Nov 21st, 2006 at 08:33:31 PM EST
While what you say about pork is generally true, I would argue that the lion's share of intrer-regional investments in the US since the New Deal, in education, rural electrification, and in

In fact, in this regard, the US has perhaps something to teach the Europeans, as discussed awhile back in a compelling article by James K Galbraith.

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

by r------ on Wed Nov 22nd, 2006 at 11:58:37 AM EST
[ Parent ]
oops, cut off. "...and in interstate transportation has undoubtedly been a boon to economic growth and prospoerity which, at least initially, was broadly shared by all Americans."

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Wed Nov 22nd, 2006 at 12:43:34 PM EST
[ Parent ]
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 ]
Drew, I found this diary both extremely interesting and well-written. You obviously know your stuff (if that doesn't sound too fatuous).

However, I don't quite see how you would apply the points you raise to the specifics of the European social models. Can you describe some examples?

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Wed Nov 22nd, 2006 at 04:45:30 AM EST
That's a big ass diary, Drew.  I wish I had more time to digest it.

What is frustrating to me, both as an economist and as an American liberal, is the view which, as I said in the Breakfast thread, states that flexibility and security are mutually exclusive in this case.

I call bullshit.

I want to agree with you.  I struggle to understand economics, but I really want to believe that we can have both flexibility and security.

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.

Brutal, indeed.

What is your take on today's story, VW CUTS - Thousands of Jobs Endangered in Brussels?

If Belgium were to implement a similar apporach as the "Nordic" model, could this mass disappearance of jobs possibly lead to a "renaissance", as this presentation claimed happened in Uppsala when Pfizer

Recommendations for developing a region's resilience

Resilience of a region: partnership approach

Resilience for a region means its ability to absorb shocks and stress. It can be resilient and overcome massive change if the proper parameters and tools are in place.

The years to come may see an increase in the realignment of large companies, posing a threat similar to the one described in this case example and for many regions in Europe. The resilience of a region cannot be created by one entity alone.  Integration of entrepreneurial spirit, experience, managerial skills and capital are key ingredients, and must be available when needed.

Some tips

  • Regional governments have the responsibility to mobilise all elements in building their regional anticipatory resilience. They need to encourage the study of various scenarios; to develop options regarding what would happen if established companies change course and move away from their region; and to prepare accordingly.

  • Professionals and scientists taking on the role of entrepreneur need initial support in the management and running of their companies.

  • Pre-seed and seed money needs to be made easily available in the short term (from start up to two to three years) to finance the new companies' development and early survival, since venture capital can only be attracted when the new enterprise becomes viable within a period of some two to three years.

  • Experience and technology transfer skills are required and must be made available in open dialogue with regional research institutions and universities.

The case example was presented by Mr Gunnar Eliasson and Mr Per Lindstrom. Mr Eliasson is professor at the University of Uppsala and has looked at the region's resilience as part of his academic work. Mr Lindstrom is a former Pharmacia manager and currently represents his own company, Meadowlands Business Partners, which supports many of the newly created companies in the region.

Clearly the automobile industry -- as in the VW/Brussels case -- and the pharmaceutical industry -- as in the Pharmacia/Uppsala case -- are quite different.  But does the example of Uppsala's recovery from a sudden mass job loss have anything to offer to the current, seemingly disastrous situation in Brussels?

Truth unfolds in time through a communal process.

by marco on Wed Nov 22nd, 2006 at 04:54:44 AM EST
While I agree in principle that at first glance, your economically liberal, yet reasonable, point of view seems to provide for optimism that this is the best of all possible economic worlds we are living in, I and I suspect other lefties like me will continue to have our doubts.

The reason for this is, I suspect, that human history demonstrates over an over again that human nature tends toward accumulation, of power and of money, and that eventually, those who are doing the accumulating tend to consolidate those gains for posterity, and in so doing, are willing (and in fact, they sometimes relish) subjecting fellow men and women to oppression, poverty, insecurity of person and death.

Keynesian theory is all very well, and as a time piece which was the mid-20th century and its attendent crises (note plural, the Great Depression was but one of them) of Capitalism, it served a purpose to extend the interests of Capital in America and in Western Europe by softening the harsh impact of what had heretofore been described as the benevolent invisible hand but which was now shown to be anything but. And if I were to assume a theodiciean perspective on the matter, and ignore human nature, I would likely be inclined to buy this third way which you, and Bill Clinton, and Tony Blair, have been pitching.

Alas, that's not the way the truly Wealthy, those who have inordinate control over allocation of capital, operate. They refuse to pay all but a pittance of their share of taxes and the externalities of their activities. (And why should they? The noblesse levies taxes, they don't pay them.) When the occasion arises (and they lobby much so that it does) they pry open the door of public coffers so as to ensure the public wealth is allocated on projects which further their inordinate share of productive capacity. They demand the right to transmit their wealth, unfettered, to their offspring, as if the right to allocate capital were a Divine right. They minimze the rights and securities of the lower classes by any number of policies (or lack thereof) so as to more efficiently mobilize and motivate tax-disadvantaged labor and thereby increase their tax-advantaged rents. Fear of unemployment, fear of poverty, fear of loss of access to health care, fear of loss of access to upward mobility for one's children via education - all great motivators. Add fear of starvation for those folks in the "South" whose livelihoods your multinational corporations are destroying, then see them migrate "North" and further feed the merciless circle of insecurity for the poor in the "North". And if you've a middle-class person still posing a principle-agent problem for your labor efficiency paradise whose returns accrue not to laborers, but shareholders, there's always debt to get 'em on the hook, not to mention screwing with the pensions so as to simulate, for them, that your interests are effectively theirs.

That's the nature of the system which Keynesian policies seek to tweak around the edges, and if you're living in America, we've seen now for 30 years what it really means. In my relatively affluent city, despite the wonders of the Clintonian economy which liberal myth describes as a tide which lifted all boats, there are three times more homeless people than in 1980.

I respectfully submit that we forget about the tweaking, throw the whole damn thing out.

One last note - Friedman's work, as others, on what sorts of combinations of stimuli, both monetary of fiscal, might have cushioned the unnecessarily harsh blow of the economic crises of the 1920's and 1930's, are well taken to heart, for it is true that monetary policy in particular was horrendously bad in the aftermath of the crash.

This being said, let's not forget two things. First, while disasterous, at least as far as the US experience show (France having a bit different a history), industrialists, in large part via the supreme court their political clients had installed, fought what little stimulus was attempted tooth and nail. Why? Because that is the way such classes tend to define their interests, and this hasn't changed. And second, we are always prepared for the crisis which last took place, but rarely do the next ones, those momentous enough to knock the shit out of the political systems of numerous countries simulatenously, look the same as the previous ones.

Whether the welfare system can survive in Europe, on the other hand, is an entirely different question. It most certainly can. Whether it will, on the other hand, depends on whether the continent has the balls that the English have shown themselves, via Blair, so sorely lacking. One thing's for sure - the neo-liberal drift in many parts of the continent do not bode well for its prospects.

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

by r------ on Wed Nov 22nd, 2006 at 12:40:36 PM EST
Yup, that's about my take. However, culture has a huge effect on what the popultions are willing to endure.

America is a gambling nation, where winner takes all and losers are encouraged to think their lack of real opportunity is somehow their fault. they remain quiescent. Europe, except perhaps the UK which attmepts a curious mid-atlantic compromise that gives them the worst of both, has a different view. They understood the behaviour of the rich was not in their interst and had their revolutions to shackle them.

so they're less likely to be taken in by slavers offering bright shiny baubles in exhcnage for their economic security. But they must resist the siren call of the British, who are not to be trusted in this.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Thu Nov 23rd, 2006 at 04:03:21 PM EST
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