THE ECONOMICS OF GREATER ECONOMIC FREEDOM

In the last two and a half decades, the idea of economic freedom – low levels of government intervention in the economy and wide scope for individual freedom of choice -has been widely embraced by both conservative and social democratic governments. This is because of the wide belief among many economists that liberal reforms (increases in economic freedom) have a positive impact on output and employment and on the resilience of the economy.

However such reforms often raise community concerns about possible effects on income and wealth distribution, quality of life and social cohesiveness. Governments may choose to ignore these concerns and rely on the welfare safety net and trickle down effects. Or they may decide to defer or dilute the liberal reforms and forego some of the economic benefits. Or they may try to compensate the losers through the tax/transfer system, even though it might have some economic disincentive effects. Or they may look for alternative ways of achieving the same economic outcomes without the social cost.

Which of these four courses is taken will depend in part on the extent of the social costs (and whether they are transitional or prolonged). But they will also depend on the scale and durability of the prospective economic benefits – the focus of this posting.

My overall theme is that the prospective economic benefits of liberal reform vary considerably from one area of reform to another and tend to diminish after a certain threshold of economic freedom is reached. What follows is a brief summary of the salient points. For those who want the full argumentation and references they should read a paper (Economic Freedom: the good and the ugly) published in the Australian Quarterly July/August 2007 (available from the Australian Institute of Policy and Science web site).

Comments welcome.

  1. Reforms which remove competition barriers in product, service and financial markets have potentially large economic benefits because competitive markets give sellers strong incentives to minimise costs, innovate and channel goods and services to those consumers who value them most highly.
  2. On the other hand, the economic benefits of smaller government lower levels of government expenditure and taxes per se are much more uncertain. To an economist, there is no optimal size of government. Depending on the starting point and, most importantly, on the nature and composition of government spending, smaller government does not necessarily produce higher per capita incomes. Perhaps this is why even conservative governments like Howards ignore this dimension of freedom.
  3. The same uncertainty applies to labour market deregulation. Its benefits depend on how much labour market freedom there is at the start and what exactly is being deregulated. In particular, it is useful to distinguish between four dimensions of labour market freedom.
    1. The first dimension relates to levels of government intervention in wage determination. In Australia, minimum wages have been at high levels relative to average earnings but have been steadily declining relative to median earnings in the last decade and longer. Most economists accept that this relative decline has been good for employment.But, apart from social concerns (do we want a US-style population of working poor?), many economists caution against going much further down the road of downward flexibility because it would reduce the willingness of employers to train their low-paid workers, lighten the pressure on management to innovate and reduce waste; allow relatively uneconomic industries to survive and (if the market falls below the so-called efficiency wage) dampen the motivation and effort of workers.
    2. The extent of employment protection legislation (EPL) is a second important dimension of labour market freedom. It is designed to protect workers from such risks as unfair dismissals, loss of severance payments and bad hiring practices.Even before 2006, Australia was counted by the OECD as a low EPL country. With the employers right to fire greatly increased by Work Choices (which removes the legal redress against unfair dismissals in businesses with under 100 employees and allows larger companies to sack workers for operational reasons without any great accountability process), Australia may now rank almost as high on this freedom indicator as the USA. [It is worth adding that in other respects WorkChoices is extremely prescriptive rather deregulatory].

      Studies suggest that countries with high and intrusive levels of EPL (such as France, Italy and Spain) could benefit employment-wise from deregulation. However, countries starting from low levels (like Australia) are likely to get only marginal gains in employment from a further deregulation and these need to be weighed against the loss of psychological wellbeing by workers who are risk-averse and attach importance to job stability and those who want to have a say in decisions affecting their wellbeing in the workplace, especially their working hours and conditions. This is an aspect of economic wellbeing most conventional models completely ignore.

      As to the effects of EPL on productivity, there are conflicting forces at work. EPL constrains resource flexibility at the enterprise level but tends to foster workers effort, cooperation and willingness to be trained, which is positive for efficiency.

    3. A third dimension of labour freedom is the degree of restrictiveness of unemployment benefits. In Australia, we have seen a tightening of eligibility requirements, an increase in penalties for non-compliance, a decline in the relative real value of unemployment benefits and a relentless psychological war mounted by politicians against welfare recipients. Australia still has a more open-ended system than the majority of OECD countries (i.e. the duration of benefits is longer on average) but this advantage is diminishing steadily and Australia remains in the lower half of OECD countries on generosity of benefits relative to earnings levels.Most of the literature agrees that tough eligibility and job search requirements for people of working age help ensure a worker-friendly economic environment and put extra pressure on people to break out of welfare dependence. That said, the literature also finds that generous benefits need not hurt employment if there are strong incentives for the unemployed to find work and well targeted labour market programmes such as training and wage subsidies.
    4. A fourth dimension of labour freedom relates to rights of access to trade unions.
      In Australia, trade union activities are much more legally restricted than in most other OECD countries and WorkChoices will make access even more difficult.The economic literature suggests that trade unions hinder employment. But much of that literature is out of date. Nowadays trade unions bargain on a decentralised basis and mostly operate in a tightly competitive product and service markets. In this situation, trade union leaders know that employers have a limited wage capacity and that if they push too hard, their members will be out of jobs. Indeed they have every incentive to do productivity enhancing deals with employers if that increases capacity to pay. Many trade unions have shown they can be both flexible and innovative.

      Some trade unions do operate in industries where employers have a degree of monopoly pricing power and in such circumstances they are able to extract high wage settlements. This could lead to higher prices. But if a quasi-monopoly firm is earning excess profits, the effect of trade unionism is simply to redistribute rents from shareholders to workers or, as noted below, from one group of workers to another.

      In any case, there is an economic rationale for trade unions that is often ignored or disputed. Even in a full employment situation, the bargaining power of low-skilled workers is very poor relative to skilled, professional and managerial staff: the latter are likely to get a higher share of a given employers available wage fund (which covers the wage bill and cost of other job attributes). If unions force individual employers to reallocate some of the wage fund to the more vulnerable workers, it could produce a superior welfare outcome within the firm without hurting third parties.

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Terje (say tay-a)
Terje (say tay-a)
14 years ago

Some trade unions do operate in industries where employers have a degree of monopoly pricing power and in such circumstances they are able to extract high wage settlements.

If you are refering to the employers price power in terms of labour prices then the correct word in this context is monopsony not monopoly. And in such a case it is worth noting that this situation very often involves a sector that is dominated by government ownership. For instances teachers in the education sector or nurses in the hospital sector. There is a degree of monopsony in some remote mining towns however such market power is generally regionally limited and mine workers have a lot of options if they are prepared to relocate (which given the transient populations in such communities many evidently are prepared to do).

If the point is that the employers are selling their product at monopoly prices and are thus very profitable (if not for the high wages that unions could extract) then the flow on to shareholders (eg frequently superannuation funds if it’s a traded company) is probably a more equitable way to share out the bonanza rather than giving it to the workers specifically in that industry. Although ideally competitive pressures would return it to consumers via lower prices.

Individual employees should have the right to be represented by a trade union of their choice. However I don’t think trade unions should have any special legal rights.

The following statement from the article seems a little rich:-

The economic literature suggests that trade unions hinder employment. But much of that literature is out of date.

Terje (say tay-a)
Terje (say tay-a)
14 years ago

On the other hand, the economic benefits of smaller government lower levels of government expenditure and taxes per se are much more uncertain.

More to the point the benefits of larger government is uncertain. And yet the cost per capita in real terms of our federal government is now at least 34% higher than it was in 1996. That increase was achieved through stealth and inertia and not via any serious debate about the benefits of having a larger government. See the following for some details:-

Dan Buchler
Dan Buchler
14 years ago

Can I throw the cat amongst the pigeons please? One dimension missing in this discussion is that of environmental sustainability. Of course, if the market were to correctly price environmentally damaging consumption, then there would not be a problem with greater economic freedom. However, the market does not cost environmental consumption (if I can call it that) in the overall price of goods and services. Hence the problem of global warming and general environmental degradation which as to a very large extent derived from the “wide scope for individual freedom of choice”. Environmental issues alone and the urgent need to address them, should suggest a model of greater intervention, not less.
(This is my first ever blog!)

wilful
wilful
14 years ago

More to the point the benefits of larger government is uncertain.

Terje, that merely indicates that you are introducing an ideological position into the debate, rather than focusing on evidence. So no it’s neither more nor less to the point.

Unions (3.4) feed virtuously into 3.1, with a focus on safety and reasonable working conditions.

Andrew Norton
Andrew Norton
14 years ago

“psychological wellbeing by workers who are risk-averse and attach importance to job stability and those who want to have a say in decisions affecting their wellbeing in the workplace, especially their working hours and conditions. This is an aspect of economic wellbeing most conventional models completely ignore.”

Fred – I have a post today again questioning whether the job security changes you mention really make a big difference to dismissal rates or workers’ perceptions of their chances of being sacked. I think the changes reduce the costs to the employer of sacking staff, but fundamentally sackings and retrenchments are driven by business conditions and worker suitability for jobs, and not by the legal framework.

BTW, the award system doesn’t give workers a greater say in their working hours and conditions. It does however set conditions that may be more favourable to the worker than they would achieve in market negotiation.

observa
observa
14 years ago

Dan, your point about inadequately pricing externalities(ie not paying trueer social costs cf private costs) is valid but does not necessarily call up more Govt intervention in the marketplace. It could simply be a case of devising a less intrusive intervention via the setting of the ‘constitutional marketplace'(CM). We inherit the current and historical CM but you could imagine many others. For example, imagine the Govt raising all its current revenue via 1. A carbon tax 2. Payroll tax, only. There is a lot less Govt intervention in the marketplace in both CMs over the current CM, but I’d suggest each strategy has a lot different implications for the outcomes for labour, which is very relevant to the topic here.

Fred Argy
Fred Argy
14 years ago

Andrew, thank you for reminding me of the survey evidence on worker security but I do not believe it greatly affects my basic argument about loss of psychological wellbeing. Let me spell the argument out more fully than I did in my summary piece.

When a government scales back employment protection legislation (EPL),workers feel they can be dismissed or threatened with dismissal by unscrupulous employers more arbitrarily and therefore feel more exposed to dismissal and less in control of future earnings and working hours within their firm than they were prior to WorkChoices. But note (a) it applies mostly to vulnerable workers only; (b) it is more a life cycle concern than a short term concern and (c) it is about perceptions of risk not actual dismissal or turnover rates.

Like most propositions in economics, mine is based on ceteris paribus. It assumes unchanged labour market conditions. When aggregate employment market conditions are improving (as they have been), this must inevitably alter perceptions of job security in the short term. So I am not surprised that despite WorkChoices, the vast majority of workers feel secure over the next twelve months (although it seems less true of unskilled, former unemployed – 17.6%).

Andrew, I agree with you that overall labour market conditions are more important than laws in determining job security etc. but employment laws are not irrelevant in affecting perceptions. Why else is there so much electoral concern about WorkChoices? It cant be about minimum wages or unemployment benefits or trade unionism, where the policy differences between Labor and Coalition are minimal.

Fred Argy
Fred Argy
14 years ago

Dan nice to have a thoughtful new blogger. Can I add a further comment to Observa’s. I believe economists are very conscious of the need to take account of ‘third party” effects which are not directly or immediately picked up by “GDP”. But many of the third party effects such as on the environment and on social capital are generally hard to measure (e.g. how measure the impact of WorkChoices on the psychological wellbeing of workers?). So it becomes a footnote to their main thesis.

observa
observa
14 years ago

Then ceteris paribus, a perfectly worthy defence of Govt advertising to change such ‘poor’ perceptions of Workchoices, wouldn’t you say Fred?

Andrew Norton
Andrew Norton
14 years ago

Fred – Personally, I think there is a widespread over-rating of the importance of the IR system in wages and conditions. For most workers, their overall package is probably not vastly different from what they would get in a market – though AWAs still have a role to play in fine-tuning that package. This over-rating is reflected in both the anti-Workchoices campaign and the polls.

However, we have got ourselves into a situation in which anachronisms like mandated penalty rates for routine opening times are declared to tbe benchmark of ‘fairness’. While I would reject this idea, I am likely to be in a tiny minority, consisting mainly of the employers how have to pay these rates and free-market intellectuals.

I would also take the tiny minority view that some weight ought to be given to the unemployed in wage setting, and that when a downturn comes some of the shock should be absorbed by wages rather than in job losses.

As these arguments have never convinced the public, their opposition to them also helps explain why WorkChoices is unpopular.

observa
observa
14 years ago

What Fred said too Dan. I used a couple of extreme examples of possible CMs that you might imagine would have some very different perceived outcomes. A less extreme case might be to imagine one with a total reliance on general resource taxing(land use included here) as well as carbon taxing. That may well satisfy pricing environmental concerns much better than our current observed outcomes, with much less Govt intervention than now, favouring labour over capital outcomes better at the same time. As Fred points out, that is clearly a matter of perception, as we wouldn’t really know until we tried it. It’s often about perceptions at the margin(incremental change), but sometimes radically changed circumstances might require some real imagineering.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Thanks for the post Fred,

As you think I know, I don’t like the way you set out the problem as if ‘intervention’ is somehow to protect equality and free markets somehow threaten it. As our friend Adam Smith observed, the truth is often the opposite.

However my concern is on presentation because your analysis shows your awareness of the point, and I agree with most of it. I don’t think the issue of ‘freedom to fire’ should be given the prominence you’ve given it (I expect perhaps you don’t either). We don’t have bad law there – never have – so ’nuff said.

I also agree with you that employees perceptions that they might be fired can deviate from the facts, but like Andrew I think that the main perceptions are not of legal protection. I think most sane people know that you don’t want to rely on ‘the law’ for anything much. But in the 1990s in the wave of downsizing – which was never prevented by the IR laws, people realised that they could be sacked. This was as much or more to do with people picking up the zeitgeist (most particularly managers being prepared to get into sacking long standing loyal and generally productive workers including even quite senior white collar workers) as it was to do with their knowledge of the law.

So I doubt that changing ‘right to fire’ rules will change perceptions much. Most sane employees wouldn’t want to stick around if their employer wanted to be rid of them. Still the asymmetry of risk between a worker being fired and an employer having someone leave them seems to me to be one probably smallish part of the explanation for the strange phenomenon going on in the US where so little return is getting through to the bottom end of the labour market despite high levels of employment (with the bigger part of the explanation going to immigration – mostly outside the official channels.

I think the ideas that unions in competitive industries don’t bid up wages is wrong. Unions in the car industry do it all the time – and the car industry is competitive as hell with our own firms making lousy returns. We don’t have huge wages in the car industry, but wages in that industry are clearly higher than they would be without union involvement.

Of course people can chime in ‘they can only do that because of protection’. It’s true that protection makes it easier for them – and increases the wage they can get, but that doesn’t really answer my point, which is that it stands to reason that a union will extract some margin for its services and for its collusive power. That is, at the margin they sacrifice employment for higher wages.

And I wonder about collective bargaining in firms that have produced some edge for themselves through their own good management. Perhaps Cochlear or CSL are good examples of what I’m talking about. Now unions won’t be stupid enough to drive production offshore (at least not in a hurry and not if they really know what they’re doing). So that means they can’t grab all the surplus. But the bargaining game is played with a fair bit of asymmetry of information so they can certainly make some bad mistakes as far as the long term interests of the firm is concerned.

And why should all the workers be able to extract for themselves rents that have been earned by the ‘brain workers’ in such establishments? That’s not so much a moral question as one of economic efficiency. I don’t mind brain workers making some contributions to the greater good, but it makes brain work here less attractive, and slows the growth of our most promising companies. Doesn’t it?

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Oh – and Fred,

I couldn’t find the article to which you referred on AIPS.

Fred Argy
Fred Argy
14 years ago

Nicholas, on 13, it appears the July/August edition of Australian Quarterly where my article appears is only now being circulated to members and may not be posted on the AIPS site for a few more days or weeks. Sorry.

On 12, thanks; I will ruminate on the complex points you make.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Fred,

Strike a blow for the creative commons and post the article here. If you’re not sure how to – feel free to email it to me and I will!

From what I could see of the site, the AQ remains locked content – as if the AIPS really was beavering away creating all that IP – instead of you doing it out of the goodness of your very good heart and the rest of their contributors being mostly paid off by the government (ie the people).

Tom N.
Tom N.
14 years ago

ECONOMIC EFFICIENCY vs ECONOMIC FREEDOM

While I know this “economic freedom” vs “intervention” model of gets a lot of work in the popular media and is favoured by certain polemicists, Fred, I question whether it is particularly useful for understanding the way professional economists approach policy issues.

Regarding your statement that there is a “wide belief among many economists that liberal reforms (increases in economic freedom) have a positive impact on output and employment and on the resilience of the economy.”, I would accept it to be true had you included the term “generally” before “have a positive impact”. More importantly, I don’t think that many professional economists ask simply: “will this reform increase economic freedom?” when deciding on whether to recommend it. Certainly, the institution I work for thinks principally about whether a particular reform is good for economic effiency, rather than economic freedom. Accordingly, it sometimes supports measures that reduce economic freedom, and oftens spends more time thinking about how to improve the efficiency and effectiveness of existing government interventions, and supporting institutional arrangements, than whether any intervention in warranted per se.

You also contrast the economists’ concern with “output and employment and on the resilience of the economy” to “community concerns about possible effects on income and wealth distribution, quality of life and social cohesiveness.” I have already argued in response to you on Andrew Norton’s blog why it is misleading to categorise distributional issues as a social concern and thus as something outside economic concerns.

I would also question the notion that ‘quality of life’ (QOL) considerations are somehow separate from an economic approach. The first point to consider here is that people’s desires for QOL items – such as more leisure or family time (and, their corrollary, less hours at work), more holidays, clean air and nice views etc – and the trade-offs they are willing to make between those items and material items, would normally be reflected in their preferences, and are thus captured in the economist’s model. Now, if you can mount a robust case that identifies a significant market failure that leads to an under-provision of such QOL items, then I think that most economists would be happy to endorse government actions that would rectify the situation.^ Once again, the instition I work for has at times done just that. For all these reasons, QOL considerations do not fall outside the scope of the economic efficiency criterion, even if they happen to confluct with policies that maximise economic freedom.

_________

^ With the usual proviso that MF>GF and that the most efficient intervention is used.

Fred Argy
Fred Argy
14 years ago

Nicholas,in response to your request, I will email you the paper which appears in the latest AQ. I will also attach two other related journal articles of mine which are cited in my AQ article. I could do the same for others if they like.
My reluctance to post all my journal articles on Club Troppo is partly that it would be over-kill (how many people would read them?) and partly that, on my understanding, a journal has some intellectual property rights or at least some ethical rights doesn’t it? They make their money by selling membership or individual journal copies.

Tom, you and I seem to be on the same wave length on most important issues yet we seem to be arguing on methodological or definitional issues such as what is social.

But one concern you raise is similar to one raised by Nicholas. It relates to the efficiency/equity conflict. I believe that, contrary to what you and Nicholas seem to be saying (forgive me if I misunderstand you), many efficiency-driven reforms – especially some forms of labour market deregulation – have regressive distribution and quality of life effects. There is a conflict here and I don’t see the sense in denying it.

That said, I accept (and indeed I have argued) that (a) many other factors such as shifts in international trade and immigration, the skill-intensive character of technological innovation, the higher premium on education etc. are as or more important in determining trends in inequality and (b) strong economic growth does not intrinsically require high levels of inequality.

Tom, like you I believe wholeheartedly that economists need to integrate distribution and quality of life issues into their models but there are technical problems in capturing them fully in any objective way. In the end economists must make value judgments when evaluating economic reforms. A libertarian and a social progressive may well arrive at the same evaluation of the benefits of a specific reform for GDP, employment and economic stability – yet reach different conclusions about the merits of that reform simply because they would give different weight to efficiency, equity, quality of life, individual freedom etc.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Fred,

Of course I agree that labour market liberalisation has both efficiency and equity implications. What I’m trying to say is that the generalisation that more efficiency implies less equity is very often implied in what people write – including what you write – when it’s often not the case (which was Adam Smith’s point – Smith thought that since the government interventions that we see around us are put there by and for the benefit of the rich and powerful, removing them will generally not only improve efficiency but also equity). So, while you often follow up with all the caveats, I disagree with the way in which you often frame the question.

I guess I’d put my own views this way:

1. Almost invariably reforms have some equity implications.
2. They’re often minor and there’s little warrant to compensate (given that we already have compensatory mechanisms in place – the social safety net). It sounds nice to compensate people if the government’s changed some rule and that hurts them, but why should they get special help when others are hurt in ways that are also beyond their own control and don’t get it.
3. Labour market regulation probably has strong equity effects. For that reason they should be considered carefully in labour market reform.
4. But those equity effects are not all one way. Labor market regulation seems to compress wage relativities, but it also keeps people out of the labour market at the bottom end. They’re the most important consideration for policy.
5. As you know, these considerations take me in the direction of the Scandinavians, not the US. (A value judgement).

Tom N.
Tom N.
14 years ago

Yes Fred, I suspect we’d come out with quite similar positions on a range on matters, or at least we’d probably agree on what are the important things to weigh up.

Even so, I think that it is important to get the language ‘right’ on these matters, particularly because you are a well-known and respected economic policy adviser. In this respect, my concern is that, rather like Gittins*, the way you portray the issues might well give lay people a false impression about what economics covers and what economists actually think and consider. While I recognise that you are necessarily simplifying the presentation for a broadish audience (as any expert in any field does), I feel that we “nasty, narrow minded, New Right, neoclassical economic rationalists” – as our critics see us – are misrpresented enough already, without needing to add to the problem ourselves.

Regarding labour market “deregulation”, I agree that equity issues come strongly into play here. However, I give more weight to the welfare of the truly lowest paid in our society – ie the unemployed – than I do to low-skilled workers, and thus I do not find the fact that wages and conditions to the latter group have fallen under WorkChoices to necessarily be a bad thing, since it seems reasonable to believe this ‘correction’ may well explain at least part of recent employment growth. Moreover, in principle it seems to me that negative income taxes are a better way of addressing the wellbeing of these low-skilled/low pay workers than labour market arrangements that exclude many from the income, skills development, exposure to pro-social norms, networking opportunities and other benefits of being in employment.

One final point, I think there are plenty of judgments, including judgments about trade-offs between material and non-material ends, involved in determining whether a policy promotes economic efficiency, but I do not agree that they are “value” judgments. Here, I agree with Kew-Yang Ng’s (Welfare Economics) distinction between these terms.

_________

* Actually, that’s unfair, because Gittins often misrpesents economists almost wilfully, it seems to me. Still, perhaps he’s just meeting the demands of his target market!

Fred Argy
Fred Argy
14 years ago

Having read your viewpoint, there is nothing between us (as I suspected all along). I might add some words to point 4 such as “there are often good policy measures which can achieve the same employment outcomes as labour market deregulation with a more even distribution of the costs and benefits but with higher taxes”. This would provide a link to point 5.

Fred Argy
Fred Argy
14 years ago

Tom, thanks for spelling out your thoughts on labour market deregulation. We agree on the basics but we have a distinctly different bottom line. Let me explain.

I agree that the unemployed are the worst off in our society and deserve policy priority. I also agree that unemployment could be appreciably reduced through a deregulation policy which encompassed (a) downward wage flexibility (b) low unemployment benefits (c) stringent restrictions on trade union activities and (d) low levels of employment protection (EPL). And if this was the only way for governments to help unemployed into work, I would have to agree with your prescription.

But is it the only way? There are in fact alternative strategies. For example, the Danes have achieved even lower unemployment rates andhigher employment rates than Australia through a policy called flexicurity. They have few restrictions on the employment contract i.e. on hiring and firing (although their EPL is slightly higher than Australias). But they reject solutions (a) (b) and (c) and instead opt for active labour market programs such as training and wage subsidies and work experience in the private sector). These programs are automatically implemented once a person has been unemployed for more than a period (12 months I think). People are shamed into getting a job before that threshold period is reached because it does not look good to be on these programs. It seems to work. . .

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

As promised – I’ve now linked Fred’s complete paper above. So you can download it from the link in the original article or from here (doc).

Jc
Jc
14 years ago

Fred

can you demonstrate that the Danes, the Swedes or whoever are classifying their

Patrick
Patrick
14 years ago

NGruen in particular might find this paper interesting.

It seemed very in line with some of his comments re Adam Smith to me. Soundbite:

[T]he goals that are traditionally held dear by the European left like protection of the economically weakest and aversion to excessive inequality and un-earned rewards to insiders should lead the left to adopt pro-market policies. What has often been the norm in Europe from the 60s until recently heavy market regulation, protection of the status quo, an enormous public sector which rewards not the very poor but the most-connected and requires highly distortionary taxation, universities which often produce mediocrity in the name of egalitarianism (while the very rich get a good education anyway, somehow) all end up decreasing efficiency and justice at the same time.

Conclusion:

Reformists in Europe should refuse to be pushed in the corner of the equation: more market equals more injustice. It is exactly the opposite. Accepting this equationand trying to apologise for it is certainly not the way to win the battle. If the European left wants to be able to say honestly that it fights for the neediest members of our society, it must adopt as its battle cry the pursuit of competition, reforms and a system based on meritocracy.

(via freeexchange)

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Thanks Patrick.

My point entirely. “Il liberismo

Patrick
Patrick
14 years ago

Or a revitalised right-leaning party. I personally see more visible reform potential in voting for Costello/Turnbull than in voting for Ruddy Gilliard.

‘Sinistra’ certainly is a scary word for ‘left’ – imagine the political joke potential inherent in that!

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Costello has shown himself to be such a strong leader. . . .

Fred Argy
Fred Argy
14 years ago

JC (comment 23), we had this statistical argument lots of times before. You reject Nordic employment and productivity figures. I do not. If you really want to know why I could send you my article (Employment policy and the clash of values”) which was recently published in the Journal Public Policy volume 1, number 2 2006. Give me your email and I will gladly do so.

As to Australia “aspiring” to emulate the Nordics, that same article of mine looks at the question of whether the Nordic model is sustainable or exportable to Australia. The answer to this second question is “yes – but only to a limited extent”. And that is the key point you seem to overlook: I am not arguing that we should embrace the whole Nordic model lock, stock and barrel. It is selective adoption of their ideas that I am advocating. Australia is moving more and more towards the US model but there is nothing to stop us moving just a little towards the Nordic model instead.

Backroom Girl
Backroom Girl(@backroom-girl)
14 years ago

Hi Fred

I’m coming in rather late to this discussion, but I thought I should just say something about your point on the generosity of unemployment benefits.

Australia still has a more open-ended system than the majority of OECD countries (i.e. the duration of benefits is longer on average) but this advantage is diminishing steadily and Australia remains in the lower half of OECD countries on generosity of benefits relative to earnings levels.

In fact, Australia has a completely open-ended system in that there are no time limits on benefit payments so theoretically you can receive them forever.

On the relative generosity of our benefits, this is an inescapable consequence of our decision way back when to go down the route of having flat rate, means tested benefits funded from taxation revenue rather than through social insurance. The only reason that most other countries have more generous benefits that us is that the workers helped to pay for them through insurance contributions and in most, if not absolutely all, countries part of the deal is that they get back a reasonable proportion of their previous income when they claim benefits.

So for middle to high income earners, our system is less generous, but for the lowest income earners it is more generous ie their replacement rates are probably higher in some cases than in social insurance systems overseas. And we cover lots of groups that get nothing out of social insurance at all, such as young people joining the labour market for the first time and people without a recent employment history.

Peter Whiteford, if he is listening in, could probably confirm that when you compare Australian income support with social assistance schemes in other countries (which is where you end up if you don’t have a good recent employment history), Australia doesn’t come out too badly at all.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Thx BG,

And exactly why I argue that Fred should be more careful with terminology and what’s implied in terms like ‘generous’ and implied ‘equity/efficiency’ tradeoffs when the issues are almost invariably in the detail.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Btw, here’s some figures that people might find of some interest.

Patrick
Patrick
14 years ago

I can definitely confirm that France pays you unemployment benefits relative to your actual salary prior to being sacked!!

So I should think that Fred agrees that whilst more generous, France is less equitable, or indeed positively iniquitious.

Also, generally, the benefits are capped at 12 months by which stage you are well and truly obliged to be jumping through hoops such as training course/actively searching employment. In fact at that stage you become ’employed’ by the ANPE (centrelink, roughly), for between 3-18 months.

Since I doubt Fred has lived on centrelink in any countries, he should judge carefully here.

Fred Argy
Fred Argy
14 years ago

BG, Nicholas and Patrick, I do not really want to get bogged in the complex subject of international comarisons of welfare generosity. In fact I don’t know why I mentioned it at all – it was really irrelvant to my earlier post. The basic concern in of that post (and my AQ paper on economic freedom) was with the following question: have unemployment benefits become less generous in Australia than in the past and is that a good thing? My answer was yes and no. I propose to post another short Club Troppo piece soon to explain again why. Thank you all for spurring me on.