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Tuesday, January 29, 2008

Inequality and Prosperity

Inequality and Prosperity: Social Europe Vs. Liberal America by Jonas Pontusson was a book for my second directed reading class (the first one being basically me working on my thesis). In basic terms I already knew a lot of the points that Pontusson made, having taken a class on the American welfare system in Germany right before I left. Still, the amount of data in this book was quite overwhelming (and made for dense and slow reading).

Pontusson's argument basically is that unlike what most Americans (and Europeans it seems for that matter) think there are some lessons to be learned for the USA from European systems (especially the Nordic ones). He firstly, and importantly, refutes the notion that European welfare states are restrictive of growth. This, because those two did go hand in hand during the 1960s and 70s after all, while there is no clear correlation between the two for the 80s and 90s (if the Nordic states are taking out of this equation there is a clear-cut correlation though even if Pontusson never mentions this). The main criticism of the European systems that he puts forward is related to the low employment rate (because of lower female participation rates and early-retirement plans enacted during the last two decades of the 20th century (and still today)).

Yet, his main point I believe is a normative one, specifically, that the USA should try to implement some of the positive aspects of European welfare states. Namely, wage solidarity (possibly through Union negotiation powers) which limits unproductive agencies (due to a kind of convoluted argument that claims that lower wages for unskilled workers subsidize unproductive industries (this because compressed wages due to union activities put a higher premium on capital and thus lead to its more efficient usage)) and prevents social unrest and losses through constant strikes (see France :)). Furthermore, higher investment in public education as a public good (with the German trade school system to some extent being held up as an example) and more active labor market policy. As an extra argument, (I would have included this in the active labor market policies) 'family policies designed to facilitate female labor participation' and, finally, more universalism as opposed to means-tested assistance as a means of increasing public acceptance to welfare programs.

He does make a convincing case for the most part, offering up an incredible amount of data, even if some of his statistics seem doubtful (significance at 90%?). Yet, he stays very much on the ground analytically, meaning he mostly refrains from deeper analysis, which does not necessarily detract from his main argument (see above), but leaves the reader exasperated at times. Also, some of his theories make an impression of containing at least some wishful-thinking. Thus, he argues that the EU unemployment rate is artificially high, because the current account balance (as % of GDP) needs to be deducted from it. While in theory, the long-term current account balance needs to rest at an equilibrium, this does not mean that its effect would necessarily be lower unemployment, adjustments could also take place through wages.

Lastly, one fun fact on the USA: If the prison population is included American unemployment rises from 5.6% to 7.5%. For the EU the same change in people considered results in an increase from 8.3% to 8.5% only.

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