Economic Theories and Social Justice. Part II. Who Minds the Gap?

At the March 2004 summit in Brussels, progress was cursorily reviewed, though other items on the agendas have left little time and interest for the economy. Each government awarded itself good marks for its wise and decisive policies. In fact, with the exception of Spain, Portugal and the Netherlands, (Britain was already ahead of the rest thanks to the radical Thatcher reforms of the 1980s that Labour has preserved and built upon), progress by most of the others consisted of two steps forward and two steps back. In France, “progress” has consisted rather of three steps back. Romano Prodi, the outgoing President of the European Commission who, told them to their face that he wished they would stop pretending that they are even trying to implement the Lisbon Programme.

1. Mind the Gap!

Users of the London Underground are familiar with the sonorous warning of the loudspeaker at certain stations to “Mind the Gap!” between the carriage and the platform edge when getting on or off. The message of the Lisbon Programme can be compressed into the same warning shout to “mind the gap”, though here both the gap and the danger it holds are metaphorical, but no less serious for all that.

The gap, of course, is that between the sadly wilting economic performance of the core states of Europe and the vigorous growth of China, South Korea, India—and, more painfully and embarrassingly—of the United States. For it must be recognised that while most Europeans think that fast development in Asia is rather a good thing, they find being outperformed by America in the last two decades quite hard to take.

In fact, one cannot really grasp the contradictions of European opinion in matters of political economy without constantly bearing in mind the mostly subconscious, visceral hostility to America felt by so many Europeans (the “intellectuals” and the politically articulate and active more than most) that Americans find so mystifying. Because America is growing faster, “we”, as the aforementioned Europeans argue, must speed up and at worst stop the gap from widening, at best close it. But because America is brazenly capitalist and knows no social justice, “we”, they argue further, reject capitalism (except as a last resort the well-regulated, tame sort) and insist on widening and deepening the sway of social justice.

The gap is deplored and there is a genuine desire to reduce it if that is feasible without sacrificing what goes by the name of “the European social model”. They wish this only in part, but only in part because more growth is still widely regarded as good in itself despite ecological objections. In great part, however, reducing the gap is a matter of pride, a virility symbol that would sweep away any suggestion of superior American prowess.

To mitigate shame about the gap, a good deal is made of statistics that cast doubt on its very existence. Relatively recent growth rates of national product favour the US, but statistics going back fifty years or a century do not. Moreover, faster American growth since the 1970’s was accompanied by a swelling of the current account deficit, i.e. by heavy capital imports from countries poorer than America, an apparent anomaly that tarnishes the US record. In a sense, it was “too easy” for America to grow faster by hogging the savings of the rest of the world, even if the rest of the world had willingly lent itself to this aberrant relation.

Another line of European defence rests on productivity comparisons. It is accepted that American productivity per man/year in manufacturing is higher, and in services much higher, than the European one. But this is wholly accounted for by the much longer American work-week—an average of 42 hours against 34 in Western Europe (ex. Britain)—and the much shorter American vacation. Productivity per hour worked is fully as high as, and in some areas higher in the euro-zone than in America.

(It is worth noting, though, that the high European productivity per hour is in part due to the age composition of the work force. Many under-25s linger on in real or pretended higher education, and many over-55s go or are eased into early retirement. The 23-55 age group, which is somewhat more productive than the younger and the older ones, is thus over-represented in Europe. Heavier unemployment among the young and the old acts in the same direction).

Where the gap is more threatening, and where it ought really to be minded, is not in the comparative levels of productivity, but in their growth rates. Statistics can be made to say many things, but most things they say about productivity amount to a gap of about 1 percentage point between the US and European growth rates of the various productivity measures in America’s favour. This would be no great matter if it were a passing phase. But if it is destined to persist for a generation—which on the present showing looks far from impossible—the gap could become abysmal and the effect truly shattering for European self-respect. Europeans might come to look upon America with the same sense of failure and despair as Arabs now look at Europeans.

2. The favorite Model

While large segments of European opinion—the self-employed and much of the political right—do “mind the gap”, the majority of opinion-makers and behind them the political centre and left, hold a more ambiguous and self-contradictory position. For public consumption, they mostly refuse to see the gap or explain it away by citing transitory causes. When speaking more frankly, they acknowledge it as part and parcel of a “European model” that is less money-grubbing, milder, gentler and above all socially more just than the American one. Some diehards still insist, carrying on the Soviet tradition despite the catastrophic results it had brought, that with proper planning an egalitarian, socially just society is not only capable of creating wealth just as fast as the capitalist “free-for-all”, but can in fact show it a clean pair of heels.1 The great majority, however, reluctantly admit that this model is intrinsically slow and could only run faster if the parts they most cherish were drastically modified.

The long and short of it is that the increase in material wealth and social justice are regarded by the dominant strand of European opinion as two rival gods. If the economy is driven to deliver more of one, it will inevitably deliver less of the other. The social and political mix incorporated in the American model will make it deliver more wealth and less social justice; the European model will make it do the opposite.

This is very broad-brush economic theorizing and it is easy to bring it down to earth with some hard-headed scrutiny. However, it has the great strength of meshing remarkably well with the ideological defence of social justice. For if material wealth and its equal distribution are two rival goods that can be “produced” in variable proportions,—more of one entailing less of the other—asking which is “better” is a silly question. There shall be no dispute about tastes; it is for the consumer to decide what dose of each good he prefers. The American apparently wants to tilt the “product mix” more towards riches, the European favours a mix with more equality even if that means somewhat less wealth.

But how do we know this? The centre-left and socialist answer is that we have it from the horse’s mouth: European voters time and again vote for the “European model”, punishing governments that flirt with liberal economic policies, dismantle subsidies, embrace free trade a little too heartily, tamper with the legal privileges of labour unions, refuse to finance an ever growing share of health care from general taxation, try to reform pay-as-you-go pensions and give public education an “elitist” twist. Governments do make small and cautious steps towards such goals simply in order to keep the system from seizing up. But they have to pay a heavy price and are lucky to last out a legislature if they deviate perceptibly from the pursuit of “social justice”. The electorate apparently knows very well which model is its favourite.

3. When Rates Start Fighting One Another

Something, however, must be wrong with the confident claim that the “European model” of superimposing on the economy a far-reaching redistributive mechanism is in fact a straightforward case of revealed preference: the electorate gets the advancing welfare state because that is exactly what it wants. How does one square this idyllic picture of consent and contentment with the infighting, the sourness and the strife that are becoming the mark of everyday life in most of these societies?

A parallel suggests itself that is crude and disrespectful but—alas—fairly accurate. When population and the food supply are in equilibrium, a rat colony is internally peaceful, but when the balance tilts the wrong way, its members begin to quarrel and fight each other. Likewise, when the development of the welfare state takes place on the back of a vigorously expanding economy, creating a new welfare entitlement for one group,—say,old-age pensioners, single mothers, aspiring college students—does not prevent the claims of other groups to be satisfied the following year. Health care coverage improves, unemployment benefits increase or are prolonged, the unsaleable works of would-be artists are bought by the local government and warehoused (as was till recently the case in the Netherlands), and so forth. At a rhythm dictated by the electoral calendar, bits of additional social justice can be handed down all the time. Each claimant group gets its turn and there is enough or nearly so to go round.

These good times were enjoyed in “never had it so good” Britain in the 1950s and 60s and in much of Continental Europe in the 1970s and 80s. In both areas, the trade-off between wealth and social justice eventually shifted much too far, and welfare started to stifle the economy. In Britain, the absurdity of the result became so apparent in the strike-bound 70s that finally the Thatcher reforms became politically possible. On the Continent of Europe, rival interest groups are still mostly deadlocked, the economy is broadly speaking still stagnant and unemployment is bumping against the 10 per cent ceiling. Reform in Germany and Scandinavia is creeping on timidly, but is stuck fast in Italy and especially in France. Every interest group is defending its “social rights” with tooth and claw and is trying to gain additional ones to pre-empt similar attempts by the other groups. Outside the strict welfare sphere, the same pre-emptive infighting is going on in the public services and the industries where the employer is the government, so that in these sectors of the economy labour’s unbeatable bargaining lever is its voting strength.

Arguably, all this must first get worse before it can get better—as one day it probably will. Meanwhile, this desolate and strife-torn scene offers admirable scope for studying how the economics of social justice really works.