Well we’re seeing similar economic policies on both sides of the pond, namely defecit spending and tax cuts (in the EU, with specific reference to France and Germany).

The US has also made it pretty clear that it wants the dollar to fall and the effect of breaking the stability pact - which the French and Germans seem pretty intent on doing - would normally drive down the Euro’s value (I think!).

of course that adds competitive devaluation to all the other stuff we’re supposed to be worried about…

The problem here is that Europeans seem to want a bunch of incompatible things all at once; no one can or ought to force women to have more babies against their will, most Europeans strongly dislike the prospect of more immigration, particularly that of people who aren’t “white”, Europeans refuse to trust any of their retirement income to the financial markets, and yet workers want to be able enjoy 30 years or more (1) of well-paid idleness!

Something has got to give, and whatever Berlusconi manages to push through will be at best an interim measure, with yet another attempt at reform to be expected within the next 10 years or so. The same is true of France and Germany. Raising the retirement age by a few years to an awe-inspiring 62 (2) is like applying a plaster to a wound that’s in need of stitches.

(1) I read recently that the average female child born in Europe today has a 50-50 chance of living to be 100!

(2) I’m being sarcastic, in case anyone is in doubt on the matter. I realize that not everyone who might read this is a native english-speaker.

NB - Could the administrators here consider switching on HTML tags? The <SUP> tag in particular would have come in very handy in making this comment.

“refuse to trust any of their retirement income to the financial markets”

Abiola, I think this problem is greatly overdone. There is no real difference in principle between the two ’pillars’. The only problem is the first pillar has already been spent on the previous generation. So you need the second pillar, and you get to pay twice. It simply isn’t an issue about social and private.

At the same time if all the extra saving leads to a general OECD slowdown, and we get Japan style asset price deflation as a xmas present to accompany this, then all those private pension funds won’t be worth too much either. So you could get to pay twice and lose twice.

Or again are you suggesting investing now in India and China, and you get to see the fund value blossom as the renminbi and the rupee rise. This would mean Europeans hedging against their own economies, and again pension funds do tend do be rather risk averse so I can’t see them doing this too systematically.

Ah, pensions reform, a subject that generates more heat than light.

Italy has a demographic ’problem’ (if people living far longer than their parents can be called a problem), in which it will soon have lots of old people and not many young people. This puts pressure on its pension system, because pensions are basically a transfer of goods and services from young people to old people.

However, when for exampple The Economist notes (latest issue, p.91 UK edition) that ’public pensions gobble up as much as 15% of GDP annually’ in Italy, and this is because ’there is no huge pot out of which future obligations can be made’ it is talking utter rubbish.

If public pensions cost 15% of GDP in Italy, then regardless of whether those pensions were private, public, corporate, or whatever if you don’t wish those pensioners to have a lower income, pensions are going to cost you 15% of GDP. You can’t say spend 5% of GDP on pensions and get the other 10% from some mythical ’pot of money’, regardless of your pension system*

Thus any ’reform’ has to look at the basics -- are pensioners getting too much money (quite possible in Italy), are there too many pensioners (raise the retirement age), are there too few workers (change working practices, immigration), could each worker be more productive (investment).

What’s not particularly important, at least as far as pensions provision is concerned (it might matter a lot for political reasons) is the setup of the pension scheme -- whether private or public, funded or unfunded.

* the exception, and one that some sensible countries have done, is if you have large overseas assets. Then your demographics become less relevant.

Whoops -- my comment was made simulataneously with Edward’s. Any repition is therefore unintended, rather than merely unoriginal.

“At the same time if all the extra saving leads to a general OECD slowdown, and we get Japan style asset price deflation as a xmas present to accompany this, then all those private pension funds won’t be worth too much either. So you could get to pay twice and lose twice.”

I don’t agree that one would “lose twice”; the fact is that no PAYG system of the sorts currently on offer can be infinitely sustained without betraying the promises being made to younger taxpayers anyway, because population growth cannot be infinite. A transition *will* have to be made at some point, or else the net benefits received by future generations will be far less than what they paid in. Investing in the financial markets is the only realistic way to avoid such a blatantly unfair outcome, as neither *extremely* large-scale immigration of the sort that would be required, nor 1950s-style families, are at all realistic possibilities. Indexing the retirement age to life expectancy would make PAYG schemes sustainable, but only at the cost of making the ripoff even more egregious than it already is.

In any case, you’re making a hidden assumption here, namely that the payroll taxes governments impose on their workers are being more productively “invested” than they would be under a more market-based pension system. In reality, every dollar invested in a pension fund is a dollar less paid into government PAYG systems, and I’d trust the judgement of even the most conservative pension fund manager over that of the average politician anyday. Why should dollars diverted from politicians’ hands somehow be less productive in the hands of private agents?

I think all talk about monetary movements is really a red herring when it comes to discussing the effects of greater saving. If you subscribe to Solow’s growth model, in the long run growth can come from only a few sources. In the case under consideration here, the two sources of greatest relevance would be capital deepening and higher productivity. At worst, we’d have a one-time boost from the former, but the latter would be sustainably improved if governments did less of the investment allocation themselves and left such decisions to the markets.

Japan’s difficulties have little to do with “oversaving” as much as with a deeply troubled banking system which the country’s leaders are afraid to take a broom to, along with an extremely wasteful allocation of Japanese savings by politicians with easy access to Japanese savings, thanks to their control of the postal savings system. That is why Koizumi’s proposal to privatize the system is such a big deal - it would mean the end of cost-free loans to (for example) bankrupt but politically-connected construction companies that build roads and bridges to nowhere in particular. Japan’s export sector is world-class - it has to be - but it’s domestic firms are often horribly unproductive when compared with their western counterparts, and this is very much due to the sheer amount of political interference and backscratching there is in all parts of the domestic sector, mostly paid for with (you guessed it) Japanese “retirement” funds.

If anything, Japan is an argument *against* giving governments so much control over how the retirement savings of their citizens are spent.

“Investing in the financial markets is the only realistic way to avoid such a blatantly unfair outcome”

How does that change the basic problem of less working people and more idle retiree? Switching the problem to “investing in financial markets” only means that 20 years down the road, there will be lots of people willing to retire, trying to sell these investments, and few worker investing for their own future retirement. Result : the market crashes, and indeed, those that are investing right now don’t get a fair return.

“Why should dollars diverted from politicians’ hands somehow be less productive in the hands of private agents?”

Most of the money you pay in a PAYG system is not put in the hands of politicians, but in those of the actual retirees, who certainly are private agents.

And although sometimes private agents are efficient, sometimes they aren’t, and many don’t want their retirement ages to be determined by chance - a strong possibility in a market-based pension system.

“At worst, we’d have a one-time boost from the former, but the latter would be sustainably improved if governments did less of the investment allocation themselves and left such decisions to the markets.”

A lot of the growth of post WWII Europe was made possible by nationalised, government-controlled companies, something we often are quick to forget.

And again, in a PAYG system there are few investments done, only when demographic changes requires it ; in a state of demographic equilibrium, no investments are needed.

“Italy has a demographic ’problem”

It’s not just Italy, it’s every OECD country outside the US. The US is only different because of the extraordinarily high immigration of the late eighties and ninetees. Two states in India and several developing countries are already below the 2.1 replacement fertility level. I don’t think this is overdone, it is the major stuctural problem of this century.

“getting too much money (quite possible in Italy)” On the numbers I’ve seen pensions already seem fairly low in Italy, they have had two previous downwards reforms. Southern Europe as a whole doesn’t have anything like the welfare infrastructure of the North. Most of the burden for caring for the elderly falls on the female family members.

“no PAYG system” Abiola, on this we agree. I am not advocating Paygo. This is pyramid selling, a Ponzi scheme. What I am saying is that private pensions can’t necessarily guarantee anything better with declining populations. Property prices, for eg, could eventually exhibit the same pyramid-based decline as less people need less houses.

My point is that having a contributions defined, as opposed to a benefits defined system could be either public or private, there is no difference in principal, it’s a pragmatic choice. You are clearly more comfrtable with a private scheme. OK But remember Enron. You still need regulators. Pension funds need different risk criteria. If making money was easy any fool could do it, etc.

“more productively “invested”” No I’ll make the assumption more explicit, more safely. The govt in the final analysis has to bail out the banks and the pension schemes if they get into trouble. It’s a game with mirrors really. Maybe a fully funded state scheme isn’t so exciting, but…….Equally we could leave people free to choose. The problem is if their pension fund goes bust, do they still have the right to come back to the state. IOW there seems to be a moral hazard problem. I mean the government schemes are only the same as making you wear a seat belt, aren’t they?

“Japan’s difficulties have little to do with “oversaving” as much as with a deeply troubled banking system”

Obviously the banking system is a mess, and obviously everyone has their favourite ’explanation’ for the Japan phenomenon. Mine is demographic. I am more convinced of this when I see other rapidly ageing societies like Germany, Switzerland and Italy starting to go down the same road. It’s early days yet. I’m sure we’ll get to see this more clearly later.

“If you subscribe to Solow’s growth model” I love Solow. But the capital deepening thing doesn’t work beyond a limited initial impact as you hit diminishing returns. This is why most great economists have been pessimists, and why they call economics the dismal science.

Growth comes (on Jorgensen’s reading of Solow) from having more people working (labour), and with more people working you get more saving (capital). Also if you’re good at adapting to innovation you can get some extra benefits (TFP) while the others are catching you up. The best combination of this is to have lots of young people, who can accumulate quickly lots of human capital. The advantage here is about to go to some rapidly developing third world countries with the “lots of young people” part. Sorry Europe.

On the export of capital argument, people tend to forget there is a thing called ’creative destruction’. You can lose as well as make money. But Japan will provide us with an interesting test. They have had years of enormous surpluses, so we should be able to see what kind of protection this can offer.

If I understand thins well we pension-problem atually consists of three very different problems.
First we have a growing life-expectancy.
Second we have a declining birth-rate.
Third we -or better: some of us and that’s the fourth problem- have systems where the funds are not pre-paid.
The first “problem” i don’t want to see as a problem on itself: it’s an achievement. Abiole makes it seem a great threat that newborns can have life-expectancy going up to hundred year. Well if the quality of life is on some level that really is great. And we -or they!- will have enough time to face the problems connected with the necessary shift of how the wealth is distributed between people and years.
Productivity-gain can be huge in 80 or 100 years but it does not grow very big in social services.
In the end this part of the pension-problem is on how society assesses its elder people; government or private is absolutely secondary.

If the birth rate is much below 2 children per woman then something is deeply wrong in our societies; we should not ignore that issue; not just accept as a fact of life (of death better).

The third problem is of double paying. Here we have the complicating factor that the problem differs strongly between EU and Euro-countries.
British Euro-opponents rightly use this argument.
This link http://www.no-euro.com/factsfigures/research.asp has some very interesting figures on the subject.
The non-euro countries AND the Netherlands are the ones in the EU that have more pre-paid funds.
This can also partly explain the position of our minister of finance Zalm on the subject of the SGP!
(off-topic: groupblogging can be booming. take a look at the nuber of visitors for the US based open soure politics http://www.ospolitics.org)

Sorry for the number of typos. Apart from limited English I also have to deal with a keyboard causing problems with m, “,”, c and y.

Indeed, longer life expectancy is a good thing.

But I hoped I’d made clear that the idea that you can ’pre-pay’ for pensions is a myth. The only way in which you can ’pre-pay’ is if you directly store the goods and services you want to consume when you retire -- this is mostly impossible with the exception of housing. As it is ’pre-funding’ does nothing to solve a demographics problem.

See the rather excellent ’Reforming pensions, myths, truths and policy choices’

http://wbln0018.worldbank.org/HDNet/HDDocs.nsf/2d5135ecbf351de6852566a90069b8b6/307dcdf30f915c4b8525696200583bf2/$FILE/Reforming%20Pensions.pdf

“non-euro countries AND the Netherlands are the ones in the EU that have more pre-paid funds.”

I’d been think that after the Swedish vote you were looking rather lonely in the euro group Frans. There’s another reason why.

“with the exception of housing”

This is OK if you just think of a house as somewhere to live. But be careful if you think of it as an investment. Japanese house prices are currently somewhere round the 1983/84 level.

Edward,

Every day I pray for a collapse in the london housing market!

But yes you’re right. I did mean though housing is a good example (one of very few) of a way in which you can store something that you will consume later (in this case housing services).

“It’s not just Italy, it’s every OECD country outside the US.”

I went in search of data to get a better fix on the scale of Italy’s problem compared with other OECD countries. Perhaps the best quick roots to data tables (source: OECD) are: http://www.cepr.org/press/LM3502_Disney.htm or Table 1 in:
http://www.axiaecon.com/disneyoecd4.PDF

By that Italy does have a differentially large problem from the especially high percantage of GDP needed decades hence just to finance payment of state pensions at prevailing entitlement rates, a function also of Italy’s high dependency ratio and a faster population ageing relative to other EU countries. No wonder Berlusoni is worried about sustainability - any Italian government would be.

The question inevitably arises as to whether tax burdens on labour do affect work incentives. I came across this (heavyweight) speech by Prof Nickell on Taxes and Employment at: http://www.bankofengland.co.uk/speeches/speech199.pdf

His conclusions: “Our basic conclusion is that tax rates are a significant factor in explaining differences in the amount of market work undertaken by the working age population in different countries. However, the evidence suggests that tax rate differentials only explain a minority of the market work differentials, the majority being explained by other relevant labour market institutions. Particularly important are probably the differences in social security systems which provide income support to various nonworking groups including the unemployed, the sick and disabled, and the early retired.”

His Table 2 at the end shows comparative data for Taxes on Labour, including Pay Roll Taxes, Income Tax plus Consumption Tax Rate. The table is illuminating on comparative Tax Burdens in EU countries. Italy comes out near the top, exceeded only by Sweden, France and Austria.

Those here who rail against the disincentive effects of the European Social Model have a point, it seems to me. This perhaps also helps to explain why Tony Blair has been concerned to preserve national vetoes in the EU over tax and social security issues in earlier discussions over harmonisation and the EU Draft Constitution. We shall need to watch what happens at the forthcoming Inter-Governmental Conference where the Constitution in on the agenda: http://www.euobserver.com/index.phtml?sid=9&aid=12867

Last weekend I watched an interesting debate on the PBS channel here in New York between two economists on the issue of privatizing the federal Social Security program (that is the mandatory government pension plan; there are a whole host of private plans which are funded through tax-break incentives, and which really constitute the huge capital pool in our financial markets).

As it stands now, the Social Security Administration takes 6.2% out of each worker’s paycheck (the employer matches that, for a total of 12.4%). The growth of the fund is limited, due to the fact the SSA is barred from investing the money in the private sector. What the Republicans are suggesting is a program where the individual can choose that at least a portion of funds earmarked for them can be invested in private markets. The Democrats are resisting, fearing market instability could catch whole segments of the population without adequate pensions (as if Social Security were enough in the first place).

I think that, given an option for each individual taxpayer to CHOOSE whether to participate (and be responsible for that choice), the Republican proposal has merit. It certainly would unlock billions more into the capital markets. It will be interesting to see how the proposal will be dealt with in Congress…

“it certainly would unlock billions more into the capital markets”

But isn’t part of the problem of the moment finding things to invest all that money on apart from new construction projects. Interest rates are at historic lows, but people are not investing.

And then, what is the answer to the ’Enron’ problem, people who invest their savings and then lose them? I don’t think this is so easy.

Edward: “But isn’t part of the problem of the moment finding things to invest all that money…”

I’ve rarely encountered any American complaining of not being able to find things to invest in.

Interest rates are low, but investment in the market (at least in the US) has begun again. Yes, most likely people did park their pension money in cash accounts (I certainly did), as the market continued in a steady decline over the last few years. However, the upswing has started…

As for Enron, the lesson from Enron is basically two-fold: first, if you want to enjoy the fruits of greater return, you must share in the risks, and second, the public must have faith in the information provided (the accounting must be correct) - therefore, it is good that some regulatory measures are taken by the government, but only to referee ground rules for the operation of the market.

The sad fact from the Enron debacle was the fact that Enron employees had been somewhat barred from diversifying their pension portfolio. This I think is wrong. The Enron executives certainly deserved to be punished, perhaps for this reason alone.

My mother subsists on a small pension portfolio. One of her holdings happened to be Worldcom - a small percentage, about $7000 worth, but now all gone. Yet the income she’s derived from the portfolio, and the growth in the size of the portfolio certainly has paid off over the years. She herself takes an active interest in the markets - something she never bothered with in the past. And that in itself is a significant bonus: a nation of watchdogs, ready to cry foul when corporations don’t perform… quite apart from Euro corps, who simply get a subsidy should their performance not meet expectations, and a shrug from the general public.

“However, the upswing has started…”

Markku: This isn’t clear yet. Bernanke still is saying the US economy on its present course is going to have a run-in with deflation sometime around the spring of 2005. Some people are betting in the equity markets that the US economy is about to take off, they could well be wrong. Also the US economy is driven by private consumption not cap-ex right now. There is plenty of liquidity, but the environment is more risk averse than it was in the late ninetees. So there isn’t the investment. Of course, as in the Japan case, the pension funds could use the excess liquidity to buy-up the increasing government debt. But then I fail to see what is so special about having private pensions.

But this isn’t the point. The point is there is no guarantee. Capitalism is about risk and entrepreneurship, it doesn’t claim to be socialism. If you have good entrepreneurs you get to do well. In the 80’s it was all Germany and Japan, the 90’s were good for the US model, but who is to say that the next decade won’t be for the Chinese or the Indians. Maybe the Indian entrepreneurs will be better than the US ones. Recent judgements over things like Iraq don’t bode too well. This issue is not decideable in advance, it is empirical, you have to run the programme to get to see what happens, but meantime you have to take decisions. This is called the ’pensioners problem’.

So you can get very badly hurt, that’s part of the game. The funny thing is when you ask people questions like ’would you fancy being a foreign investor in Argentina and taking a 75% haircut on your savings?’, people seem to be risk averse.

They seem especially risk averse when it comes to their pensions. And this is my concern about the second pillar. I have nothing against people having private pensions, and nothing against people making and losing money. It’s a casino, and if you like casinos that’s fine by me. My problem is what to do with those people who arrive in old age having lost a lot. Becuase if you provide for them, you have to provide for the others, and if you’re going to be provided for anyway there’s no point in taking the risk. This is the moral hazard part.

If you think this is unreal, look at Japan. And don’t tell me what has happened in Japan can’t happen in the US, because you don’t know, and neither do I.

Thats why it’s capitalism, because we can’t know in advance. If we knew in advance it would be planable, and making money would be easy, which it can’t be, in principle. And if it was planable, it wouldn’t be capitalism it would be socialism, which is impossible because things aren’t planable in advance etc etc etc.

So we’re in a circle, and we’ll get to see later whether it’s a vicious one or not.

BTW: “who simply get a subsidy”

Don’t forget the US steel industry. Things are not that simple. This is not a dichotomised world, most things are simply……….grey (when they are not extremely mirky, that is).

Edward: It seems to me that you argue from the typical risk-averse European point-of-view. Perhaps that is also one of the reasons that Europe will never become a force on a par with the US: Europeans just don’t like taking risks, while to Americans, risk-taking is second nature.

Competition is so much a fabric of American life, culture and society, more so than in Europe, which prizes safety at the expense of growth. Well, to each his own…

By the way, earlier I had written about the steel tariffs. There is much discussion even within solid Republican ranks about that. Most seem to agree that it was a mistake; however, I’ve seen some commentary as to it being a “shot across the bow”, - a warning to the rest of the world that the US can at any time turn protectionist, should others continue trade protectionism. If that is so, however, I think the message was lost… and it remains a blunder.

But I do know that there will be some moves against China, which has been seen as benefitting from US largesse on a unilateral basis (thousands of jobs have been lost to cheap Chinese imports). It’ll be interesting to see in what shape these moves come, especially during an election year….

“Europeans just don’t like taking risks, while to Americans, risk-taking is second nature.”

Put on this level Markku I’m sure you are right. And as you say to each his (or her) own. What I’m not sure is whether post 09/11 the US itself has not become more risk averse. I certainly read the Bush administration as a move against the whole ’new economy’ ethos you were developing in the late 90’s, an ethos which I certainly found lacking here in Europe. Far too many here were trying to copy Time Warner rather than Yahoo - ie to buy in from the top rather than facilitate development from below. The role of Texas and the interior in general seems to have grown, while your innovative coastal regions seem to be losing influence. This is probably the greatest threat to the future of living standards in the US.

’Old US’ monopolies like Microsoft and the RIAA seem to have gained in influence - so we are seeing ’internal’ and ’external’ protectionism. Venture capital seems to be much more difficult to come by, there are few really exciting IPO’s etc. I don’t think you have an innovation friendly administration, but I don’t doubt this will change.

As far as we Europeans go, we are obviously not so materialist, but where’s the harm? We can still live well without being ’super rich’. We trade a bit of quantity for a bit of quality.

I guess we aren’t so bothered about not being a major military force either, but one day our negotiating skills may come in handy, even for those who value militray prowess more.

I don’t think our growth problem is so much to do with valuing safety. I think it is demographic, we are ’old Europe’ in the sense that we are ageing, and this is affecting our rate of consumption increase and hence internal aggregate demand, this is really the German growth slowdown. Also this situation is aggravated because we do not accept immigrants as readily as you do, and here I am a clear admirer of the US model, which seems to me much more in harmony with a globalised interconnected-world.

So here I think we have things to learn from each other. Life isn’t a football match, you don’t have to be so partisan. Pragmatism is the great American strength, unfortunately of late you have allowed yourselves to be unduly attracted by the charms of ideology.

your page is inspirational ;)

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Thank you, I just wanted to give a greeting and tell you I like your website.

unclaimed money

See also http://www.rsf.org/article.php3?id_article=8868
http://www.consapevolezza.it/notizie/gen-mar-2002/impero_berlusconi.asp

Now there is the internet. And I really appreciate people like you who take their chance in such an excellent way to give an impression on certain topics. Thanks for having me here.

Dustin