Sunday, March 17, 2013

Egalitarian Reforms

Structural reforms are necessary but have a bad reputation in Europe. Although one could argue, a la Krugman, that the urgency now in Europe are not reforms to introduce efficiency, but coordinated measures to promote growth from the demand side, the need for structural reforms (on pensions, the labour market, public spending and product markets) will just not go away.
But advocating structural reforms risks becoming a futile exercise, unless one accompanies the recommendation by suggestions on how to address three related sets of problems.
First, those derived from the “endowment effect,” that is, the well recognized pattern in behavioural economics by which one tends to value more what one already has in her possession than the same thing when it is owned by someone else. Hence one will not easily accept losing something that is perceived as a right in exchange for something new and uncertain (such as a more efficient economy).
Second, the government is not an exogenous machine that one can activate at the suggestion of some adviser. With an endogenous government, individuals embedded in social relations and with a understandable eye on the next (democratic) election, are the ones who make the final decisions. Some recommendations often have the flavour of advising a monopolist to lower its price. You probably should suggest something else that improves the prospect of the monopolist.
Thirdly, distributive justice interacting with commitment issues play an important role. In an increasingly disfunctional labour market, why the center-left does not support labour market reform in Spain, if it has supported market liberalization, NATO membership and so many liberal reforms? Perhaps because the insiders of the labour market (a good proportion of center-left potential voters) think that it is unfair to ask sacrifices from them in a country with high tax evasion (which is not precisely concentrated on the workers) and increasing inequalities. Something credible enough accompanying labour market reform should be offered to them (tax reform, corporate participation…).

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