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The Citizen’s Share Idea for Europe Saving EU Economies from Austerity and Reducing Inequality through Inclusive Capitalism Dr. Richard B. Freeman, Harvard University, NBER LSE Centre for Economic Performance European Ownership Caucus Nov 13, 2013 ① The Problem: Austerity, Imbalance, and Inequality ② Alternativlos? Social Partner Investment Plan (SPIP) built on private sector can save the day ③ From Interesting - Idea to Action ① Eurozone 2013: Sick Economy of World Unemployment rate ~ 12%; GDP < 2007; High consumer debt ratios; divergence between core/ periphery economies; deflation in periphery economics. Rising inequality; increased working poor; danger of another financial crisis/recession. Austerity‘s poster child: Portugal (GDP 7.6% below 2007 level; unemployment, 16%-18%) No policy tools to grow GDP: cannot depreciate; bailout deals with EU, IMF, ECB squeeze fiscal, weakened labor institutions; govt effort for fiscal devaluation fails. Oxfam warns: Austerity threatening to impoverish 25 million more Europeans By Agence France-Presse, Wed, Sept 11, 2013 20:35 EDT “I can't think of anything new, so take your leeches and shut up.” – Troika What you do when there are no alternatives Europe? Oct-Nov 2013 ② Alternatives to Austerity 1. Devaluation: Break-up Eurozone or cut payroll tax/raise VAT to mimic floating currency (aka fiscal devaluation). If wages sticky, lower payroll tax reduces labor cost and prices, if flexible. Higher VAT can balance lower payroll tax → constant domestic price. But VAT raises price of imports while lower labor cost make exports more profitable → growth. (Calmfors, 1998; Farhi, Gopinath, Itskhoki 2013); Proposed for Greece (Cavallo and Cottani 2010); Portugal Cabral (2011); France in 2012. ② Alternatives to Austerity 2. Inflate. “In most historical episodes, household deleveraging was facilitated by higher inflation, and an expansionary fiscal policy”... IMF (2013, p 61-63) ② Alternatives to Austerity 3. Restructure sovereign debt so creditors lose; "Marshall style” Social Partner Investment Plan 1.Lead by private sector; orthogonal to battles over austerity and recapitalizing banks and to troika finance shenanigans. 2.Funds from pension funds, private equity, with possible incentive from government/finance institutions. 3.Provides equity or loans for investment in firms whose workers trade wage cuts/freezes for equity/profit-sharing. 4.Investments focus on S&M (and other) firms that seek capital to modernize or expand in crisis economies. 5.Investment directed at sectors/firms likely to prosper early in recovery or with big input-output effects that stimulate activity in other firms --> self-sustaining recovery. What can a Social Partner Investment Plan Do? Macro effects 1.Mimic devaluation to help periphery troubled economies adjust through wage trade-off for equity. 2.Ignite self-sustaining recovery through sufficiently large investments/loans in key sectors. Micro effects 3.Improve productivity through greater incentives to employees with stake in firm; create stable employment, 4.Reduce inequality by giving workers/pension funds greater share of capital income. Improve long term economic situation and put real economy as center of economic policy Examples where this has worked on a “small scale” The recession bailout of the US auto industry with goverment funds. Chapter 11 bankruptcy and union cost concessions → sector recovers pre-2007 sales. → Workers get huge bonuses in recovery Examples where this has worked on “small scale” Detroit Worker Bonuses Approach Records on Rising Profits Ford $8,300; Chrysler $2,250. GM expected to exceed $7,325. For new Ford hires, paid ~1/2 what senior workers make, $8,300 adds 23 percent to annual of $36,000 compensation. (Bloomberg, Feb 2013) Small? Auto-related industries and after-market service businesses US employed 3.1 million vs 4.7 million employed in Portugal. Mixed record for Employee Stock Ownership Plans (ESOPs) set up as concession bargaining to save jobs; positive record when ESOPs set up as surcces to retirement of existing owners. Questions to ask... Q1 Where is the money? Worker-related sources 1. European worker-related financial institutions: private pension funds (Netherlands, UK, German Riester pensions); coop banks; Mondragon 2. Norwegian Sovereign Wealth Fund 3. Non-EU Pension funds (US, Australia,elsewhere) Non-Worker-related sources 4. Sharia Capital from wealthy Arabs 5. China banks, billionaires. “Sell Greece to Beijing” 6. Hedge and equity funds (especially those handling pension fund moneys) Q2 Are there really barriers to investments/ undervalued assets? IMF (2013b): credit channel “broken during the crisis, particularly in stressed markets … small and medium-sized enterprises in hard-hit economies appear to most affected...monetary transmission in periphery and stressed markets remain impaired” Fragmentation of financial markets seen in differential country interest rates; declines in cross-border banking flows; periphery banks relying on deposits IMF recommendation: ECB should support the banks. Social partner investment plan support the enterprises that need the funds! “$$ for businesses not the banks.” Hedge fund and private equity looking for bargains in distressed economies Q3 Will wage trade-off reduce worker spending? In principle, trade-off of wages for equity/profit-sharing can maintain worker lifetime income by transferring lower wage today for higher income tomorrow, adjusted for risk-> no reduction in consumer spending. Wage concession lowers price of goods, which could increase spending dependent on demand elasticity; capital investment increase spending, raise productivity. But with liquidity constraints, trade-off could reduce consumption spending. Q4 Is this too risky for private sector ? Organized through mutual fund, diversity lowers risk. Funds could mix long term investments in infrastructure with short term cyclical investments. Key is extent to which investors take worker willingness to accept wage trade-off as valuable insider information about future prospects. Can Wall Street/ “Madoffs” game this? They game anything, so need rules/regulations to limit ripoffs. Q5 How could governments/international financial agencies help the Investment Plan succeed? With tax breaks: encourage investments via tax breaks for investors similar to tax-breaks for mandated private pension schemes or for share ownership schemes. Give tax benefits to returns on fund With insurance for investments, for instance guaranteeing capital in pension fund so investment risked returns but not capital With cyclical tax reductions/write offs possibly related to increase in tax revenues ③ From Idea to Action Orthodox alternativlos opens door to a lost decade or more for many European economies; and poverty and inequality as ordinary citizens pay for the excesses of finance. It endangers political stability and undermines democracy as moneyed interests call the shots. But failure of austerity opens door to fundamental changes to address jobs/GDP growth problem, inequality, and reduce bank/finance dominance of economic policy. ③ From Idea to Action Next steps: 1. Expert commission/study group to develop/assess detailed plan 2. Field trial with practitioners; improve implementation 3. Communicate to broader society; scale to sustainable growth. Commission/Working Group to Explore Potential Establish a group to assess benefits and risks of proposal, recommend legal changes to effectuate it. Group should have strong credentials so recommendation would carry weight. Need expertise of business and labor, of socially-minded financial institutions, equity/hedge funds. Assessment should simulate possible effects of details; determine which sectors would give big early bang, do the inputoutput analysis of links; estimate the size of boost needed to create self-sustaining growth. A report from expert group could move ideas from a small group of economists and policy analysts to center stage. Field trials to test implementation Given positive recommendation, some group – investment fund and union/works council and firm – should give Social Partners Investment Plan a trial run. Subsidies to do this? Field trial should identify factors that make plan more/less successful, uncover ways to create “market” to bring groups together. For instance, would having an open market form on Internet work? Firm/union/works council draws up a plan and posts it on some website where different investors look at it and judge whether the workers stake/risk is enough to justify investment. See recent efforts to crowd source start up funds. Communicate and Scale Up Commission/Expert group should alter plan, give additional recommendations after the field trial. Publicize results Assess potential value of government subsidies/insurance of pension fund investments to scale system up. Should next turn to corporate governance issues, to make sure that workers with ownership and outside investors influence corporate decisions. The Value of Worker Equity in Long Run Two meanings of equity in English: Fairness – equitable solutions to problems; equitable division of the rewards of production Ownership – equity in one's company and ownership of the fruits of one's own labor. The Social Partners Investment Plan offers a way to surmount the austerity crisis in both senses: Reductions of inequality as labor gains part of capital share, as part of more inclusive form of capitalism, via pension fund investment and workers stake in own firm. Improved operation of firms with employees having ownership through shares or profit-sharing. Appendix A: Simulations based on econometric data say fiscal devaluation “probably” works IMF (2011) says fiscal devaluation in Portugal equal to 1% of GDP generate a short-term rise in net exports of somewhere between 0.2% and 0.6% of GDP. Franco (2011) finds them larger. De Mooij and Keen (2012) estimate that a 2.6 percentage point decline in payroll tax and a 2.7 percentage point increase in VAT would generate increase in net exports of between 0.9% and 4% of GDP Netherlands Bureau for Economic Policy Analysis (2013) simulates small, short-lived expansionary effect on employment and GDP but marginally worsens the trade balance for France, Austria, Spain and Italy. Small permanent expansion of employment and GDP driven by lower wage costs due to weakened bargaining position of workers and redistribution from current to future generations.