The cultures that is Europe

All from last week:

Greece’s health minister appealed to panicked patients struggling to secure medical treatment to remain calm after pharmacists continued their boycott of the country’s largest state health-care provider by refusing to extend credit to patients, in another sign of a credit squeeze taking hold of the economy.

Here is that article.  There is also:

Even as many European countries tighten their belts in response to the sovereign-debt crisis, French President François Hollande granted more generous pension benefits to some workers, delivering on a campaign promise ahead of legislative elections.

Here is that articleFurthermore:

The French government approved a measure Wednesday that will restore the retirement age of 60 for some workers, partly reversing unpopular 2010 pension reforms made by former president Nicolas Sarkozy that raised the retirement age to 62 as he sought to cut state deficits.

Finally:

Europe’s troubles look daunting enough already, but another crisis looms.

Most European Union countries owe more than twice their annual gross domestic product in pensions promised to current workers and retirees. As governments scale back benefits, companies and individuals face a rising burden. But saving for old age could prove a crushing blow to growth.

And so the clock ticks.

Comments

Non-gated
http://online.wsj.com/article/SB10001424052702303753904577450000181349894.html?mod=googlenews_wsj
France Gives Workers More Benefits

http://online.wsj.com/article/BT-CO-20120606-703282.html
French Government to Lower Retirement Age to 60 for Some Workers

Ho hum Professor Cowen. Having lived in Greece, I can assure you that riots, default, conflicts including wars and vendettas are hardly new or even of much concern over there. I recall nostalgically the 'car bombs' that used to rattle our upper middle class neighborhoods in the 1970s... but fortunately the targeted expensive cars not people back then...I have had a miniature Molotov cocktail thrown at me at a Pireaus riot, and know of others who have lived through WWII and the Civil War. As for default, there was even an article a by some economist that default is painful for a couple of years, and probably for less than a year, then it's business as usual. I personally think it's the nature of debt to have default, since price inflation is allowed in a debt contract but not deflation is not easily accounted for (PV, FV, N, i, PMT in your financial calculator).

Not sure what to make of the statistic about benefits promised being more than twice GDP. Not clear if it's nominal or inflation adjusted. Also there's a question about how much is collected today against the future obligation.
Just saying the statement by itself seems intent to scare, but it is really incomplete analysis.

Here's all you need to know: Arab and African Muslims can not and will not pay for 20 years of retirement and geriatric medicine for a bunch of stupid old white people.

Oh I come from a land, from a faraway place
Where the caravan roam
Where it's flat and immense
And the heat is intense
It's barbaric, but hey, it's home
When the wind's from the east
And the sun's from the west
And the glass in the hand is brine
Come on down
Stop on by
Hop a carpet and fly
To another Eurabian night

If my little song didn't suggest it, I think the Eurabian alarmists underestimate the degree of immigrant integration over demographic timespans. Despite government policies which reduce churn, and immigrant exposure to new and varied occupations, immigrant employers will hire immigrant employees in greater numbers as they assert themselves in the labour force.

Economic fundamentals will determine the scope of social welfare transfers in the years to come, demographics matter less.

Well then thank God the "Arabs and Africans" live in (respectively ) Arabia and Africa, instead of France.

1850s America instead of 2010s Europe, Irish and Germans instead of Arabs and Africans, will never accept English language instead of will never accept welfare states. Thanks for playing.

Do you seriously believe all people are all alike? Is diversity just a social construct?

Most European Union countries owe more than twice their annual gross domestic product in pensions promised to current workers and retirees.

...matched by an equal amount of assets in the ability to levy taxes to fund the system.
Those hacks' total unability to understand pay-as-you-go retirement systems always amazes me.

But saving for old age could prove a crushing blow to growth.

Ever heard about that thing called monetary policy ? Oh wait...

Pay-as-you-go retirement systems may well work in traditional societies. In Greece (and elsewhere in Europe) 100 grandparents have 42 grandchildren. The idea that a pay-go system will work with upside-down family trees seems a bit far fetched.

Of course, countries can try to import the "missing" parts of the newer generations. However once you get to a certain critical mass of new, presumably ethnically dissimilar members of society, I imagine it will be hard to convince the immigrants to give up such a significant part of their income in transfer payments to retirees.

Pay-as-you-go retirement systems may well work in traditional societies. In Greece (and elsewhere in Europe) 100 grandparents have 42 grandchildren. The idea that a pay-go system will work with upside-down family trees seems a bit far fetched.

If you have 100 grandparents for 42 grandchildren, then the grandchildren have to give up a significant amount of their economic output work to their grandparents, no matter how the pension system is set up. FInancial markets are not a time capsule. Maybe you can have a generation arriving at retirement age with significant savings, but then these savings have to yield enough ROI to actually provide a decent living standard. At best you get a lower wage share of GDP (in practice, how is that different from a tax ?), at worst you get major macroeceonomic imbalances. See China.

Besides, since France was mentioned, keep in mind it is one of the few western European countries with no impending demographic doom.

s/output work/output/

By saving, the grandparents have built up more capital stock in the economy, and have consumed less. It is the capital that produces and in turn pays for their retirement.

So yes private savings are different from tax, funnily enough.

By saving, the grandparents have built up more capital stock in the economy, and have consumed less. It is the capital that produces and in turn pays for their retirement.

So why don't we just print a few quadrillion dollars and invest them in productive capital, so we can all retire while those robots make everything we need ? Sorry but it doesn't work that way. In a country with a dearth of capital (i.e. low savings despite high real interest rates) it might be a good idea to set up pension funds, but in today's advanced economies there simply isn't enough opportunity for productive investment. Unless of course you count real estate bubbles.

"So why don’t we just print a few quadrillion dollars and invest them in productive capital, so we can all retire while those robots make everything we need ? Sorry but it doesn’t work that way."

No you are quite right - I am talking about real savings, not printing money.

In a closed economy it might be tough (but not impossible) to find a productive use for those savings. But in the current world it is not even that hard. We have youthful, growing, large developing world economies we can export to.

Yes, it's a lower wage share of GDP either way, but in practice the value of taxes paid to support state pensions (including health benefits, etc.) are higher than what grandchildren would forgo if they had to support their own grandparents. How do we know this? Because in almost every society, grandparents have traditionally lived with their grandchildren, allowing the family to economize on shelter, food, fuel, etc., while potentially extracting some useful domestic labor from the grandparents. The pervasiveness of the traditional model across time and culture (with considerable variation, to be sure) suggests that the "equilibrium" level of support for grandparents is lower than the level provided by the modern welfare state.

Note also that the traditional grandparents-live-with-grandchildren model allows the value of the support provided to grandparents to vary based on the total output of the grandchildren. For example, if there are fewer grandchildren in one generation, they might force the grandparents to share a room with their own kids, they might expect the grandparents to provide more value in the form of domestic labor, they might all eat worse food, whatever. Under the modern model, the expected support for grandparents was set by laws passed in a much more favorable demographic environment; even though the total output potential of the grandchildren is smaller. This is not to suggest that the traditional model is preferable, just that the amount of output given up by 42 grandchildren to support 100 grandparents in the absence of state support would probably be much smaller than what the same grandchildren will be expected to pay under the current Social Security and Medicare systems.

Call me heartless, but I'm willing to pay gov't a fair share of my income not to see my in-laws move in.

Ah, but what is a fair share?

Depends what you mean by "impending".

Also the question here is the amount paid to the retirees. There is quite an enormous difference between someone working as much as they can to 77 and then eating what they need to survive and having a place to sleep, versus retiring at 60 and being paid a comfortable pension.

"…matched by an equal amount of assets in the ability to levy taxes to fund the system."

You need to net out the expenses to realize this "ability."

If Hollande jacks up tax rates on the wealthy, France will be able to afford this the more generous pensions.

The laffer curve is not much in vogue in france...

Robert, what do you think the rich do when their taxes are raised? Do you think they are sheep who just stand there for their fleecing? No, they stop producing or they move somewhere else or find some way to protect their assets.Being forced to produce for the benefit of another is called slavery.

They ask their multinational employers for a raise.

If everyone had just had the foresight to ask their employers for a raise, we wouldn't be in this mess.

That what the were doing in the 90's right, fleeing class warrior Clinton's confiscatory taxes?

I know what they were doing in the 70's, when top rates exceeded 50%. They had generous expense accounts and company vehicles. Lots of pre-TFRA deductions, tax shelters and overseas accounts. Just like nowadays they have cap gains rates and jumbo-mortgages.

France vacuums up between 42 and 45% of GDP in taxes. Any more than that and the net payors will either leave or just stop paying taxes, one way or another.

Don't be so dramatic. A top marginal rate in excess of 50% is foolish, but it is not slavery.

A marginal rate in excess of 50% won't be paid. No net tax producer is going to work for negative ROI. In fact, no net producer can work for negative ROI.

Translation - "No movie star can work if they have to give away 5.5 million out of 10. However, giving away 4 out of 10 is tolerable."

It is useful to be reminded that the pension situation in Europe is almost unanimously more serious than it is in the US, with that in Japan arguably worse than either Europe or the US, the US having a far superior demographic situation to any of them, not to mention some future candidates for such worries that have slowing down demographics, e.g. Russia and China. This should be kept in mind the next time you read one of the usual hysterical suspects in Washington ranting and raving about our social security "crisis." Sorry, but not.

One buddy needs triple heart bypass surgery, another quadruple. I only need a double bypass. Pass the chili cheese fries!

Well done. You said what I was trying to say with fewer words.

Just because there are other countries that are *more* screwed than we are doesn't mean that we're not screwed, too. And how does the fact that our main trading partners are demographically screwed make our situation any better? I'd think that the economic decline of Japan and Europe would make our own situation more, rather than less, precarious.

We have problems about future commitments, but what gets lost in the periodic outbursts of Social Securfity bipartisan think tank and WaPo hysteria in Washington is not only that our system is in far better shape than any of these others, with projections that only minor tweaks would basically fix it for good, but that our problem is overwhelmingly due to our by far highest-in-the-world and still rising healthcare costs, not the baby boomers retiring. Dean Baker repeatedly points out that if we had the healthcare costs that Europe does, our federal budget would be in surplus right now.

Anybody who actually looks at the numbers closely knows this basic story, and many of those pushing the SS hysteria line also know it. What happens when you push them on it, and I have to some of them face to face in Washington, is that they will fall back on a political argument: healthcare is too hard to fix (look at how much trouble Obama has gotten into, and he has not even gotten any credit for following up on a Republican proposal (single payer mandate), not to mention some minor cost controls, which have been roundly denounced by his political opponents). So, these Wise and Very Important Persons gravely intone that Social Security is easier to "do something about," although what they want is a deal involving a fica tax increase combined with a future benefit cut, although every time this supposed deal surfaces, it gets shot down by both sides. It remains far from obvious that it is any easier than dealing with healthcare, and while such a deal might help the overall budget situation, it remains the case that in fact the SS accounts are not in all that bad shape, and that is not even based on comparing with Europe and Japan, and certainly not in comparison with our healthcare cost situation.

it remains the case that in fact the SS accounts are not in all that bad shape

Where have you been? There are no SS accounts, the money has been spent on other stuff and now there's an immense drawer full of IOUs for all those paycheck deductions. And SS is only part of the issue, there's profligate retirement benefits for public employees, the military, teachers, cops, firefighters, agriculture analysts, forest rangers, housing inspectors, and congressman, plus many others. Nobody in their right mind intends to retire on SS benefits anyway, they wouldn't be able to afford cable TV, cell phone service, and health club membership.

chuck,

How about not making a fool of yourself by declaring that there are no SS accounts. There are, even if one may argue that ultimately they are meaningless.

Here is how they are in good shape. The supposed disaster that portends around 2037 or so if nothing is done and current projections hold and the IOUs run out and SS benefits are paid strictly on what will then be the expected revenues from fica taxes, is that those benefits in real terms will fall from about 170% of those currently received by beneficiaries to merely about 120% of what current beneficiaries get.

If you think this is a "crisis" requiring something to be done immediately or if this represents some screw job on young people by current oldsters, then you are somewhat out to lunch. OTOH, you are far from being alone in your ignorance if indeed you do not know of this. Very few people do, as this is almost never reported in the midst of all the caterwauling about the supposed crisis by the hysterians.

The US has a far worse healthcare situation fiscally than the rest of the OECD, but a far better Social Security situation. That is the bottom line, although lots of people refuse to admit it.

"...if we had the healthcare costs that Europe does, our federal budget would be in surplus right now."

Yes, IF ONLY! And yet Europe's broke! So something's being subsidized!

Statements like "Europe's broke!" are fundamentally dishonest.

No countries in northern Europe are "broke". Recent additions to the EU in southern Europe have obvious problems, but Germany, Netherlands, Scandinavia, UK, France, Austria are nothing like "broke".

Propagandists want to paint the European social welfare systems as broken in order to sell their right-wing ideology, but the problems of single currency without a single fiscal policy do not have much to do European health care systems which are much more fiscally efficient than the rude Goldberg system in the US that conservatives seem dead-set on preserving, no matter how dysfunctional it becomes.
Spain was not running large deficits prior to the real estate collapse, but got caught up in a classic market bubble (real estate not tulips), as markets are wont to do, and now cannot devalue as long as Spain is locked into the Euro.

As a staunch lefty (by American standards – I'm middle-of-the-road in my home Canada), I admit that population stagnation (or decline) is a big problem. On the one hand, we have to stop populating the world, for environmental reasons; on the other hand, the welfare and healthcare system that I grew up with and support depends on there being more children than grandparents.

I don't know of an obvious solution.

"As a staunch lefty (by American standards – I’m middle-of-the-road in my home Canada), I admit that population stagnation (or decline) is a big problem" - nope, is not, as flawed as Club of Rome Population Explosion scaremongering was in the 1970s. Latest research shows senior citizens productivity is higher than expected; and if you believe in smart growth (Total Factor Productivity) rather than "factors" productivity (i.e. Chinese productivity, where farmer moves to city and increases GDP) then population stagnation is a plus not a minus. Anecdote for those of you that like stories: when the Soviets left Afghanistan they left behind a skeleton force of old men with AK-47s to fight the Taliban--who amazed the world and themselves by lasting a lot longer than expected and creating a stalemate. Even the US high tech military achieved no more, 20 years later...

Population decline in the developed country is a huge problem if you care about the future of the human race.

BTW, I cannot resist a further poke on the SS situation. This generally gets posed as greedy baby boomers and oldsters in general against young people. But the farce here is that nobody but nobody is proposing cuts for those already receiving or about to receive SS. No, it will be on future recipients, and the further out they are, the harder they will get hit. So, it is the young people who are going to take the hit on achieving what is being posed as supposedly in their interests against all those nasty old people.

The other is the essential detail of this argument to younger people. It amounts to the following: cut your future benefits now so that your future benefits will not be cut in the future, eeeeeek!!! Gag.

Hey Tyler,

Is it my imagination, or are we seeing a rise in ZMP comments? I generally hate censorship and prefer a community of responsible adults who can moderate themselves, but I would not object in the least if there were some occasional pruning of comments. Two obvious examples exist above in this thread, and I wouldn't be surprised if my comment provokes more juvenilia.

"But saving for old age could prove a crushing blow to growth."

The Republicans want to cut Social Security so far in the future that it will not help the current deficit but soon enough to cause the forty year olds out there to cut their consumption and save more NOW for retirement in twenty years further depressing the economy NOW. Just what we need.

"Most European Union countries owe more than twice their annual gross domestic product in pensions promised to current workers and retirees."

Thats small potatoes compared to the US's unfunded liabilities.

“But saving for old age could prove a crushing blow to growth.”

Keynesian idiocy.

I'm sure you see China as proof that saving for emergencies and retirement don't hinder growth because the super high savings in China has been used to fund driving up real estate prices in China so much that private developers and governments have built entire cities which are not yet populated because the private sector in China prefers to stay near the coast where the private savings has funded public transportation and utility infrastructure and to import the people into the overcrowded cities instead of moving operations to the people which the empty cities are for.

Further, the super high Chinese individual savings has funded lending to Americans to buy consumable goods on credit from China, and to buy real estate in the US which drove prices to twice the cost of constructing new real estate, so prices had to fall once demand failed to exceed housing production and as pricing is at the margin, once new houses fell in price to cost, every house sold the year before had to fall below not just their price, but their cost because capital always depreciates.

Of the two things funded by Chinese savings, the construction of capital in China, or the consumption and inflation in the US, which will more likely be available to the Chinese people when they retire? Will your children be repaying the loans you took out to consume Chinese goods or real estate status? The buying of real estate from 2001 to 2006 was not driven by any rational economic theory, which is the astounding thing. If the real estate market then was rational, then used cars would have been selling for more than the cost to make new cars, which would have sold for twice their cost of manufacture.

Unless savings are used to fund the building of productive capital assets that have a productive life in excess of the outstanding debt, the savings are not going to be repaid, and are just a tax by another name to transfer wealth from those who sacrifice to accumulate wealth to those who refuse to sacrifice and consume more than they produce. Donald Trump inc is going bankrupt a second time to shed the debt incurred to fund his consumption, which means he is transferring wealth by bankruptcy from those with wealth to his enterprise. In most cases, those with wealth are millions of individuals, each with small amounts of wealth in banks and bank like institutions which invest it for them.

So, for the greater good, you have no savings?

Geez, Happy Monday everyone!

Comments for this post are closed