Sir Tony Atkinson's lecture titled, "European Union Social Policy in a Global Context" was the keynote address for the conference, "Changing Social Policies for Low-Income Families and Less-Skilled Workers in the EU and the U.S." April, 2005.
>> My name is Rebecca Blank I'm the dean of the Gerald R. Ford School of Public Policy and I want to thank all of you for joining us this afternoon at our spring semester Citigroup lecture. This lecture series was established by a gift from the Citigroup Foundation in honor of President Gerald R. Ford in order to bring distinguished speakers, policy makers, and poly analysts to the Ford school. At the Ford school we're committed to fostering interaction among those who have an interest in the discussion of public affairs. The Citigroup lecture provides an important outlet for such interaction and we welcome everyone whose joined us today for the lecture and for the discussion that's going to follow. Now there's an error in your program it lists me as introducing today's speaker Tony Atkinson in reality he will be introduced by the co host of the University Paul [inaudible] but I want to say even though I don't get to introduce him I do have to say at least a few words. I have of course known of Tony's work since I started doing economics and met him a good number of years ago and I was having a conversation with another economist yesterday talking about this event and this other person said that Tony Atkinson was one of his academic idols and I have to say I really have to echo that thought. I'm just utterly delighted to have him here today he is someone whose worked the quality of it, the thoughtfulness of it, and the heart behind it as well the as the technical expertise as I just think in very, very important for many of us in the economics profession. With us today on behalf of Citigroup the sponsor of the lecture is Mike Sherer [phonetic] of Smith Barney and I'm going to ask Mike to say a few words. Thank you, Mike.
>> Good afternoon. Since 1989 we have supported the University of Michigan with close to two million dollars in grants. This includes the endowment for the Citigroup Lecture Series for Gerald R. Ford School of Public Policy. And outside of this pledge the majority of the funding has went to this school the graduate school of business which is considered a key recruiting school for Citigroup businesses. This of course does not include the generous donation by Sandy and John [inaudible] towards the construction of the Ford School of Public Policy taking place right now at the corner of Helen State. I'm sure in the future it will be nice to have all the events at one center that will be great. We're strong believers that corporations and its employees have a responsibly to give back both to the community in which they work and they live. That is why in 2004 Citigroup contributed a record amount of grant dollars in excess of 110 million these grants reached both domestically and reached more than 80 different countries throughout the world. Our foundation has three priorities, financial education, educating the next generation, and building communities and entrepreneurs that's why we're extremely pleased to be partnered with the University of Michigan which certainly addresses two of these priorities very nicely. Again, by enhancing educational activities will better prepare the next generation to achieve both personal and professional success. Six years ago the world's preeminent global financial services company, Citigroup, decided to expand its presence in the Midwest and that's when they decided to establish another Smith Barney office. Again, just east of the north campus here I'm happy to say. It gave us the privilege to be associated with the University of Michigan and the Ford School of Public Policy presenting the Citigroup lectures. Again, this dedication of the staff and the volunteers is again really an inspiration to us all we look forward to the insightful comments of Sir Tony Atkinson and addressing the European Union social policy in a global context. And, again, I know Sir Tony is internationally known for his work on inequality and income distribution perhaps if time permits he might be able to address the not only the financial status of the graduate students but also the economic plight of their parents. So as always, again, Dean Blank we thank you for the opportunity to participate in this lecture series thank you.
[ Applause ]
[ Pause ]
>> According to the program as Becky pointed out I'm Rebecca Blank but I'm actually not I'm Paul [inaudible name] and I am both [inaudible] of the University and a faculty member in the Ford school and in the economics department which makes it especially wonderful to be able to introduce Tony Atkinson who brings extraordinary expertise to today's subject and to public economics generally. We looked it up he's the author of 16 books, at that many books you don't quite know maybe it's 15 maybe its 17 but it's a lot of books and as a frequent and respected advisor to governments again some advisors are frequent some advisors are respected, very few are both and in the connection with Tony's work, you know, there are some economists who do the math and there are some economists who have ideas and there are really precious few who do the math about ideas and manage to put the two together the way Tony Atkinson has across a career. He was editor for many years of the Journal of Public economics which really helped to shape the field as we now think of it. With Joe [inaudible] who was office a Citigroup lecturer he published a book called Lectures on Public economics which at least two generations of public economists still view as being kind of the text and the field, I wouldn't mind seeing a new edition but it might not come that way. And at the same time, he wrote books including book called Social Justice and Public Policy which was published in 1983. That book begins with the critical observation that ideas about distributed justice must be held in mind as questions of tax policy, unemployment, insurance, and house finance, all of the technical details of public economics were explored and keeping his eye on the fundamental question of distributed justice he offers detailed technical explanations of economic status, individual mobility, well through the lifecycle, taxes and savings, income maintenance policies the essays are filled with equations that must have given his proofreader headaches, although I actually I remember being quite found of him. And the important overarching themes always present in references to Plato and [inaudible] remind the leader that public policy making has to be tied to the most deeply held values and ideas as well as the technical issues. In social justice and public policy Tony makes a strong argument for the value of social science and research in making public policy an argument that rings at least as true today as when we he wrote it more than 20 years ago and I'm going to quote, I should like to argue that informed analysis drawing on one or more academic subjects can contribute to our understanding of social problems and to more effective design of government policy. Economic research cannot ensure the solution of problems that confront us but it can illuminate the nature of difficulties and help us focus on the central issues. This understated plea for analysis, careful thought and remembering why we are acting make it easier to understand why Tony Atkinson is both a frequent and respected advisor to government and an inspiration to policy [inaudible] everywhere. It's an honor to have him here as the Citigroup lecturer and my privilege to welcome him to the University of Michigan.
[ Applause ]
[ Pause ]
>> [Inaudible] Thank you very much it is a great honor to be asked to give this lecture and to be able to talk to you this afternoon. I'm sure that the new building for the Gerald Ford School will be very impressive but this room is too and I must say I do feel a sense of occasion to speak in a building on where the steps of which I gather President Kennedy announced his idea for the Peace Corps and one bit of my vita that you didn't mention is that in 1961 I was actually a volunteer on an early version of something like that, I didn't go as far I went to Germany but I have some experience of being a volunteer. But that perhaps kindled my interest in Europe and it is I think an interesting time to be considering social policy of the European Union, perhaps even more interesting then seemed likely when I agreed some months ago to give this lecture with this title. It's probably in fact more interesting then I would like it to be since the European Union at the moment seems to be suffering a collective lack of confidence I think mainly because of its perceive and actually real failures in the domain of economic policy the continuing problems of unemployment and slow growth problems which are being increasingly blamed on the social dimension of Europe. As one participant in EU policy making put it to me recently Europe's social policies now need to be redirected supporting measures to raise employment and growth. In the hope that those at the bottom will benefit from economic progress. And I couldn't help feeling that I had heard this somewhere before that the trickle down argument is not a new one and that he should I think have read articles I think by the Dean of the Ford School of Public Policy and other articles of this audience. But I'm getting ahead of my story -- oh let me go back one, sorry I'm going the wrong way. That's where I meant to be -- what I would like to do in this lecture is first of all describe the development of the EU social dimension and the origins of the present social inclusion process. And then I shall consider some aspects at least of the nature of the challenge to the European system of social protection and the argument that the pressures of globalization threaten its continuation. In doing so I should be treating the European Union as an entity contrasting European policy with that in the United States. But it's very important to recognize the diversity within the European Union. I mean its [inaudible] to talk about the European social model and President [inaudible] was doing so very eloquently last week, they don't find this description very useful at least the description of the current state. European member states are very different and I think that diversity is in fact both one of its strengths and something from which we can learn and the importance of these diverse institutions will be the subject of the third part of my lecture. Now in the early days of the European communities going back nearly 50 years the organizations at that time were provided with very limited powers in the social field. But I think it's valuable to go back to that starting point but because it was a period of very rapid economic adjustment we tend to think today we're facing unprecedented change but at that time Europe was also facing unprecedented change particularly the movement of labor out of farming, and the restructuring of its basic industries and indeed one of the central reasons why the European communities were set up were to facilitate precisely the restructuring of the European coal and steel industries. And that involved social measures in aid of training, and to encourage mobility of workers out of depressed areas. And I think it's worth noting that right at the beginning social policy, very limited though it was, was seen as complementing economic policies for structural reform. What's required today is obviously different and it's required part more in response to pressures of changes in the world divisions of labor and to the enlargement of the European Union but it's not that different in principle from the major restructuring we've seen in the past. Then moving rapidly on in the 1970's the communities began to adopt social objectives in their own right not simply as a means to an end and the 1973 report on the development of the social situation community described the program was setting out in a purposeful way the initial practical steps on a road towards the ultimate goal of European social union. And in terms of concrete action that saw the first of a series of action programs to combat poverty. These in turn were evaluated in the early 80's and for the first time the European Commission produced an estimate of the number of people living in poverty in the European Communities at that time around 35 million and that was a definition of poverty based on looking at the living standards of people compared to the average income in the country in which they lived and that was based in turn on the view of European council of ministers of the people who were poor were those whose resources were so small as to exclude them from the acceptable way of life of the member state in which they lived. Under [inaudible] law the social dimension developed further. In 1989 the commission put forward a draft for the charter of fundamental social rights and this was adopted by 11 of the 12 member states. But you can guess perhaps who the 12th one was that was United Kingdom and as a result our position that led to the social chapter being left out of treaty that set up the European Union and at the same time the British and German governments blocked the proposals for a fourth poverty program. But in this period there was gradual development of two elements. Two elements which were the linking of economic and social policies the idea that social policy should be integrated and contribute positively to the economic development of Europe and secondly that there was a role for the European Union as well as for individual member states. And that is why individual member states, except as I say for the United kingdom in some cases, began cooperating in a field for which was there was no [inaudible] provision and that was a growing recognition that national social protection systems face common challenges demanding reform and modernization for example to cope with issues they were increasingly facing with regards to providing pensions at an adequate level for a rapidly aging population. And so there were certain common elements which persisted through the development of European social policy over this period. Even though the progress was not uniform even though there were times that we seemed to go backwards rather than forwards and even though there were times when the European agenda seemed to be dominated entirely by the common internal market on the one hand and the introduction on the Euro on the other. And you can see that it my diagram I've tried to indicate by the height of each of the elements there in some sense the relative importance attached at that time to the social rather than the economic dimension. You will see also that how it's going up in 2000 with the Lisbon Agenda. The Lisbon Summit of March 2000 saw the collected heads of government agreeing that Europe you were should adopt the now often repeated phrase of becoming the most competitive and dynamic and knowledge based economy with more and better jobs and greater social cohesion. Now this objective was remarkable in the sense that the words social cohesion appeared in the same sentence as competitive economy. Now that was a remarkable change and this was taken up enthusiastically by successive presidents of the European Union, there's Portugal, France, Sweden and Belgium. And as I summarized on this slide at the Nice Summit in 2000 it was agreed to advance social policy on the basis of what is called the open method of coordination something that wasn't new it was already being used in the field of employment, but it certainly was relatively recent invention. The process of open coordination involves fixing guidelines for the European Union, establishing quantitative and qualitative indicators to be applied in each member state and periodic monitoring in a process of peer review. Now the open method of coordination is controversial some people feel that it goes beyond what the European legislation allows for others feel that it infringes the rights of the European Parliament other feel that it doesn't go far enough, but it certainly I think is rather a clever invention lending on the one hand the need for Europe to face problems collectively with at the same time preserving the principle of subsidiarity, the principle under which a number of areas including large parts of social policy are the responsibility are the property of the individual member states. So the member states had to agree and they did agree that they would set in place national action plans to combat poverty and social exclusion those were produced they were reviewed by the commission which produced a report on the state of social inclusion and this process has now gone through its second round. And so we have a structure in organizational terms where we have the member states responsible for administering social security policy, pensions policy, policy on disability and unemployment, the actions are carried out by member states but it's in the context set by the counsel administers setting objectives through the open method of coordination and it's being monitored by the European Commission. I should perhaps stress the nature of this because in the public finance literature, through which all others have contributed, the public financial literature on decentralization there's this notion that different levels of government should be allocated different levels of responsibilities and should determine the objectives at those different levels. That is for example that we have we've got the federal in this case the European Union and we've got the local in this case member states like Britain, France, Germany and some functions like for example income redistribution should be allocated to local governments where there are marked differences in preferences regarding what should be done. And then if that was what was the system of work subsidiary would mean that member states were entirely free to determine the extent of redistribution on the basis of the expressed preferences of their own individual electorates. To some countries we would chose a very redistributed system others would choose a very low level of redistribution and low taxes. But that is not what's [inaudible] by the process of subsidiarity or by the open method of coordination which is explicitly refers to the best way of achieving agreed common objectives. It doesn't leave to the lower level governments the determination of what the object or policy should be but one has to remember the principle of subsidiarity is derived from the practices and teaching of the catholic church and the church perhaps this week we need reminding that the church certainly does not delegate to a local level the determination of its objectives. Now as the establishment of common objectives that social indicators enter the stage. At the Nice Council the commission was required to monitor the social process of Europe and to set in place social indicators to monitor that progress. And rather remarkably the European Union did agree on a set of social indicators. I've listed them on this slide they cover a range of things. They clearly build on the earlier work that had been done that I referred to a few minutes ago about measuring the number of people living in poverty in the European Union but they're not limited to measures of financial status and income. And one of the important elements of the agreement was that when looking at issues to do with social exclusion it wasn't simply an issue about people's financial resources. It was important that they covered their employment status, they covered their health, and some degree, although it's not often in these indicators covered the housing, and it covered things like low levels of educational attainment. Now I stress this because clearly if you're comparing countries according to a number of indicators you can see the political difficulties as it were if you only have one indicator where if you have several then it's likely to be the case that some member states are going to score well on say poverty but not so well on health or education, they may all of course always come top but that isn't necessarily the case. I stress this when I go to in fact to concentrate on the income dimension. That is shown in the next slide which shows the proportion of people living in households with incomes below 60 percent of the medium. Taken as I said as an indicator by the European Union of the risk of being in financial poverty. Now I appreciate also that those of us who are used to European statistics can easily read which country is which but I suspect that many of you may have difficulty you may find some of them easy but LU is Luxenberg, SE is Sweden, Denmark the next one is Finland, Germany, Netherlands, Luxenberg and you can see there is something of a geographical pattern here the Nordic countries, I have to be careful here I called Finland a Scandinavian country yesterday and I got told off. The Nordic countries are to the left, low rates below 10 percent or so are people living in financial poverty. Then you get to a mainland, Europe [inaudible] Germany, Austria, Belgium, France. And then on the right hand side you see the English speaking countries, UK, Ireland at the end and southern Europe so there's a clear geographical pattern. Now from that pattern you might expect or you might even see that there's some tendency for countries with lower incomes per head that is countries whose national income is lower are tend to be on the right hand side, there's a tendency for poorer countries to have more people living in relative poverty which is worth noting because obviously what has happened since last May is that the communities grown from 15 to 25 countries with enlargement and we've added countries most of whom have lower incomes listed per head then the member states. And you might therefore expected following this that they would be as it were from the right hand side and that's in fact the case if we put them on -- and again now I'm going to struggle I think -- Slovakia over there is indeed like Ireland but the Czech and Slovenian republics are all over here. So in fact they're actually within the range of the existing member states they're not extending the range in the way you might expect most of them are grouped around the average at member states. One's in the middle are [inaudible] Poland, [inaudible]. The same sort of pattern emerges if we look at overall income and equality and I'm going to use here one of the most popular measures of income and equality the [inaudible] coefficient which is a measure of the dispersion of incomes which reaches to zero if we all they have the same income to a hundred percent if Bill Gates scoops the whole pool. So our index measures how dispersed incomes are and you see the same sort of pattern appearing here. You also see I think the same pattern I think if I press this for the same sort of thing for the new member states. But the point I want to make about this is there is considerable diversity as well. To help you put in perspective there are coefficients around 20 percent here and around 35 percent at the end about a 15 percentage point difference. Now if you -- to help you put it in perspective the rise in the [inaudible] coefficient for the United States over the period of the last 20 years has been about seven percentage points or probably a built less. So the distance I'm talking about here is about twice the rise which happened in this country which is generated a great deal of academic and other concerns and large academic [inaudible]. So these are big differences. The last thing I've done in terms of income distribution is to show you these are figures taken from the Luxenberg income study curtsy of [inaudible] and this is for a variety of countries in the European Union and comparably the comparable data of the United States it's about the same as Portugal which unfortunately wasn't in this data set but you can see that the United States is all the European countries shown had less income and equality than in the United States. And this does make a significant difference to how we view the relative economic and social performance of Europe and the U.S. Just to show though these translate into that, if we look at the differences in national income per head the thing on which so much attention is being focused on a European discussion then for example the adjusted GDP per head in the United States is about 40 percent higher than in [inaudible] 12 Western European countries. But suppose if we were to adjust this measure for the distributional differences and I'm following there here the measure proposed by [inaudible] which involved multiplying the income by one minus the [inaudible] coefficient and you can see in this case the distributional adjusted measures of national income are much closer. The difference in fact in this case is only about 17 percent. And this has also been seen in terms of the changes over time. As I mentioned at the beginning Europe has got increasingly concerned by the fact that over the last two decades it's been falling behind the United States or the United States has been pulling ahead. The difference of 40 percent here should be compared with that of only 32 percent 20 years ago in 1980. So the difference in terms of income per head has clearly widened over this time. But that difference is in fact somewhat less than the change that's been in the distribution. I mentioned earlier the big increase in the United States inequality if we adjust for that and in fact the gap between the two is not widened at all if anything it's tended to narrow. So to some up this review of where we are in terms of social performance there are significant differences in the United States of a kind that I think would effect how we view this performance but there is very considerable diversity within Europe and that diversity in itself points to the fact that there's a considerable scope for learning about the impact of different policies. There is scope for European individual member states to emulate their better performing neighbors, but will they have scope to do this. This brings me to the second theme I want to discuss, what is the scope for Europe's welfare state to continue. In thinking about this I think it's useful to go back though and exam when this welfare state began. It is the formative period for the welfare state in Europe was in fact the later part of the 19th century. It was the period which we all now recognize 1870 to 1914 as one of rapid globalization. Welfare state and globalization came together, this illustrates this point. Some elements certainly didn't start in the 19th century, family allowances for example largely started in the 30's and later but the major programs of the social protection system, protection against work injury, against sickness, against old age, against invalidity. In many European countries as you can see in these programs started during the golden age of globalization at the end of the 19 century. As it was put rather colorfully by an American commentator in 1913, and I quote from him, from the frozen shores of Norway down to the sunny climb of Italy from the furthest east and up to Spain all of Europe whether [inaudible] Saxon, Latin or Slove follow the same path. Some centuries have made greater advance than others, but none have remained outside the procession unless it be a few of the more insignificant principalities of the Balkan Peninsula. The movement for social insurance is one of the most important world movements of our times. That's professor [inaudible] writing in 1913. So there has been a bit of a paradox that we should be questioning today an institution which appears to have grown up at precisely the time when the world economy was expanding and developing in precisely the same sort of way that it is today. [Inaudible] no doubt we have changed our view that is it is generally now seen that rather than being a positive complement of the development of the global economy the world first state is being seen as dysfunctional rather than functional. And there are hopeful important people asking for social protection to be scaled back. But I think we need to ask precisely why that is. Now as I said at the beginning of my lecture this is an interesting time we've recently seen the argument that this is direction in which we ought to be moving. We've seen this proposal that the social objectives should be relegated to only as it were as a result of pursuing employment and growth and it is employment I should note that is the overriding concern. At the European counsel a target has been set for 2010 of raising the overall employment rate in the European Union to 70 percent. And that reflects the concerns set out in this diagram here. This diagram shows what I referred to earlier the 40 percent difference in GDP per capita that's the black lines, the difference in GDP per capita in the U.S. and Britain is much the same as the difference in productivity that is in the output per hour worked. So for Britain and the U.S. productivity and employment and productivity and output per head are the same sort of thing. But for France and Germany they're not the same, that is the levels per output per head -- sorry the levels per output per hour worked is in fact considerably closer in the United States it's more like a 20 percent difference at most. And it's this examination of this that we suggested to people of what needs to be done is therefore to raise the number of hours worked and the number of people working those hours. The attention is focused on catching up the United States by raising employment rates. The first trouble with this is it obviously goes against the trend of the last three decades. The last three decades employment rates, at least for men I should be careful obviously, for men have been falling. This is illustrated in the next slide which shows the activity rates the portion of people engaged in the labor force by different ages. And I've shown it by different ages because this brings out something which is often neglected when people talk about raising employment rates which is that the activity rate of what I now feel is somewhat unfortunately called prime age workers there are people aged 30 to 50, I mean that is quite terrible, quite unacceptable definition you can see that that is hardly changed over this period. The difference is at the older ages and at the younger ages. The younger ages are worth just noting, I mean clearly a significant fraction of the people under 25, under 30 are people at this University or not of this University [inaudible] but there are certainly people in education so clearly part of this is people who are acquiring human capital and skills and qualifications clearly something which we would all support. But I suspect not only that a lot of younger people particularly a number of European, mainly European countries take a long time to get into the labor force or to get into jobs, long competitions and other things whatever. So I always feel this end ought to be focused on as well but it's the other end on which policies tend to focus and there is this objective of raising employment particularly amongst older men and women age 55 to 64. Now whether this makes any sense I'm not so sure, but it does appeal to European Union leaders. I did it once when giving a lecture like this carried out the experiment of just checking whether European leaders follow their own recommendations and I looked at the age of European prime ministers and heads of states compared to 10 years ago, 15 years ago, they're all a lot younger, you know. I think you'll find that the politicians are getting younger as well so they're not actually following their own advice. However they do go onto other things and one thing they go onto in the case of [inaudible] the former Dutch prime ministers is to write reports of the European Union and he wrote a report last November in which he made this proposal that the fulfillment of social objectives would result from progress it was employment and growth and therefore as it took by the financial times EU targets on social policy and the environment will take a back seat. Now this is being presented as though Europe has no choice the political rhetoric is that the EU has no alternative but to relegate the objectives. However, that's I think not quite clear I think we need to exam the arguments for it. What are the arguments that say we have no choices or are their indeed choices that are open to us. So what exactly is the nature of the argument that we can no longer afford the social protection that Europe has had until now. Well a clear statement of that argument appears here by Vito Tanzi who was for 20 years director of the IMF Department of Fiscal Affairs and later a minister in the Italian government. And this statement is quite an interesting one and it's valuable one because he's very clear of what the cost is, it's essential a tax cost, it's a tax burden, it is the incapacity to raise the cost of funding the welfare state. Just to see what that argument means it means that in the event, which is obviously a fanciful example, in the event of some American billionaire offering to fund the European welfare state, I mean I agree that is somewhat fanciful, then there would be no reason why European shouldn't accept that offer. It is purely a problem of raising the money it is essentially a laugh curve argument. He's saying there's a limit to the tax revenue can be raised as it clearly is and what's more tax competition amongst jurisdictions, electronic commerce, the fact that people can buy and sell things without passing through national indirect taxes and the increase mobility of factors of production will cost the tax revenue to fall and I've shown it in this diagram a shifting then of the tax feasibility to left. And this is clearly an argument that has been to be taken experienced and leads to someone who's very an experienced advisor in the field of taxation. It's important though to distinguish it from a second argument which is that the levels of taxation which are required are beyond those which are politically acceptable. That's the statement about political rather than economic constraints and that's something which is outside the province as it were of purely economics. This is an argument on the economic constraints on which we should clearly focus. Now to examine that argument obviously the tax burden is heavily introduced by the extent of social protection. The welfare state is a large element and its significance has been greatly increased both by demographic developments. And if for example the dependency rate, the ratio of people who are retired and unemployed to the number of the working population were to be reduced so it would be become only a half so if only two workers for every person retired and unemployed then a 5 percent cut in the replacement rate reduces the tax rate by two and a half percentage points. But the reason for setting up this mild piece of algebra, you refer to my books being littered with equations, I think this is probably the only equation in my talk today, the point of putting these up was simply to make obvious, well it should be obvious, which is of course that the required tax rates depends on other things as well. There are other elements of the budget which clearly are susceptible of being reduced. The argument is an argument which limits the overall capacity of the government to fund his activities and the question then is open as to on what elements those cuts should fall. There is a choice which can be made between different elements of public expenditure so that's the first thing we need to bear mind. The second thing to bear in mind is that tax expenditures. That is the cost of giving tax concessions is equally reducing the tax base. And I stress this because many of the alternatives put forward including by Professor Tanzi the passage I sited earlier was private provision. Private provision for example of pensions, and certainly most countries that have private provisions of pension provide some degree of tax concessions for those institutions certainly they do in many European countries. And to the extent that we switch to private provision we may be saving on the first line in the right hand side but on the other hand we're going to be costing more on the last line. Now that's important to bear in mind some people talk about the burden of pensions, they tend to talk only about the direct costs in terms of the amount paid out in state pensions they ignore the implications in terms of tax expenditures. Now it could be argued that we should discriminate against social protection expenditures because they are particularly damaging. This brings me to a second line of argument, on this line of reasoning, social protection is different from other outlays because it not only costs money but also distorts key economic decisions. The welfare say it's not only expensive but also, on this argument, at least partly a cause for Europe's economic [inaudible]. And to go back to my fanciful example of a U.S. billionaire in this case it might by that European countries would want to refuse the offer because the provisions which it will be funding would have an economic damage. Now this argument is sometimes made along the lines that any interference with a market economy distorts decisions. It distorts the decision to work, it distorts the decision to save, it distorts investment decisions. The trouble with that argument is that it's based on a world of perfectly competitive and perfectly functioning markets. Where as in such a theoretical framework none of the contingencies exist for which the welfare state has been established. There is no involuntary unemployment there's a full set of capital and insurance markets. I can make sure today that I can have personal care if I need it in 20 years time. But the existence of the schemes that we see is in part because markets don't work in this way. We have to allow for at least some of the contingencies which are the reasons why we have a welfare state. Now to illustrate this I want to take this is the only bit of economic analysis in the lecture, to take the influential article by [inaudible] entitled, The Welfare State and Competitiveness, in which they study a two countries world, where in the home country wages are bargained by trade unions, generating unemployment in that country and the other foreign country there's a competitive labor market with full employment, well I should say this was published in the American economic review it should actually be the other way around, I think the home country should have had a competitive labor market and the foreign European one had trade unions. I say this is the only piece of economic analysis I should apologize I'm drawing a diagram to demonstrate what I want to show which is that in this world there are workers who have an alternative use for their time which is a reservation wage and the in the case of the unions they bargain wages as a mark up and the mark up is shown by M in my equation and that mark up then means as a result of the combination of the mark up and the reservation wage to which is added the unemployment benefit to which people would receive if they're unemployed that then causes the wages to be above the level of which full employment can be secured and so in this case we see the welfare state is generating the unemployment generating part of the problem which we're trying to solve. Now I've done this little bit of analysis because it does I think demonstrate some of the advantages of actually having a formal [inaudible] account. What it brings out is it indeed true that the welfare state in the form of the unemployment benefit is causing some of the problem, it would arise without even the tax rate. So it you if you take away the tax rate, if someone else paid for it but you would still have the unemployment caused by this. It also brings out that in this situation you can either get to full employment or either raise employment by making labor markets more flexible or by cutting back on social protection. The policies are substitutes as you can do one or the other you don't have to do both. And in practical terms you can see this for example demonstrated particularly by the case of Denmark a country which is combined on the one hand relatively light regulation of the labor market relatively flexible labor market where on the other hand generous social protection. There is a choice. And that has been the theme I've tried to emphasis in this discussion so far. However as I said we can't just think about Europe and the United States diversity of institutions are very important. In fact the detail of institutions is important. And that's in fact well illustrated by the analysis I've just been presenting. I said rather casually if people don't work they receive unemployment benefit in fact many macro economists make this statement. They say unemployment insurance, and I'm quoting here, is the wage when not working. In other words, you've got a choice you can either work for wages or you can receive unemployment benefit. Now anyone with any actually experience of unemployment insurance systems knows that is not the case. And for many Saturday's in my younger years I used to work on a an advice service for people that was held in the market [inaudible] on a Saturday morning and people used to come to ask for advice about their social security benefits and their various other parts of the welfare state. And one of the usual things when we would be discussing with people was the fact that they had been refused benefits for a variety of reasons and I just sketched some of these reason in this little flow cart, getting benefit is not automatic, you have to satisfy for example, you have to [inaudible] misconduct and misconduct is something which is open to interpretation. You have to be seeking work which again may not be very easy to demonstrate in some cases and often quite hard particularly if you've got children because you have to demonstrate that you've got sufficient childcare in place so you can actually take a job if the offered to -- can you take a job if it's offered to you tomorrow. And of course you have to satisfy the contribution conditions. That is unemployment insurance is a contributory scheme it was set up for example by beverage in United Kingdom as a contributory scheme. You don't get the benefit if you haven't paid your contributions. And as [inaudible] recognized many years ago the existence of social security, old age and survivors insurance in this country provides an incentive for people to enter the paid labor force. And today when we're quite concerned about the growth of the informal economy the existence of taxes is often cited as a reason for that economy existing but that ignores the fact that the other side of those taxes is the fact that you only get the benefits if you contributed in your part of the formal economy. So I think one has to bear in mind that the institutional structure of benefits, institutional structure of how welfare states work can make quite a big difference to how they actually impact on the working of the economy. And that they may contain positive as well as negative incentives. People often for example today stress that today's labor market is much more uncertain, much more risky, there are not jobs for life, people are facing a much more uncertain set of future careers. In those circumstances it seems quite likely that the existence of some form of unemployment insurance may well allow people to make their decisions with more confidence to search more suitably for jobs that they take and there are a number of economic arguments that show that in that situation unemployment insurance can play a positive not a purely negative role in the development of the economy. That incidentally has recently been recognized by the OECD who last week published a very interesting report called how active social policy can benefit us all. Strengths of applied economic research in the United States has been the study of interstate variation. I think that's demonstrated both the value of such analysis and also some of the problems of interpreting the results and the European Union as I think perhaps being slow to do this but now has institutionalized as I described earlier in the open method of coordination the notion of learning from best practice and was very considerable interest in doing that. As I noted earlier this earlier has very considerable performance on the social indicators. And as a final example of that let me take the issue of child poverty. Child poverty is an interesting issue it's one which thanks to the work of people in this room has had prominence in the United States and Canada but interestingly in the European Union is only United Kingdom and Ireland that had any great interest for in the issue. And I can remember five years ago suggesting at a European meeting that we should examine the issue of child poverty and I was looked at with considerable surprise and basically we don't have a problem of child poverty you may have one but there isn't one on the mainland. And that has changed in the last few years there's no doubt that people have in other countries have learned from the British and Irish examination of child poverty and indeed the French government or the French institution [inaudible] under the German [inaudible] produced a report on child poverty only last year. Now of course there are a number of issues but how one looks at the child poverty rate but I've shown here on one of the official European Union estimates the poverty rates for children that is children according to their incomes -- it's not their incomes let's make it quite clear, we're not talking about pocket money we're talking about the incomes of these families in which these children are growing up which obviously has major implications to their future development and so on, these poverty rates being higher than the adult or the whole population rates means the family in which they're living tend to be poorer than the average family and their country and you can see in some cases it doesn't happen in Denmark, Finland and so on, Belgium, etc, but in many it does. And this is not necessarily rated to the overall poverty rates you see Greece is appearing here as a good performer, Luxenberg and Netherlands as high performance. Now this kind of arrogant system provides a clue on where to start looking but in order to go further we need to look beneath the surface to look at individual circumstances and how those circumstances are effected by the policy instruments. And here we've seen a large body of research in the last few years looking in a microeconomic way at the impact of policy on individual households and some of the papers at the conference being held on the other side of this building today have been dealing with this. And in particular it's very interesting to carry out what I've referred to as policy swapping that is to ask the question systematically what happens if, and I've taken here the example which has been used in study of Ireland, that if the Irish government were to adopt the Danish government's policies in the field in this case of child poverty what would be impact of that on poverty in Ireland. Now of course these things need to be interpreted carefully one has to recognize the existence of the policy may effect initial distribution of income and one also has to recognize that the differences in policy are not [inaudible] Denmark may have chosen a particular set of policies because it reflects the political economy of that particular country. So there's a lot which is going on in terms of the analysis of policy. Whether a lot happens is obviously largely a matter of politics I've described the machinery I've described some of the analysis but whether in fact European countries can learn from each other, whether in fact the European Union can develop a coherent social policy is going to be very largely a political decision. And this brings me to my conclusions but I'd like to preface following on from that remark with a reminder that the European Union is above all a political entity. American economist often ask me now why is Britain accepted the European Union moving beyond just being a simple customs union what have you got involved in this project for isn't it just a question of free trade and I think the answer clearly lies in the history of Europe. I was very struck reading an essay by the American historian Barbara [inaudible] her essay on how the U.S. entered World War I and her description as to how the typical American citizen viewed Europe in 1914. She said, newspaper cartoons habitually depicted Uncle Sam separated by a large body of water from a far off furiously squabbling group of little [inaudible] and then she points out many American citizens had immigrated to the U.S. to get away from as she puts it Europe's gore dripping barbarians and I think that one has to remember that how much has changed in less than a century and that while today Europe may still seem to be squabbling it's about details of European Union directives or about who benefits most from the common agricultural policy. So I've tried to summarize on the slide the main things, lessons about social policy that there is a strong line of continuity that programs by fits and starts there's a great deal of diversity and scope for many member states to improve their performance but there is in fact room for maneuver that there are choices which remain open to us that it's not inevitable that the social decision should be relegated behind the example dimensions. If our concern is for total taxes then there are other ways of reducing the tax burden. If our concern is with incentives then increase labor market flexibility as an alternative to cutting social protection. That the fine structure of institutions can be tailored to balance efficiency and redistribution. That indeed I think was well understood by the founders of the welfare state. And finally there's considerable scope for policy learning. A process that may flow across the Atlantic perhaps as well as across the English Channel. Thank you very much.
[ Applause ]
>> I think that Professor Atkinson is willing to take questions so I'm just going to let you come up and call on people or --
>> Oh, okay. That's great. Maybe I can call on people from up here and I'm not sure people can hear you though this is a --
>> Okay. Good enough. Whose -- there's a microphone right here so if you raise your hand we'll get you a mic and then everyone can hear.
>> What is the differences between countries in the European Union is population stabilization, how does population influence the effects that you've been talking about?
>> Yep. I don't think you're the only person to ask me that question.
>> Right. Okay. That's a very interesting and important set of issues that I didn't address at all and of course if I was making the U.S. European Union comparison there's no doubt that as Becky was telling us this morning at the conference the growth in the United States economy is a great deal to the expansion of the population in the labor force in the last couple of decades and Europe has not seen that and it's still true that the low migration most important source of extension of the population the natural tendency is to fall and interestingly I think it's not been changed its being worsened by the enlargement I think most people thought somehow that the demographic balance would change as new member states but in fact the demographic balance is any more towards all the people. So my own view is that the European Union seriously needs to construct an immigration policy in fact as a member of a high level group last year and one of our four or five key recommendations was precisely that. Now of course that's very easy to say it's very hard to set in place but I do think it's the kind of issue which actually in some respects is easier for the European Union then it is for member states because many member states successfully used the European Union to make changes domestically they had not the political courage to do. And I've think they used it for example in pension reform the Italians used basically the threat of not being able to join the Euro to make changes in the pension system and so on. So I think that in some ways more likely that there would be agreement that it would be for an individual member state to reach a sensible immigration policy.
[ Pause ]
>> This is a bit of a follow up question it's obvious that in terms of solving economic problems in the United States is vastly helped by the immigration that Europe is not getting and I guess I have always been something of a free immigration, but I have to say that I'm a little taken aback by the apparent difficulties in culture assimilation that the Western Europe is encountering with the immigrants that it does have is there any way of resolving this tradeoff between economic needs or immigrant and cultural problems that seem to be arising. I mean, you know, when some immigrates are shooting politicians it might be hard to convince the politicians to liberal immigration.
>> Yes. Well on short answer I have no simple answer. I think it is the two things that may go partly together that is some of the concerns are about those linked to the unemployment and lack of job opportunities there currently are. So if it were the case that an economy with more immigration was actually more dynamic of an economy then it maybe that would be a benefit to both sides and reduce some of the tensions. But I'm sure you're right that I think it's partly an issue to do also with population densities and location as well as this country I suspect has certain advantages in terms of space and so on that Europe doesn't have. No, and I think it's difficult I think it's certainly distributional element because many of the costs of this are born by people at the bottom of the income distribution not like me who are always sympathetic as to your view that our policies and immigration are very being far to restricted but it's easy for me to say that and less easy for those who have to make those adjustments. But I think if the only sort of optimistic root is the idea that these two things would actually contribute. So I think back to the period certainly in Britain it was a major immigration period of the 1950's which was a major expansion of the economy and so on and the same is true in the United Kingdom today. I mean we are seeing now a quite large immigration, partly linked to the English language but it's also linked partly to the fact that we do have in certain parts of the country zero unemployment. But that's [inaudible] optimistic rather than confident.
[ Inaudible ]
>> Well I can think of one obvious reason. I mean I think seems to me we have in a sense we [inaudible] away the so called peace dividend and that was an obvious root for reducing Britain substantial fraction of its GDP on defense and we did not seize the opportunity to reduce the expenditures of [inaudible] and I'm not saying that's my personal view that's a choice and that is one of the obvious choices one can make.
[ Pause ]
[ Inaudible ]
>> Yes. And I think one has to remember well there are two let's leave out [inaudible] they're slightly different the other form of communist countries had various forms of social profession before but not exactly as if they were starting from zero although they've been largely dismantled there is still quite a significant element of social protection in most of them. I think the main -- if the issue is about wage costs then it is a wage differences are far bigger than the differences in social production and if the wage is how [inaudible] Germany then that's what is going to be driving movement of location of industry or whatever, but whether social insurance contributions are 10 percent higher isn't going to make that much difference. So I think the same is true even more when you move outside the European Union and consider competition from other countries it's the wage cost differences that are really the big differences.
[ Pause ]
>> How about declining tax revenues as being a driver towards cutting social protections or making some labor markets flexibility and of course that resonates very strongly in a U.S. audience because we do have declining tax revenues and large parts tax cuts at the national level and I'm wondering if you can comment on that and whether there's any similar move within the EU in cutting taxes or whether there's any move in the opposite direction.
>> I think the tax proportions have been broadly, stable for quite a long period. There's been changes in the tax structure in particularly a number of countries have effectively reduced their top income tax rates. There's been some tendency for that. There's been some tendency for corporation taxes to be scaled back as well. We've seen no reductions in indirect taxes VAT and so on and equally payroll taxes there's been some reductions at the bottom but not very much else. But, no, I agree we've not seen anything like the tax cutting agenda the current U.S. government made. It's hard to see it happening, I think the UK government has one of the lowest tax proportions but it has been pushing it up by a variety of devices and its been certainly aware of the political problems and raising taxes. Although interestingly one of the parties liberal democrats is campaigning on a proposal to raise the top tax rate to 50 percent. Which I say they will spend on -- they've got a list of things they're going to spend it on but they certainly don't think it will damage their electro prospects on campaigning for raising taxes.
[ Inaudible ]
>> Certainly it has been some time it's I would say that process quite in a sense started a long time ago partly because I suppose partly we had an empire of things we always had an element of that textiles for example increasingly have been outsourced for a long time. So now I think there's probably a big difference say in the United Kingdom where manufacturing is about 18 percent of output now, it's a much smaller fraction. So the big issue will really be the outsourcing of services there's where it will become serious. And I'm not I think it's potentially quite large, I'm not myself quite sure I think that our farther delivery of services as a difference is going to be consistent with services, the quality of the services I think we've yet to see. I think no one doubts that quality of manufacturing coming from China is equal of that being produced in Birmingham but whether the service is and I certainly detect, and this is purely anecdotal I'm completely outside any professional knowledge as it were, but I detected a lot of people becoming very irritated with not dealing with their financial intermediaries directly and not having someone to speak to and so on. But it's also a trend back and I think some companies have [inaudible] their call centers in fact for that reason they actually wanted -- they did didn't like this distance relationship to what you want to speak to someone who really -- and for all the training it doesn't, people in [inaudible] may say oh it's raining in Ann Arbor but sometimes they miss something is the local color somehow so I have an open mind about this I think the services are going be quite difficult to be localized to quite that degree but that's a big guess.
>> Thank you very much we appreciate your presence.
[ Applause ]
>> I do have a short presentation here that I would like to give to Tony it is our plaque that we give to all of your Citigroup lecturers to his distinguished contributions to the analysis of economic and equality and for effective public policy.
[ Applause ]
>> Thank you all for coming this afternoon there is a reception to follow in the Wolverine room. The Wolverine room is one floor down and at that end of the hall. There a few people of the conference that are going to see all of the rooms of this building before the conference is over. I hope you'll join us there if you want to chat further about this topic with each other or about any other topics. Thank you again very much to Tony Atkinson for being here today and thank you to all of you for being part of this.
[ Applause ]