The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

FLOAT OR SINK?

THE MILLSTONE OF THE “SOCIAL MARKET” IN GERMANY*

It has long been observed that instinct, the product of selective evolution, tells man to choose behavior that is most conducive to his and his genes’ survival. It has long been overlooked, however, that at some crucial junctures instinct tells man to choose behavior that does the exact opposite. When he falls in deep water, the nonswimmer should lie flat on his back, let his head submerge, and keep only his nose and mouth above the surface. If he does this, he may survive. Instead, he will instinctively try and straighten up to keep his head and neck out of the water, thrash about, swallow water, sink, and drown.

Behavior supposed to defend against some danger, but in fact making the danger more threatening and the defense ineffective, is worryingly frequent among groups that decide their conduct collectively, for example by majority vote. Job protection is a classic case. It is not hard to get a majority to vote for “workers’ rights,” including a worker’s right to his job that he should only lose under the most compelling circumstances. In Germany, it is left to the courts to say whether there are really compelling reasons for allowing this, and cases can drag on and on. Only firms with fewer than five employees have a relatively free hand (which provides a good reason for not expanding beyond that size). Comparable “job protection” measures have cropped up in other European countries over the last quarter century, and have mostly been tightened up as unemployment started to become endemic.

German businessmen now say that if you hire at all, you must know that you hire for the very long term and as long as an employee chooses to stay with you, you must pay him, rain or shine. The employer carries the risk that it will rain and not shine, and to cover this risk among many others, he must mentally add a risk premium to the wage he must pay. It is hardly surprising that the effect of “job protection” is to reduce the number of jobs that should be protected. Like the man trying to keep his head above the water, the German job market has been sinking at an accelerating rate; the latest unemployment figure is 10.6 percent, and the latest growth forecast is 0.1 percent per quarter for the current year (the only-just-positive number showing a naive faith in the precision of statistical output and income measurement).

Needless to say, job protection is not the only, nor even the main cause of the appalling performance of the once-mighty German economic machine. “Be assured, my young friend,” as Adam Smith famously remarked, “that there is a great deal of ruin in a nation,” and it took more than just a few manifestly counterproductive measures to bring about stagnation. The ever heavier millstone of the world’s most elaborate welfare state was carried with growing difficulty as Germany progressively emerged from the fiercely energetic and productive era of postwar reconstruction and settled into bourgeois comfort. The loss of buoyancy finally got the best of the “social market economy” that left-of-center world opinion used to applaud as the living proof of the “European social model,” the Third Way, social and market all rolled into one!

Like in other European countries where Left and Right outdo each other in being “social,” many horror stories circulate in Germany about how much it really costs to employ the average worker. Some employers claim that it costs them 300 euros in all the various statutory deductions, health, disability, unemployment and pension contributions, to give their employee a pretax take-home pay of 100. Aggregate national income statistics tell a less lurid, but still fairly preoccupying story. A pretax take-home pay of 58 must be topped up by employers’ and employees’ various social insurance contributions of 48, raising the total cost to the employer to over 100. To this must be added about 20, representing the contributions of the general taxpayer to the various social services. All in all, the total cost of a worker to the German economy is a little more than twice his take-home pay.

Many economists now believe that German labor has become too expensive and this is the root cause of high unemployment. The labor unions, whose power in Germany is still great because of the monopoly role labor legislation reserves for them in wage bargaining, furiously refute this. German wages are in fact too low, they argue, for if they were not, the country would not have a visible trade surplus year in, year out. Once again, here is proof that a little economics is worse than none, for the trade balance depends on many other things, and depends on them more strongly, than on domestic wages. Nevertheless, like the argument of the illiterate that if jobs are menaced, the lawmaker must protect them, the trade balance argument is widely believed to show that wages are not too high and the unions are responsible corporate bodies, exercising statesmanlike restraint in wage bargaining.

Cornered and finally persuaded that “something must be done,” Germany’s social democratic government is now proposing to turn against its own parliamentary supporters and introduce a long overdue reform of the “social market economy.” It has a majority of only eight seats in the lower house, and two-thirds of its legislators are union officials or union members. To pass reform legislation, it needs some support from the opposition, much of which is just as “socially” minded and, if only for sound electoral reasons, may refuse to curtail “workers’ rights.” As a result, the proposed reform package is decidedly timid. Some say it is just a bandage on a wooden leg, though others think that the very fact of a socialist government at last repenting is good news in itself.

A few items in the reform are significant. Entitlement to full unemployment pay is reduced from thirty-two to twelve months, a fixed tariff is proposed for severance pay, and the obligation to engage in industrywide wage bargaining is somewhat relaxed. If they pass, these would be useful measures. Much of the rest is little more than cosmetic. All in all, however, they are far too weak and far too anxious not to hurt, to restore the natural buoyancy of the economy.

Any but the boldest and widest-ranging reform is up against a force greater than itself, the dynamics of the advanced welfare state that acts as a giant automatic destabilizer. The incipient welfare state begins with social services absorbing under 20 percent of GDP. With the economy growing fairly briskly, more can be afforded, and bidding for votes ensures that “social” spending rises to the neighborhood of 25 percent. In fact, by 1990 the fifteen-country European average was 25.4 percent and Germany’s spending was exactly the same as the average. This level seemed sustainable though, from the point of view of productivity growth, probably not desirable. Some items of expenditure grow autonomously whatever you do; health service and pay-as-you-go state pensions are of this kind. Others grow when the economy starts doing less well; unemployment pay does this. The upshot is that the slower is economic growth, the more of GDP is absorbed in social spending.

By 1996, German social expenditure as a share of GDP passed the 30 percent mark, beaten only by a short head by France and the Scandinavian countries. After a slight easing in 1999-2000, the percentage continued its trend rise, and as we write it probably exceeds 32 percent.

Believers in socialist or communitarian doctrines will take it that this chunk of expenditure on all that is “social” rather than “market,” apart from its morally attractive aspect, is really a stabilizer. If things go awry on the market side, they are rescued by the rocklike solidity of social spending that, in addition, makes people feel safer and more willing to spend. I will not try and answer the claim of moral worth except to wonder about the moral worth of forcing workers to spend half or more of their gross wages on compulsory social insurance. Extortion is extortion even if it is “in your best interest.” However, let that pass.

Regarding the effect of a high and rising social service overhead on the course of the economy, to contend that it acts as a stabilizer is tantamount to saying that fewer incentives produce more jobs and more growth. Though such beliefs cannot be categorically disproved, they are very, very unlikely to be true. The commonsense view is that poor economic performance augments the relative share of social spending, and a higher share of social spending leads in turn to poorer economic performance—and so we go on until something totally unforeseen breaks this circle. Until then, thrashing about without quite sinking is probably the best the “social market economy” could hope for.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on May 15, 2003. Reprinted by permission.