Opinion

Edward Hadas

Time to retire unemployment

Edward Hadas
Aug 20, 2014 09:25 UTC

Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Give Janet Yellen credit. The chair of the U.S. Federal Reserve is keen to use monetary policy to help get more people into good jobs. Her priority – work is more important than finance – is reflected in the subject of this week’s get-together for the world’s central bankers: “Re-Evaluating Labor Market Dynamics.” One item should be on the agenda of the distinguished guests at Jackson Hole, Wyoming: how to replace the concept of unemployment.

The suggestion may sound frivolous, but the idea of a simple measure of unemployment is tied to a wrong view of how modern economies work. The unemployment rate made sense in developed economies a century ago, when workers were men who wanted full-time jobs as soon as they finished school, and to continue until they died or retired. In that world, unemployment was easy to define – working-age men without a job.

That binary split of employed and unemployed no longer exists. Many people nowadays drift in and out of paid jobs, shifting back and forth from full to part-time work. Some move in and out of the legal economy. Transient self-employment is common. Retirement is a flexible concept. Parents and other carers sometimes balance paid and unpaid labour.

Students, prisoners or disabled people at any time could and might want to work for pay. And paid employment cannot always be interpreted as a sign of a well-functioning labour market: jobs may be precarious, ill-suited to the worker’s skills, or pay less than a living wage.

Do autocrats and strong economies go hand in hand?

Edward Hadas
Aug 15, 2014 08:52 UTC

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Are authoritarian governments bad for the economy? Turkish voters do not seem to think so. On August 10, Tayyip Erdogan won an absolute majority in the country’s presidential election. Observers say that the country’s increasing prosperity is a big part of his AK Party’s appeal. Erdogan is not the only popular authoritarian around. Viktor Orban, who reportedly endorsed “illiberal” government, wins similar majorities in Hungary. If Russia had an election today, President Vladimir Putin would win big. And Xi Jinping, who seems to be making one-party rule in China more authoritarian, would undoubtedly triumph if the government bothered with elections.

The success of such leaders irritates many Americans and Western Europeans, who believe that genuine multi-party democracy is the natural political arrangement in the modern world. Clearly, though, most voters in some countries want authoritarian leaders who tolerate no effective opposition and who impose their vision on the nation.

The stupidity of student debt

Edward Hadas
Jul 2, 2014 14:31 UTC

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The fast increase in loans to pay for higher education is a trend that is moving in the wrong direction. The idea that borrowing should play an important role in financing higher education, now standard thinking in the United States and the United Kingdom, is financially dangerous and economically wrongheaded.

Overall, American households are deleveraging. Most notably, U.S. mortgage debt outstanding has fallen to 51 percent from 71 percent of GDP since the end of 2008, according to survey data from the New York Federal Reserve. However, over the same period the ratio of student loans to GDP increased to 5.7 percent from 4.3 percent. The $1 trillion now outstanding is economically significant. In England, the ratio of student loans to GDP is only about half as high as in the United States, but the 80 percent increase over the last five years has been even faster.

Three Ms for economics re-education

Edward Hadas
May 21, 2014 15:10 UTC

Many economics students are unhappy with what they are being taught. A network of 62 groups from around the world has drawn up a petition calling for more “pluralism” in instruction. The malcontents find the dominant neoclassical model too narrow and want to know why so few experts predicted the 2008 financial crisis. They also want less abstract theory and more study of actual economies. The reproaches are just, but the students’ reform agenda is insufficiently radical.

They underestimate the scale of the intellectual scandal. The profession’s ignoble tradition started in the 19th century, when most political economists, as they were then known, failed to notice that industry was leading to massive improvements in the standard of living. Today’s practitioners know much more, but they still struggle to explain the most basic phenomena – prices, wages, money, credit, unemployment and development.

Pluralism, the study of alternative schools of economic thought, would help, but not much. With the partial exception of the still underdeveloped study of institutional economics, the available alternatives to the neoclassical synthesis largely rely on the same erroneous assumptions that humans are rational and that market forces almost exclusively shape economies.

Mega sovereign writeoff could work

Edward Hadas
Feb 12, 2014 15:48 UTC

A massive sovereign debt reduction is the right way to reduce the ridiculously high indebtedness of governments. The idea might sound crazy, but it makes economic sense, and could be done, albeit after some serious preparatory work.

Many rich country governments have been borrowing excessively in recent years. In 1991, when the calculations from the International Monetary Fund started, gross government debt of advanced economies was 60 percent of GDP. This year it is expected to be 108 percent of GDP, or about $51 trillion.

The current level is much too high for the overall economic good. Heavily indebted governments spend too much of their tax revenue on interest payments and spend too much time trying to placate bond buyers, who rarely support useful long-term investments. Rumours of possible default can spark a financial crisis. And the excessive supply of sovereign obligations encourages parasitic speculation. The economically pointless trades of supposedly risk-free government debt pay much of the high salaries at investment banks.

Apple, hypocrisy and stakeholder tax

Edward Hadas
May 22, 2013 14:00 UTC

Apple is the latest multinational to feel the heat on cross-border tax management. The news that the tech giant used Irish law to lower U.S. tax payments should not have been surprising. After all, “Do no evil” Google had no second thoughts about recording what were essentially British sales as Irish, for the sake of a lower tax rate. It’s hardly likely that Apple, which has cultivated a certain anti-establishment air, would have hesitated.

Indeed, until a few months ago, I don’t think there was a corporate treasurer anywhere who would have taken justice into account when deciding on tax strategy. At most, there might be worries about bad publicity, but the well-established corporate practice of tax dodging had generated little attention.

And who would complain? Lower taxes on profit bring benefits to most people connected with companies; the money that doesn’t go to the government goes to workers, customers and shareholders. Besides, most experts who understand the arcane rules of international taxation are paid to use them to keep payments down.

Banker-think in welcome retreat

Edward Hadas
Mar 27, 2013 09:45 UTC

For once, investors have got it right. In 2008, their panic turned a financial crisis into a long multinational recession, but they have mostly yawned right through the drama in Nicosia. They hardly twitched at a stream of warnings from investment banks and pundits: bank deposits are no longer sacrosanct; the European Union has been exposed as despotic and incompetent; the Russians are coming; the Russians are going; capital controls will destroy everything; “bail in” (taking losses on loans that cannot be repaid) is the end of the world as we once knew it.

Such talk was out of proportion. Cyprus is a small country – its GDP would put it at 116 on the Fortune 500 list of the largest quoted U.S. companies – with a financial sector that had expanded excessively for two decades, almost entirely by attracting flight capital from Russia. A national financial collapse was both insignificant and merited. Besides, the EU and the International Monetary Fund had a plan to deal with the collapse: a combination of financial help from other countries and managed pain for depositors in Cypriot banks.

Alarmists could not deny all this, but they invoked the great demons of financial crises: precedent and contagion. That was silly. Cyprus was obviously a special case, and the European Central Bank was clearly determined, and able, to keep its problems from spreading. Even if Cyprus had left the euro zone, there would have been no dangerous precedents or grim effects, just a demonstration of a bizarre desire for economic self-harm. For everyone else, Cyprus would still be like a flea-bite – scratch for a minute and forget about it.

Cyprus and the danger of promises

Edward Hadas
Mar 19, 2013 14:42 UTC

Don’t make promises you can’t keep. Wise parents tell small children that, and wary lovers use that command as a taunt. But in the world of finance, unrealistic promises are the norm, and they are too often broken. Depositors in the banks of Cyprus may be learning that lesson.

True, the government of the Mediterranean island may retreat from its first plan, and in any case the accounts are to be taxed, not written down, so the terms of the deposit insurance will be technically kept. And strictly speaking, deposit guarantees are not being breached in the United States and other countries with an inflation rate higher than the interest rate paid on savings accounts, even though that inflation-tax steadily erodes the accounts’ real value. But in fact, governments – both small and suspect like Cyprus, and large and respectable like the United States – have failed the lovers’ test. They have made promises to savers which they either cannot or will not keep.

These trust-breaking governments can resort to the errant lover’s usual excuse: we could not have known what the future would bring. Just as bitter experience somehow invalidates a promise of undying love, an impossible-to-predict avalanche of bad loans might erase the obligations of Cypriot banks and the equally unpredictable financial crisis could exculpate monetary authorities in the United States and elsewhere. Such events, they can say, are like the acts of God which invalidate insurance policies.

Taxes and human nature

Edward Hadas
Jan 30, 2013 14:54 UTC

The tax system could well be the most idiotic, hypocritical and unnecessarily complicated part of modern industrial economies. The system needs to be rebuilt.

In developed economies, as governments have expanded, taxes have increasingly been used as a tool of economic and social policy. The rich are taxed more than the poor for the sake of a vision of social justice: from each according his ability. Depending on the jurisdiction, some good cause or another is favoured: house ownership, marriage, children, charitable contributions, savings. For companies, an almost endless series of exemptions, deductions and definitions are supposed to encourage investment, employment or some other desirable end.

Each tax wrinkle produces its own complex set of rules. Taxpayers’ continuous efforts to minimise payments lead to yet more rules. Each tax jurisdiction has its own system, a diversity which both increases the intricacies of international business and creates opportunities for individuals and companies to place income where it is less highly taxed.

The then and now of pensions

Edward Hadas
Jan 16, 2013 14:50 UTC

What is the right size for pensions? That question can be approached in two ways: “then” and “now”. Pensions, and other economic arrangements to support elderly people, may be considered repayments for what they did back then, when they were young. Alternatively, these payments may be considered as a share of output right now. In rich countries, the two approaches are in conflict. The “then” logic, which is based on promises made long ago, supports higher pension payments than the “now” logic, which is mindful of rapidly ageing populations. Politicians struggle to find acceptable compromises between the two approaches.

Until 60 or 70 years ago, politicians did not have to worry much because governments played a minimal role in supporting the few people who lived long enough to be unable to earn their keep. The elderly mostly relied on their own families for support. Moralists provided a “then” justification for this obligation: children had a duty to the parents who gave life, the young owed the old more than could ever be repaid for the provision of nurture and wisdom.

Philosophers and religious teachers often claimed that the duty of children to parents was as natural as that of parents to their children. However, many people must have remained unpersuaded. Otherwise, the injunction would not have been repeated so often in such solemn tones.

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