Transcript November 13, 2013, The Citizen`s Share Idea for Europe, Saving EU

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