>> 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 --

>> [Inaudible]

>> 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 --

>> [Inaudible]

>> 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.

>> [Inaudible]

>> 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 ]