Is Europe Ready for Reform?

This week, Charlemagne’s column in The Economist deals with policy reforms in Europe (Reform or Die). The author argues that there is growing momentum for reform in Europe because the situation has become so bad that Europeans are now more ready for reform than ever in the hope that the “bad-times-can-be-good-times”.

Indeed, reforms do not take place because a country’s whole population has suddenly become libertarian or most people have become acquainted with Austrian economics. The idea that people’s mental models and views of the world have to change in order for policy reforms to take place is misleading. Surely, it would be great if public opinion could suddenly change in the right direction, but it doesn’t happen.

As the experiences of New Zealand, Ireland, and Britain show, policy reforms happen because a country’s economy slides towards the abyss. Then and only then, the political “courage” for reform can be found and new policies can be carried out in spite of what people believe. This is only because the choice is either to fall in the abyss or to reform. In essence, once the opportunity costs (political and otherwise) of reforms have plummeted, they become acceptable (see also here).

Years after the reforms started, people come to like what they see and realize that the reforms were necessary. They are still not libertarians, but they come to accept that a bloated and heavily regulated economy was probably not a good idea (until they forget). This is why public opinions and governments in New Zealand, Ireland, and Britain are now much more to the right (in the sense of pro-market) than they were 30 years ago (compare PM Helen Clark and Sir Robert Muldoon in New Zealand, and PM Tony Blair and Sir Edward Heath in the UK).

Has Europe come close to the abyss yet? Perhaps. Germany is now taking the lead in reforming, although they just started to sort out their public finances (see here). Spain also started a few years ago and is now ahead of the pack. On the other hand, the situation in Belgium, France, Portugal (see this other article in The Economist), and Italy is deteriorating but is not yet where New Zealand was in 1984.

It is hard to say when serious policy reform in Europe will happen. In the mean time, economists need to continue reflect on the mechanisms for social change and the policies to implement. As the great Milton Friedman said in his 1982 preface of Capitalism and Freedom: “That, I believe, is our [economists] basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable”.

Comments

[Rafe]

Bill Hutt was good on the role of economists and one would like to see a replay of history with the economists, especially Lord Keynes, following his advice and his example as well. In "Politically Impossible: An Essay on the Supposed Electoral Obstacles Impeding the Translation of Economic Analysis into Policy" (note the trademark long subtitle) he proposed a "dual formula" for economists to deal with the problem of unpopular policies. He quoted Milton Friedman on the duty of economists to prescribe what should be done, without courting political approval. He then noted that Friedman had departed from his own advice on occasions.

"Friedman's maxim implies that the economist's role is to do this (the ideal) and not to do that (the expedient). I suggest it is the economist's role and duty (in public policy discussions) to do both. Why should not advice proferred typically take the form of saying to the politicians (and indirectly to electorates) with complete candour, something like the following?"

'In our judgement, the best you will be able to get away with is programme A along the following lines; but if you could find a convincing way of really explaining the issues to the electorate, our advice would have to be quite different. We should have to recommend programme B along the following lines'."

"I am not suggesting that economists ought ever close their eyes to political realities. On the contrary, when they are concerned with the practical applications of their science, they ought in every instance to bring voting prospects into the picture - but explicitly."

http://www.the-rathouse.com/Revivalist4/RC_Huttachieve.html

[Rafe]

This is a really interesting retrospective commentary on the reform of the car industry in Australia by an economist who worked closely with the relevant Minister and the various departments that had fingers in the pie.
http://www.clubtroppo.com.au/2006/02/08/the-automotive-industry-the-column-3/

Plus a self-indulgent notice for a piece on the same site concerned with the Danish cartoons.
http://www.clubtroppo.com.au/2006/02/05/cartoons-censorship-and-civility/