Saturday, April 11, 2009

The Best of Both Worlds

Segway, not content to be bigger than the PC, is now teaming up with GM to save the American auto industry.

Which reminds me ...

GM's North American operations have to get much smaller to be viable. From a macroeconomic perspective, it would be a good thing for that happen quickly and without incident. The problem is that many real people work at GM and its suppliers. Compassion aside, asking these people to "suck it up" is not efficient, since people will resist changes that are obviously not in their best interests through the political process.

Americans accepted the risks associated with an efficient labor market during times of prosperity, but as unemployment rises we can expect a backlash. France is the prototype of runaway labor populism, and the resulting high unemployment has explosive consequences. Can we avoid this fate?

Enter Flexicurity. Pioneered by the Nordic countries, it is a combination of a flexible labor market (like America), a generous social safety net (not like America), and responsibilities for the unemployed to continue receiving assistance (even more stringent than America).

I like the idea of getting workers out of obsolete jobs as fast as possible; otherwise, it's a waste of human capital. By providing a generous social safety net, we can improve the alignment of incentives between citizen and society. While I expect there will be fraud and abuse, ultimately, the inefficiencies from defrauding generous welfare have to be balanced against the inefficiencies that result from other policy choices, such as handcuffing businesses in the labor market.

Since we cannot afford our current entitlements, I'm willing to pay more taxes for policies based upon flexicurity. This is not despite the fact that the labor market for my particular skills is strong and should stay so during my working lifetime, but because of it. I'm going to pay for the curity whether or not I directly need it: protectionism, subsidies, and distorting incentives will get me if taxes don't. I'd rather the goal of sustainable labor market efficiency be tackled directly, so that I can benefit from the flex via higher wages, meritocracy over seniority, and increased job choices.

This line of thinking forces me to be in favor of some kind of health care reform. Currently I prefer a Mccain style plan to adjust the tax code, rather than what Obama has been proposing lately.

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