Why the Left should learn to love liberalism

Alberto Alesina, Francesco Giavazzi, 5 October 2007

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Continental Europe is in the midst of a burning discussion about the pros and cons of market-friendly reforms and greater economic liberalism. We all know what the package contains – competition, labour-market flexibility, liberalisation of services, lower taxes, and privatisations.

The traditional debate runs as follows. These reforms are “right wing” policies. They may increase efficiency – perhaps even economic growth – but they also tend to increase inequality and to be detrimental for the poorest in society. Therefore – and here comes the typical “socially compassionate” European argument – be very careful moving in that direction. Governments should proceed cautiously and be ready to backtrack at any point.

Much of this reasoning is fundamentally wrong. Labour-market flexibility, deregulation of the service industry, pension reforms and greater competition in university funding is not anti-equality. Such reforms shift financing from taxpayers to the users themselves and, as such, tend to eliminate rents. They tend to increase productivity by basing rewards on merit rather than on being an insider. They tend to open up opportunities for younger workers who are not yet well-connected. Pursuing pro-market reforms does not imply facing a trade-off between efficiency and social justice. In this sense, pro-market policies are “left wing”, if that means reducing the economic privileges enjoyed by “insiders”.

Expanding on some of the messages of a book we published a year ago,1 this is the argument we make in our new short book – Il liberismo è di sinistra 2. The new book was written with Italy in mind, but most of our comments apply equally to other European reform-laggards, France above all. Our point is that the goals that are traditionally held dear by the European left – like protection of the economically weakest and aversion to excessive inequality and un-earned rewards to insiders – should lead the left to adopt pro-market policies. What has often been the norm in Europe from the 60s until recently – heavy market regulation, protection of the status quo, an enormous public sector which rewards not the very poor but the most-connected and requires highly distortionary taxation, universities which often produce mediocrity in the name of egalitarianism (while the very rich get a good education anyway, somehow) –all end up decreasing efficiency and justice at the same time.

A good example can be found in the labour market. In Italy, Spain, and France, the labour market is split. The young are hired with temporary contracts which offer no social security and no prospects. When the contract expires, the employer opts not to renew it, so as not to run the risk of having to convert temporary hires into permanent employees who would de facto immediately acquire the right never to be fired. Reforms that eliminate this duality by making the entire labour market flexible with an appropriate scheme of unemployment compensation would not only reduce unemployment but, most importantly, would favour the really poor and the young entry-level workers. This is an example of a pro-market policy that favours the poor.

Or think of public spending and consider again the case of Italy. The government there does very little to protect families from the risk of falling below the poverty line. Why? Because Italy spends too much on pensions and too little on other welfare programs. Guess who is against reducing pension expenditure by increasing the retirement age? The unions, supported by much of the left! By adopting this stance, unions are not helping the poor, just their members who are old workers from heavily unionised sectors and other retirees. During the Summer, the threat of a general strike – in which only the old, unionised and protected workers would have stopped working (certainly not the young with temporary contracts and no social security) – was enough to convince the left-wing government to lower the retirement age from 60 to 58. This will create an even bigger burden for today’s young. How can anybody claim that these unions and their political allies in the left still represent the young and the poor?

If there is no trade-off then between social justice and efficiency in today’s Europe, why are reforms so slow in coming to nations like Italy and France? Why is the typical “compassionate” European voter confused about the pro-poor features of pro-market reforms? The answer is the usual one in political economics – the “insiders” block reforms, although the political mechanisms vary from country to country. Alas, they can’t simply say no to reforms just because they would hurt their interests. They need the rhetoric of defending the weak and poor.

Consider for instance the case of the Italian State-owned airline, Alitalia. The company has been losing money now for more than 10 years, costing taxpayers a fortune. Pilots are paid as much as elsewhere, but fly half the hours. And a coffee served on an Alitalia flight is twice as expensive as on any other regular airline, not to mention low-cost carriers. The company’s unions fight to keep receiving state aid, and one can understand this. But why should a left-wing government be on their side and keep taxing the poor to transfer money to the relatively well-off Alitalia crews? By keeping Alitalia alive, it prevents creative destruction in the airline industry which would create more jobs, not fewer.

Reformists in Europe should refuse to be pushed in the corner of the equation: “more market equals more injustice”. It is exactly the opposite. Accepting this equation—and trying to apologise for it – is certainly not the way to win the battle. If the European left wants to be able to say honestly that it fights for the neediest members of our society, it must adopt as its battle cry the pursuit of competition, reforms and a system based on meritocracy.

Footnotes:

1 Alberto Alesina and Francesco Giavazzi, The Future of Europe, MIT Press, 2006.

2 Il Saggiatore, Milan, 2007.

Topics: Politics and economics
Tags: anti-reformists, Inequality, left-wing, pro-market policies

Nathaniel Ropes Professor of Political Economy, Harvard University; and Research Fellow, CEPR

Francesco Giavazzi

Professor of Economics, Bocconi University; and Research Fellow, CEPR

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