Edmund Phelps: “Clientelism is the essence of social protection”

Truman Factor : What are your thoughts coming out of the World Economic Forum (WEF) in Davos this year, where one of the central themes was growing inequality? How were your ideas on innovation and growth met at the Forum?

Phelps: “There was no clear consensus on how to address inequality or, for that matter, how to address the stagnation that some of us see in the West. I view both phenomena as symptoms of a decline of dynamism in the once-dynamic nations – Britain, Germany and France in the postwar period, America in the late 1960s. My explanation of the decline has met resistance especially from the many business interests who live in denial that a slowdown has occurred.”

TF: Six years into the European crisis, the prospects for stagnation in this part of the world echo the concerns you raise in “Mass Flourishing” –lack of innovation results in anemic economies and high unemployment. What is your current assessment of Europe today?

P: “I hope and expect that the nations in Europe hit hard by the financial crisis – Greece, Spain, Portugal, Ireland and Italy – will take steps to achieve a faster recovery. But after such a recovery, those nations will still be far short of the moral reconstruction that will be necessary to achieve “mass flourishing.” France, Britain and Germany have a long way to go too.

“The crucial challenge for Europe is to understand that “social protection” – the preservation and pandering of vested interests, cronies and insiders – far from being a godsend is the poison behind the stifling and stultifying economies in Europe. Moderate levels of social insurance are relatively harmless if financed by neutral taxation. Behind that protection in turn is the culture of corporatism, with its hostility to the modern values that once made the more modern nations great – values under the categories of individualism, of vitalism and self-expression. Of course, changing social thought will be a tall order. But I doubt that adequate change can come without such a cultural reconstruction.”

TF:  What is your view on the prospects for the Spanish economy to flourish? Is insisting on internal devaluation the only tool at our disposal for the time being?

P: “It is clear that for Spain to get from where it is to where it needs to be it will have to survive in the transition. I trust that Spain is not doomed to fail. I would recommend the program I have championed for nearly two decades – gradual subsidies to companies for their on-going employment of low-wage employees¹. It is imperfect but at least it will function to pull up employment and wages at the bottom of the market. But the state cannot subsidize employment across the whole economy or even across the lower half. An “internal devaluation” may well prove necessary – if it isn’t already proven. The wealthy can pay a wealth tax and everyone can pay taxes on all sorts of government benefits just as they pay taxes on their incomes.”

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