Challenges for Europe

Challenges for Europe

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Challenges for Europe Edited by Hugh Stephenson Centre for Economic Performance London School of Economics and Political Science

Editorial matter and selection Hugh Stephenson 2004 Individual chapters contributors 2004 Softcover reprint of the hardcover 1st edition 2004 978-1-4039-3659-2 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-51878-4 ISBN 978-0-230-52449-1 (ebook) DOI 10.1057/9780230524491 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Challenges for Europe / edited by Hugh Stephenson. p. cm. Includes bibliographical references and index. 1. Europe Economic conditions 21st century. 2. Europe Economic policy. I. Stephenson, Hugh, 1938 HC240.C48 2005 330.94 dc22 2004052198 10 9 8 7 6 5 4 3 2 1 13 12 11 10 09 08 07 06 05 04

Contents List of Tables List of Figures Preface Notes on the Contributors vi vii ix x 1 What s Wrong with Europe s Economy? 1 Adair Turner 2 Assessing the Euro: Expectations and Achievements 31 Peter B. Kenen 3 The Return of Deflation: What Can Central Banks Do? 46 Willem Buiter 4 The Problem of Inequality 75 Paul Krugman 5 Education Matters 90 Alan B. Krueger 6 On the Edge: The Uneasy Boundaries Between Public and Private Sectors 125 John Kay 7 Demographics, Economics and Social Choice 141 Adair Turner 8 Europe: Pillar of the World Economy or Just an Appendix? 168 Norbert Walter Index 179 v

List of Tables 1.1 US and EU growth compared 3 1.2 Labour productivity per hour worked 3 1.3 Unemployment rates, 1973 2000 4 1.4 Hours worked per person in employment 7 1.5 Labour productivity per hour worked 10 1.6 Labour productivity by type of industry 13 3.1 Total, goods and services inflation in the UK 59 5.1 Cumulative CAT gains by SES 116 7.1 Support ratio dynamics 150 7.2 Support ratio forecasts, 2000 50 151 7.3 Support ratio dynamics 152 7.4 Demographic conditions and investment attractiveness 155 7.5 Immigration-only responses: UN migration scenario 156 7.6 Fertility intentions of women: England and Wales 164 vi

List of Figures 1.1 Real GDP per capita growth, 1993 2000 5 1.2 Employment rates, 2000 5 1.3 Productivity, labour input and prosperity: France and US, 1999 6 1.4 Labour productivity per hour worked: US 8 1.5 Relative output per hour worked by sector, 1999 9 1.6 US productivity per hour, 1973 2002 10 1.7 Industry contribution to labour productivity gap 11 1.8 Labour productivity growth by sector, 1995 99 14 1.9 Employment rates, 2000 17 1.10 Average hourly wage costs, 2000 18 1.11 General government total outlays as percentage of GDP, 2001 19 1.12 GDP per capita growth and public expenditure, 1960 95 19 1.13 Exports have sustained Eurozone growth 22 1.14 Italian gross government debt 23 1.15 General government structural balances, 2000 24 3.1 Key economic trends in Japan: 1950 to 2002 48 3.2 Key economic trends in USA: 1950 to 2002 49 3.3 Key economic trends in EU: 1950 to 2002 50 3.4 Key economic trends in UK: 1950 to 2002 51 3.5 Price level and inflation: UK, 1800 1914 52 3.6 Bank rate, inflation and /$ exchange rate, 1817 1914 53 4.1 Income and population shares for top 0.01%, 1% and 10% of US population: 1913, 1929, 1970 and 2000 77 4.2 US federal tax rates 82 5.1 Earnings rise with education, February 1990 92 5.2 Difference in log earnings versus difference in schooling; Twinsburg identical twins sample 94 5.3 Years of education, by quarter of birth 96 5.4 Season of birth and years of schooling 97 5.5 Mean log weekly wage, by quarter of birth 98 vii

viii List of Figures 5.6 Increases in education lead to GDP growth over long periods, 97 countries 101 5.7 Ratio of wages of college to high school graduates 103 5.8 Most of national income is due to education and experience: United States, 1996 104 5.9 Years of schooling by birth cohort: US native-born residents at age 35 105 5.10 Returns to cognitive skills: hourly earnings by test scores 107 5.11 IALS scores by year of birth: United States 107 5.12 IALS scores by year of birth: United Kingdom 109 5.13 IALS scores by year of birth: Sweden 109 5.14 Hanushek s class-size results for 277 estimates 111 5.15 Average percentage of estimates positive, negative or unknown sign, by number of estimates taken from study 111 5.16 Sample starting in kindergarten 113 5.17 Maths CAT gains over the school year, by family socioeconomic status (SES) 115 5.18 Maths CAT gains over the summer, by family socioeconomic status 115 7.1 Life expectancy at birth, male 143 7.2 Life expectancy at 60, male 143 7.3 Total fertility rates: Europe and North America, 1950 2000 145 7.4 Total fertility rates: Asian countries, 1950 2000 146 7.5 Total fertility rates: Iran, Turkey and Brazil, 1950 2020 146 7.6 From pyramids to columns 147 7.7 PAYG pension systems: key ratios 148 7.8 Demographic change in the UK and China, UN Medium Variant projection 154 7.9 Rising longevity, fixed retirement age and stable support ratios 157 7.10 Population density: US and Europe 160 7.11 Italy s population structure, 1970 2050 164 7.12 European fertility rates, 2001 165

Preface In 2002, the Centre for Economic Performance at the LSE was awarded a Queen s Anniversary Prize for Higher and Further Education for its research on unemployment and inequality. To mark this award, the Centre ran a series of Queen s Prize public lectures by some of the world s leading academic economists and commentators on the theme of the main current challenges for Europe. This volume consists of an edited version of those eight public lectures delivered at the LSE in the order they appear here between February 2003 and January 2004. The CEP is the leading research centre for applied economics in Europe. The citation for the Queen s Anniversary Prize said that the CEP is recognized as a centre of national and international excellence in the application of economic theory and rigorous empirical analysis to the issues of unemployment, productivity, education and international trade. These lectures provide stimulating and controversial contributions to many of the key debates about the future of Europe, drawing extensively on American experiments and experience to throw light on both possibilities and pitfalls that face us. HUGH STEPHENSON ix

Notes on the Contributors Willem Buiter is Chief Economist at the European Bank for Reconstruction and Development. John Kay is Visiting Professor at the Centre of Economic Performance at the London School of Economics and Political Science and author of The Truth about Markets. Peter B. Kenen is Walker Professor of Economics and International Finance at Princeton University. Alan B. Krueger is Bendheim Professor of Economics and Public Affairs at Princeton University and a Research Associate at the National Bureau of Economic Research. Paul Krugman is Professor of Economics and International Affairs at Princeton University. Adair Turner is Vice-Chairman of Merrill Lynch Holdings and a Visiting Professor as the London School of Economics and Political Science. Norbert Walter is Chief Economist of Deutsche Bank Group. x