Europe's wrong turn: Three Nobel Laureates urge expansion to ease unemployment

LAST WEEK I had the good fortune to sit around a conference table with three Nobel Laureates in Economics to discuss Europe's mounting unemployment problems, among other things. Prior to that, President Clinton delivered a State of the Union message in which he combined crime control, welfare reform and health care security into a three- pronged domestic programme that was billed as a pressing economic experiment rather than traditional social reform.

Mr Clinton's assertion that progress in all three would lead to one of the largest domestic economic benefits in decades had elements of both conservative Reagonomics and classic New Deal liberalism. The appeals from the Nobel Laureates for a variation of classic Keynesian expansion to fight Europe's employment ills also borrowed from an earlier era.

In both, the emphasis was on 'renewal' through a healthy dose of government involvement, which went against the grain of the ardent supply- siders.

Robert Solow, the Nobel Laureate from the Massachusetts Institute of Technology (MIT) was the most impassioned in his belief that European policy-makers had got it wrong for more than a decade as a result of their adherence to stricter-than-necessary macro-economic policy.

He traced Europe's unemployment problems to the late 1970s, when he said that growth had virtually stopped. The two other Nobel Laureates, Paul Samuelson, also of MIT, and James Tobin, of Yale, agreed with Solow that macroeconomic solutions had been ignored for too long: what is needed is a quick, concerted effort to lower European interest rates. The consensus was that this could erase 3 to 4 percentage points of Europe's current high unemployment.

Above all, the three stressed that Europe's unemployment problems were not cyclical, nor could they be blamed solely on structural rigidities. The result is that they will not disappear magically with a projected Europe-wide recovery in 1996/7 without macro-economic intervention by government.

Samuelson was particularly harsh in his criticism that Europe had rejected any expansionary policies for the last 15 years, in a programme that has failed miserably on the job creation front. The sanctity of the price level has become too much of a religion, without regard to the real output of the economy.

The result, according to Tobin, was a new generation of unemployables, people who had been out of work for so long they had lost touch with the marketplace.

Solow, who delivered the Lord Robbins Memorial Lecture at the conference sponsored by the Claremont Graduate School, said that he was motivated by the fear that European policy-makers were ignoring the real causes and therefore the right solutions. 'What is the social and political cost of two more years of high structural unemployment?' he asked.

Contrast was made between two former central bankers: John Crow of Canada, who was cited as one who had got it wrong on the macro policy front, and Paul Volcker, of the US, also a strong anti- inflation fighter, who was praised for getting it right.

In 1982, according to Samuelson, Volcker made a 'magnificent decision', applying some monetary steam to the stagnant US economy despite cries from inflation militants that he was sacrificing the goal of complete price stability by 1995. Later, once he saw that the US recovery was strong, Volcker pulled back and applied the brakes.

By contrast, Crow adhered religiously to strict anti-inflation policies that resulted in 10 per cent and higher unemployment and eventually brought down an entrenched political party in Canada. Moral of the lesson, according to the Nobel Laureates, is that it is better to overshoot and correct than to do nothing at all.

Paul McCracken, a former chairman of the US Council of Economic Advisers, noted that one of 'the advantages of age' is the certain knowledge that such policies work.

President Clinton, a new generation Democrat, also promised that interventionist policies would work in presenting his ambitious social reform programme, which is heading for a rough ride in Congress.

Like the Nobel Laureates on the macro side, he presented his programmes as more of a job-creation scheme designed to ''renew' entire communities and restore family structures. Communities cannot grow while violence is escalating, Clinton said.

Similarly, without healthcare security, many people will stay on welfare when they would rather work in order to provide these benefits to their families. In making his appeal, Clinton illustrated the potential social benefits by citing the remarks of a former welfare recipient.

'We asked a woman from my state 'what is the best thing about being off welfare and into a job?' She replied 'that when my boy goes to school and they say what does your mother do for a living, he can give an answer'.'