On Wage Reduction and the Contract Between Workers and the State
My colleague Sezgin Polat, of Galatasaray University, has an interesting idea on wages and the burden of the crisis. All the more interesting, that just yesterday the ECB called for further wage flexibility, at a moment in which aggregate demand is despairingly low in the eurozone. Here is Sezgin’s proposal (I shortened it):
The latest austerity plan lacks the support of the Greek people. It is addressed, as usually happens in Europe when democratic backing of a policy emerges, by making recourse to “technocrats”. The democratic deficit is neglected by dictating the rules [from above].
One possible solution to overcome such deficit is to make a genuine deal with the Greek voters. This will enable social support and backing. Any public wage cuts, or welfare benefits reduction could be securitized by the government e.g using 10-year maturity bond. Securitization of the austerity cuts will function as a forced saving in its simplest form, as a way to carry income to the future, if the public debt problem is temporal as I assume and hope. Make the commitment to the people and give them the right to be in the position of a principal monitoring their agent, the government.
The German proposal to impose a borrowing limit clause in the national constitutions could be made more flexible by allowing governments to exceed the limit if they borrow directly from their citizens, making a commitment that can bind them as agents. The direct borrowing can serve as a fiscal transfer of the intertemporal kind, binding national governments to their citizens/voters, who in the case of default would be the ones with whom the government should negotiate any hair cut.
The feasibility of this proposal has to be worked out, and it assumes that the budgetary effort for the government is only temporary. Furthermore, it has the major flaw of not addressing the short run contractionary effects of wage and purchasing power reduction. I do wholeheartedly believe that wage cuts are not effective, and unjust. But if wage cuts need to be imposed, then Sezgin’s proposal has a few appealing features.
- First, it gives substance to the typical argument that we hear when sacrifice is imposed to the people. We hear a lot the sentence “We need to impose hard times today in exchange for a brighter future”. Wage cut securization would transform this generic engagement in a binding commitment.
- Second, it would at least partially free the government from foreign holding of domestic bonds, and from speculation. This is an interesting aspect of the proposal, that is shared with an article calling for forced borrowing (imposed on the wealthier) that was published on the Financial Times a few months ago.
- Third, but this is harder to demonstrate, if workers have some sort of permanent income approach, the fact that the wage cut is in the end temporary could impact less their consumption today, and hence be less contractionary. This last argument actually implies that workers have savings to use to smooth consumption; any newscast on Greece shows how implausible this is…
So why not discuss this further? This is what public debate is for.