Economics on Trial; M. Skousen

My column was not well received by the profession. None of the economists cited in my column responded, perhaps because they were too embarrassed. But Milton Friedman wrote, "Herbert Stein underesti mates his knowledge; you overestimate yours." Brigham Young University profes sor Larry Wimmer said, "Ignorance is pref erable to arrogance. " So the battle of ideas continues. Now along comes Charles R. Bean, a Mark Skousen is an economist at Rollins Col lege, Winter Park, Florida 32789 and editor in chief of Forecasts & Strategies, an investment newsletter. He is the author of Economics on Trial and other books on economic andfinancial topics. For more information on his books and newsletter, contact Phillips Publishing Inc. at (800) 777-5005. bright economist at the London School of Economics, writing in a recent issue of the Journal of Economic Literature. Mter en gaging in 47 pages of citations, graphs, charts, cross-country regression analysis, and econometric studies, he bravely con cludes that nobody really knows why un employment is so high in Europe. None of the numerous technical models works. It's all a "major puzzle. "

Obviously, if economists can't explain why a major problem such as European unemployment exists, they can't be ex pected to prescribe a policy to rectify the situation. Hence, the growing impotence of the economics profession. It has blunted Occam's Razor: Complexity is preferable to simplicity. Economists know so much that they now know so little. Fortunately, not all economists subscribe to this new form of economic nihilism. Some economists see through the clouds of com plexity, realizing that econometric modeling often obscures rather than elucidates the real nature of the problem. It's time to return to basic economic principles. The Real Cause of Unemployment For example, Richard K. Vedder and Lowell E. Gallaway, economists at Ohio University, demonstrate quite powerfully that government policies cause widespread and persistent unemployment by raising real wages above equilibrium levels. Labor laws 54 significantlyincrease labor costs and hence discourage businesses from hiring workers.

In addition, the federal government's infla tionary fiscaland monetary policies create a boom-bust business cycle, causing much temporary unemployment of labor and re sources. Their important study, Out of Work, applies their thesis to the United States during the twentieth century and concludes that unemployment is primarily due to "government activism." 1 Applying the Thesis to Europe The unemployment rate has been gradu ally rising in Europe and now exceeds 11 percent, compared to 6 percent in the United States and 3percent inJapan. It's the highest since the oil-shock years of the 1970s. But today there is no oil crisis. Through much of the 1980s,virtually no new jobs were created in the private sector. Fifty percent of the 16 million unemployed in Western Europe are considered long-term unemployed-without work for a year or longer. Only 11 percent of U.S. jobless are long term. What is the cause of European jobless ness? Despite the machinations of econo metricians, the answer is not that difficultto discover. First, high payroll taxes-per sonal income tax withholding, social secu rity, and unemployment compensation discourage businesses from hiring. As Ed mund S. Phelps, economics professor at Columbia University, declares, "Nearly every European country has brought much of its unemployment on itself-through its punishing taxation of labor.... Big increases in payroll and personal income taxes in most countries have been mass job-killers. ,,2 Last year, in an effort to close the national deficit, France raised income taxes by 10 percent. Not surprisingly, the unemployment rate in France rose by about a point and a half to 12.6 percent.

A second cause of unemployment in Eu rope is its labor laws and regulations, such as minimum wages, collective bargaining, and labor-management restrictions. Other 55 mandatory benefits, including health care, pensions, unemployment and disability compensation, and paid vacations, raise labor costs. The minimum wage in Belgium is $7 an hour, compared to $4.25 in the United States. Even now, German labor unions are pushing for a four-day workweek, amount ing to an immediate 20 percent increase in real wages. In Italy, an employer must give up to six months notice before dismissal. In order to protect workers from sudden un employment, Spain passed legislation mak ing it virtually impossible for employers to fire workers. These are disguised methods of raisinglabor costs. But the actual effect is unemployment: If you can't fire workers, why hire? Spain's labor law dealing with employers' obligations to the work force is 600 pages long. It should come as no sur prise that, as a result of this legislation, Spain's unemployment rate has gradually risen to depression levels, 25 percent. Por tugal, on the other hand, has a less encum bered labor market and an unemployment rate of only 5.5 percent.

Third, generous welfare benefits to the unemployed, encourages the jobless to avoid work. The existence of the European Common Market will undoubtedly force high-cost nations to liberalize their labor laws, or else face a major talent drain. Not surprisingly, manyjobless Europeans are headed to other parts of the EC, or to Asia, where jobs are plentiful and labor markets are unfettered. The answer to Europe's unemployment problem is simple. Sharply reduce payroll taxes and the rules and regulations govern ing labor-management relations to allow market forces to work more effectively. This means less mandated job security and fewer government benefits, but more jobs and greater productivity. It is a difficult choice for Ee governments to make, but if they don't, unemploymentcan only get worse. D 1. RichardK. VedderandLowellE. Gallaway, Outo/Work (New York: Holmes & Meier, 1993). 2. Edmund S. Phelps, "Summiteers: Your Taxes Kill Jobs," The Wall Street Journal, March 14, 1994.