Elements of a Plan for the EU 2009
 

Thomas Cool / Thomas Colignatus

Candidate for President of the EU / Economic scientist

http://thomascool.eu

2009-04-16

  1. This is a political statement that relies on the economic scientific analysis available at http://thomascool.eu/Papers/Drgtpe/Crisis-2007plus/Index.html (DRGTPE). 

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  2. Without these measures we can expect a protracted period of stagflation (high unemployment or high inflation) and continued instability. There is even a serious risk that this stagflation turns into a Depression (prolonged negative growth and high unemployment).

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  3. In the US, the policy measures by President Obama are likely to fail. They already are causing a slide into a Bush-Obama Depression. Unfortunately, critics of the Obama policies do not have a good alternative. 

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  4. A good treatment also requires a good diagnosis. A good diagnosis is only provided by DRGTPE. This might sound pedantic but please consider this point: when a scientist has a new idea then this idea is not yet known by other scientists and the only solution is to say that you have a new idea.

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  5. The proposed EU Constitution (Lisbon Treaty) and the current financial crisis and developing depression have common roots in ideology. Instead, it are liberty and democracy that are the best solution and insurance for those risks.
     
  6. The EU is basically a social-economic space and this property is in danger at the cost of stability by efforts of some politicians towards curious notions on state formation. See The Economist, Charlemagne, September 18 2008, at http://www.economist.com/world/europe/displayStory.cfm?story_id=12263166. The following Plan presumes a restoration of the social-economic space.

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  7. I must compliment Mr. Jens-Peter Bonde for his text http://www.j.dk/exp/images/bondes/From_EU_Constitution_to_Lisbon_Treaty_april_2008.pdf

    8. The reader might also want to see http://www.bonde.com/. I do not agree with his Alternative ("An alternative cooperation agreement in 47 paragraphs") since that contains too much state-forming as well. But the democratic spirit must be aplauded. In sum, the EU Constitution, and also the Lisbon treaty that is essentially the same, will destroy liberty and create an authoritarian state. This political development can only be understood against the background of economic developments and the risks of the future.
     
  8. The starting point is the diagnosis of how we got into this situation. (a) The state of the economy is "repressed stagflation bursting into the open". Stagflation is a situation with high inflation and/or high unemployment. The Great Stagflation since 1970 was repressed by the deregulations that started in the early 1980’s. After the resulting chaos, regulation will return, and stagflation will return too. (b) All this could happen because information available within the community of economic scientists did not get used or was distorted in the policy making process. There is a serious omission with respect to scientific information in the current checks and balances in our system of democracy.

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  9. The path towards recovery consists of three elements: (a) institutional safeguards, (b) restoration of the optimal path, (c) measures to get to that path.

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  10. The main institutional safeguard is that each nation in the EU adopts a constitutional amendment for an Economic Supreme Court. A draft text is in DRGTPE. The system for economic analysis and forecasting is greatly enhanced as well. Given the increased sense of insecurity it is remarkable that official forecasts do not generate more stability. Much of the current crisis is a vote of no-confidence in economic analysis. Markets do not trust current arrangements for economic advice and forecasting. Our nations are penny wise, pound foolish with respect to their layouts for those crucial functions.

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  11. For the financial system: (a) Restore the distinction between savings banks, investment banks and insurers, (b) Reduce the size of these companies to increase competition (which also reduces bonusses), (c) Restrict the use of complex financial products to a public utility created for that purpose, (d) The EU will not follow the US on the Geithner – Summers plan for the removal of "toxic assets". The EU will ask the US to drop that plan and follow the EU approach. The EU will also ask the US to turn the US Federal Reserve into a proper Central Bank.

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  12. Other general guidelines for the financial system can be adopted from Taleb, Financial Times, April 7 2009, see http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabdc0.html. However, the Taleb suggestion that our current economic / monetary / financial leaders would have to resign and "Instead, find the smart people whose hands are clean" is a bit difficult since we would have to replace too many people and be rather short on alternatives. The suggestion that physicists might be such alternative smart people can be rejected since it also have been "rocket scientists" who have shown not to know enough economics. Better is that our leaders adopt the framework of DRGTPE and that we work from there.

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  13. The structural cause for stagflation since 1970 is the imbalance in tax and social security (including health insurance). To resolve this, tax and premium exemption must be put at the level of the net minimum wage so that a person can start working at gross = net. The VAT can be reduced to 1%. (In nations where the income tax system is unreliable and VAT the only reliable revenue, it might be tried to compensate minimum wage costs with subsidies, but then one must prevent other red tape and fraud, and work towards implementation of a sound system of income tax.) All this allows a sizeable reduction of the gross minimum wage without a reduction of net income. It will be useful to impose a tax and premium system with three parameters: exemption, limit marginal rate and a shape parameter. The shape parameter follows from the first two and the required revenue. Standard policy will be that exemption and the shape parameter are indexed annually with the general rise in welfare. In that case the dynamic marginal rate will be approximately equal to the average tax rate. Tax payers then can pay more attention to their average tax rate that will be much lower than their marginal tax rate. Hence a limit marginal tax rate of 75% and in some countries even 90% can coexist with sufficient revenue, lower average tax rates and a thriving economy – that does not suffer from stagflation.

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  14. A temporary measure to get from the current crisis with high unemployment to the optimal path (with only frictional unemployment) is a reduction of the working week. Such a reduction is not advisable if it were an escape from painful restructuring. However, it is proper in the current situation for which unemployment is ineffective and even counterproductive. Currently, it is best to keep people in jobs, maintain their skills and contacts, and maintain a prospect for sustained income. While the reduction in working time comes with a reduction in earned income, the increase of tax exemption and reduction of VAT help to sustain disposable income.

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  15. Government budget deficits during the recovery can remain within the 3% boundary by means of a tax on wealth. Such a tax would actually help shares to restore to stable values and ought to be welcomed by wealth owners.

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  16. The countries of the EU will create national investment banks that create plans for national investments, such that those plans are available for direct application in a possible next downturn in the economy. The EIB will create such a branch as well.

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  17. To manage trade imbalances in the EU (notably the export surplusses by Germany and the Netherlands), each country will have a national "tax" on a surplus and allocate those funds for the development of the interior economy with the objective to arrive at balance.

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  18. National statistics are improved for a better monitoring of economic activity. The tax void is measured – and a historical series created. Unemployment hidden in benefit schemes is brought out into the open. Consumer durables are included in the definition of investment. Next to the index for national income an index will be adopted for (environmentally) Sustainable National Income (eSNI) according to the definition by Hueting, see http://www.sni-hueting.info.

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  19. The EU and ECB develop jointly a policy to keep inflation at 0% instead of 2%, such that short periods of minor deflation can compensate for short periods of minor inflation. With the resolution of stagflation and the return of full employment, minor deflation can be a proper tool in monetary policy.

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  20. The EU works towards enlargement with Turkey, Russia and related Eastern European nations. The existence of a stable social-economic space in this area is a crucial element for world stability.

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  21. The EU works towards a world currency, possibly first without the US. The EU, Russia and China could jump-start the process, neutralize the Chinese overhang of dollars, and guide the world towards a readjustment of the US dollar.

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  22. There are a refocus on "trade not aid" (with the reduction of subsidies and tariffs), reduction of aid that is counterproductive, redirection of international assistance towards basic needs and a stabilization of the world population.

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  23. Two countries merit special mention: (a) For Ireland, the EU must provide for extra funds for quick economic recovery, so that the Irish electorate can decide without fear in the Autumn of 2009 upon the second referendum of the EU constitution (labelled the first referendum on the Lisbon treaty). (b) People are advised to boycott Holland till the censorship of science in that country with respect to DRGTPE is resolved.