On the problem of publicly funding supply side adjustment

A very interesting piece by Jean Pisani-Ferry on the grand écart, as the French say (Spagat in German) of the European Recovery Fund here. He may be right about the need to balance different contradictory aspects of governance to avoid the Fund being dead on arrival. We at PEACS are thinking about that.

What got me thinking for now was the notion that the EU fund is simply a supply-side fund. I think that particular characterisation is a little too simple – 3% of GDP, even if only 1% annually, on top of the fiscal policies implemented by national governments is definitely counter-cyclical. But it does point to the problem of the pot of gold in Keynes’s argument. While it should be used and not sit idle, if necessary just to pay workers to dig it up and bury it again, assuming nothing else can be done, ideally it should be complemented by — the often forgotten second part of Keynes’s statement — something useful if possible.

The problem here is that this is in fact quite difficult to do. While it is easy to say, as many governments and commentators do, that more training is needed to prepare workers for the jobs of the future, it is a lot harder to say what exactly that training should consist of. Which types of knowledge will be necessary for the good jobs of the future? Mainly jobs relying on specific skills even if those are broader than what we now think of when we say that, or should we instead build up high general skills as a solid basis for the flexible deployment of workers and which companies only have to top up? A lot of money and lives can go wasted if we go for general qualifications, companies experiment too much and make mistakes based on their short-term interests.

To make that more effective, you probably need a mechanism to gather and process relevant information, and which then helps decide how to organise what appears as relevant training — something that does not work all that well if organised by the government, or at least not the state alone, viz. the many attempts by French governments since Mitterrand to emulate the German training system. But the analytical problem of information clearing and interest aggregation does not disappear.

Here’s the snag: companies and other private actors are reluctant to do that because it imposes costs on them while benefitting everyone else (as well as them). It is in essence a question of first order and second order collective action problems, as my friend and colleague Bill Ferguson calls it in his latest book: building institutions to help you overcome the initial collective action problem are themselves subject to collective action problems. It costs the actors that are building them resources to do so, while those who do not contribute also benefit. That explains, it seems to me, why many economic policies beyond simply handing out money are often so difficult to organise successfully.