For example, Dutch economic policy is based on a general restraint on wages. This policy has fueled Dutch exports and reduced Dutch imports. The general restraint in fact subsidises exports, and Holland runs an external surplus for quite some years now. The internal imbalance is reflected in an external imbalance. The proper policy reaction however would be a wage cost policy targetted at the minimum.
Diagnosis and Therapy
Please note that the present review only gives a diagnosis, and that it is a different affair to find the proper therapy. The first is necessary step before the second can be considered.
In the course of some years I have experienced that discussing therapy is useless when people do not even understand the diagnosis. Policy makers tend to be focussed on therapy - but judge this from a wrong diagnosis. For example, in The Hague in 1992 (at a social-democratic political rally when I was no longer a member of his party) mr. Wim Kok, the Dutch Prime Minister of 2000, occasional chairman of the European Union and the social-democratic ‘respected elder’ to mr.-s Clinton, Blair, Schröder and Jospin, and a person who did some basic econometrics in his younger years, laughed loudly when I suggested to raise Dutch tax exemption from the then € 3 thousand to € 10 thousand. He must have thought of staggering costs, and it didn’t help when I said that it need not cost anything.
A major remark about therapy is that to undo the damage of the last four decades, it is not necessary to take four new decades. Return to optimality can be much faster.
The alternative and new policy would be to abolish taxes in the tax void and to allow people to earn their own - decent and untaxed - living. This alternative policy reminds of an old rule. The Dutch economist Cohen Stuart proposed in 1889 (cited in Hofstra (1975)) to put tax exemption at the level of subsistence. To drive the point home he drafted the following analogy:
“A bridge must carry its own weight before it can carry a load.”
In 2005 there is the additional argument that abolishing void taxes will not cost anything, while nations will save benefit payments due to more employment.
Note that the ideas of Cohen Stuart’s ‘bridge’ and the tax void are not very complex in themselves. In 1991 I explained them to a 12 year old kid and he commented: “A child can understand that.” Still, the EU and its score of modern governments sin against these concepts.
If unemployment is inefficient, then by definition there is a Pareto optimising solution, that will not cost anything. Most economists don’t believe in cheap solutions. Much of the debate hence focusses on ‘efficient unemployment’, where the sad state is caused for example by globalisation, technology or ‘welfare state scelerosis’ (with poverty traps). But, clearly, the tax void exists, it is a cheap way out, and the other arguments will turn out to be ghosts, which they already can be shown to be.