In my analysis, the present situation bears another surprise. We diagnose current unemployment as inefficient. Be sure that you see what inefficiency means: it means that there is a solution that is beneficial to some and that does not hurt others. Having a bright idea always means a “win-win” situation or a free lunch. In the present case there is the move to full employment under price stability. The present unemployed will find jobs. The higher productivity group will have a theoretically larger risk of unemployment, but in practice this risk will be modest as in the 1950s. The real gain for the higher income earners will come from the services that will be provided by the jobs of the presently unemployed. So you do not need to reduce taxes for the higher paid, since they already will have a real gain at current income.
This was it, in a nutshell. Now I beg your understanding. My analysis is more complex than can be stated in these few lines. Both tax policy and social policy are quite complex themselves, and this certainly holds for their interaction with inflation and unemployment. For example, you may ask why I haven’t discussed income redistribution effects. Actually, this is because the alternative policy could be neutral to the income distribution. The reason for this is that the analysis focusses only on the link between wage costs and productivity. But you might want to hear more about this. Also, you might ask whether above explanation covers all possible cases of unemployment and inflation. Of course it doesn’t. The analysis does help to clarify that other types of unemployment need other types of policy, such as education and so on. But you might want to hear more on that too. These are just examples of issues, and there are many more issues that need to be dealt with. Which space forbids. However, given that my model amends existing economic models, much of the required explaining is ‘existing economics’.
This novel explanation is in the tradition of Keynes and Tinbergen while it fits in with mainstream economics. When economists check and confirm these findings, our economies are likely to enjoy more growth with full employment and low inflation.
[14. The 1974 Duisenberg disaster]
While the above uses a stylized example of Holland, there is a short and enlightening story about actual Dutch politics, far remote from econometric regressions. Quotes are here in my translation, Dutch readers can also read Colignatus (1994b:28).
In Dutch politics, parties have to form coalitions to be able to govern, and the Biesheuvel 1971 cabinet came about by a coalition agreement that contained the following plan:
“Increase of tax exemption (in the direction of equality exemption for married couples with one child towards the minimum wage (….))”
The explanation of this idea to parliament was (MvT 1971/72):
“(…) it doesn’t require more adstruction that current exemption is too low. Its size doesn’t satisfy the fundamental notion of a threshold, the exemption of taxation of part of income, that is reasonably required for financing the necessary means of existence as seen in contemporary social views.”
This plan didn’t succeed, the government broke down prematurely. There came about a new leftist government under leadership of Den Uyl, and his Minister of Finance was Wim Duisenberg, the president of the European Central Bank in 2000. This cabinet however rejected above concept. The 1974 argument was: