To the Editor:

Niall Ferguson and Laurence J. Kotlikoff's new method of accounting -- generational accounting -- suffers from the same weakness as other forms: what you get out of it depends on what you put in ("The Degeneration of EMU," March/April 2000).

They conclude that European governments face a choice between unprecedented tax hikes or drastic government spending cuts, based on the assumption that current policies apply forever. But governments can learn. Some European governments have already made changes to ensure that their pension systems will be reasonably robust in the future. Those that have yet to implement changes, such as the French government, are only waiting for an electorally favorable period to act. Ferguson and Kotlikoff's argument implicitly excludes solutions that would not only be simple to implement but might even prove highly popular.

European governments are in a tangle partly because, in the wake of the first two oil-price shocks, many of them decided to pay old workers to stop working, introducing attractive early-retirement schemes. The effective age of retirement has fallen steadily. The idea was that old workers would leave so that young workers could find jobs. This policy has probably made inflation pressures worse and reduced output -- in other words, made European unemployment worse, not better.

Once implemented, reforms of this kind are extremely difficult to reverse. The problem now is to get people to stay at their jobs longer. If successful, this would considerably ameliorate the budgetary problems.

In high-tax Europe, persuading people to stick to their jobs should be easy. Governments could exempt, or partially exempt, from income tax those who continue working past the standard retirement age. The supply of mature labor would increase by leaps and bounds. Perhaps then, the economic and monetary union (EMU) would survive.


Editor, The Scandinavian Economies