Work and Welfare in Europe

November/​December 2015 • Policy Report

Many European countries are known for their generous welfare programs — in Denmark in 2013, the New York Times discovered a 36‐​year‐​old single mother who had been on welfare since the age of 16, and was collecting about $2,769 in benefits every month. “In far too many countries, welfare remains an economically rational alternative to work,” write Cato senior fellow Michael Tanner and research associate Charles Hughes in “The Work versus Welfare Trade‐​Off: Europe” (Policy Analysis no. 779). This dependency harms both welfare recipients and the economy at large. Tanner and Hughes analyze whether this bad incentive system is a natural consequence of the modern welfare state, and how the U.S. system measures up against other countries.

Various theories associate a country’s levels of economic inequality with its political outcomes, claiming that inequality determines how likely a society is to break out into civil war, for example, or how much its citizens will favor redistribution. But, as Vladimir Gimpelson of the Higher School of Economics and Daniel Treisman of the University of California–Los Angeles argue in “Misperceiving Inequality” (Research Briefs in Economic Policy no. 32), none of these theories seem to hold up under scrutiny — perhaps, they propose, because in most cases, people simply don’t know how high inequality actually is.

Many policy experts believe that nominal GDP targeting would be the best and simplest rule for central banks to adopt. But, despite the idea’s popularity, it has received little study within the context of the quantitative frameworks used by central banks. In “On the Desirability of Nominal GDP Targeting” (Working Paper no. 32), Julio Garín of the University of Georgia, Robert Lester of Colby College, and Eric Sims of the University of Notre Dame set out to test nominal GDP targeting within the context of a New Keynesian model with both price and wage rigidity. “Overall,” they conclude, “our analysis suggests that nominal GDP targeting is a policy alternative that central banks ought to take seriously.”

Some scholars within conservative and libertarian circles claim that a federal carbon tax would both benefit the environment and boost the economy. But, according to Robert P. Murphy of the Institute for Energy Research, Center for the Study of Science director Patrick J. Michaels, and assistant director Paul C. “Chip” Knappenberger in “The Case against a Carbon Tax” (Working Paper no. 33), “Both in theory and practice, economic analysis shows that the case for a U.S. carbon tax is weaker than its most vocal supporters have led the public to believe.”

Some of the most difficult questions of patent infringement come from overseas manufacturers of imported goods. To deal with these cases, Congress created Section 337 of the Tariff Act of 1930, administered by the U.S. International Trade Commission (USITC). Some experts consider this an inadequate statute, and call for its replacement. In “Patent Rights and Imported Goods” (Policy Analysis no. 780), Daniel R. Pearson, a senior fellow at Cato’s Herbert A. Stiefel Center for Trade Policy Studies and a former chairman of the U.S. International Trade Commission, explores the difficulties involved in patent infringement, and defends section 337 as “a reasonable and effective means to protect U.S. intellectual property rights from infringing imports.”

Morocco presents a curious study in freedom in the Arab world. Freedom House calls it a “partly free” country: a constitutional monarchy with a freely elected government. Its king holds a divine right to the monarchy, while Islam is the official state religion. But, as U.S.-based Moroccan journalist and human rights activist Ahmed Benchemsi observes in “Islam and the Spread of Individual Freedoms: The Case of Morocco” (Policy Analysis no. 778), the country is embroiled in a vigorous debate over individual freedoms, including freedom of conscience and even gay rights. Benchemsi sees hope for the future, but concludes that reform advocates must first band together and “adopt a unified agenda and strategy.”

Cross‐​border acquisitions account for a growing proportion of all acquisitions. In “Cross‐​Border Acquisitions and Labor Regulations” (Research Briefs in Economic Policy no. 33), Ross Levine of the University of California–Berkeley, Chen Lin of the University of Hong Kong, and Beibei Shen of the Chinese University of Hong Kong provide the first‐​ever assessment of the relationship between crosscountry differences in labor regulations and cross‐​border mergers and acquisitions. They discover, among other things, that “firms find targets in countries with weaker labor regulations more appealing than similar targets in countries with comparatively strong labor regulations.”

State and federal policies subsidize the use of electric vehicles under the presumption that they are beneficial to the environment. But as Stephen P. Holland of the University of North Carolina at Greensboro, Erin T. Mansur of Dartmouth College, Nicholas Z. Muller of Middlebury College, and Andrew J. Yates of the University of North Carolina at Chapel Hill argue in “Public Policy Evaluation in the Face of Strong Prior Beliefs: The Case of Electric Cars” (Research Briefs in Economic Policy no. 34), the science behind these alleged benefits is not quite as clear as is generally assumed.

People like Warren Buffett have popularized the notion that derivatives are “financial weapons of mass destruction.” But in “In Defense of Derivatives: From Beer to the Financial Crisis,” (Policy Analysis no. 781) Bruce Tuckman of the New York University Stern School of Business rejects these claims as “misleading and false,” arguing that many businesses successfully use derivatives to manage risk. He offers the example of a beer brewery, which uses derivatives to hedge against possible increases in the prices of wheat and aluminum.

When it comes to tackling tax evasion, rather than tax enforcement through auditing, recent literature recommends verifying taxpayer reports against third‐​party sources — employer’s salary reports, for example. But in “Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement” (Research Briefs in Economic Policy no. 35), Paul Carrillo of George Washington University, Dina Pomeranz of Harvard University, and Monica Singhal of Harvard University reveal the limits to this strategy, particularly in developing countries. They discover that, when notified about discrepancies between their declared revenues and third‐​party reports, firms simply offset the adjustment by increasing their reported costs.