ZEW President Franz on the Disastrous Consequences of Questionable Word Choice in Describing Economic Situations

This piece appeared in the September 2003 edition of the ZEWnews.

Word Choice

Once again, the current economic and socio-political debate teaches us what disastrous consequences infelicitous word choice concerning certain economic facts can have. I’ll give you two examples.

First, in connection with the pay-as-you-go old-age pensions, there is regular talk of a "pension insurance" and a "generation contract." As a result, current recipients of such old-age pensions find it unreasonable having to contribute to the stabilisation of this pay-as-you-go pension system. This rejection is justified by the alleged insurance character of this set of rules in the sense that one pays contributions for one's old-age pension throughout one's life and now has, apparently, a claim to undiminished payment, as would be usual if an insured event were to occur. The choice of words "pension insurance" nourishes this fundamental error.

The pay-as-you-go financing system for old-age pensions is anything but insurance. As is well known, the generation of contributors finances the pensions of pensioners, but these contributions do not entitle them to later old-age pensions. Rather, they are raised in the hope that the next generation will adopt this financing system. Sure, such expectations may not be completely unjustified, but calling this a "generation contract" certainly doesn’t shy away from boldness. Lawyers will be following this notion with a queasy feeling, for such a "generation contract" ultimately represents a contract to the detriment of third parties—namely, the next generation. Such contracts are also ineffective according to prevailing legal opinion, sometimes even immoral. The next generations may not accept this "generational contract" in its entirety; they may avoid it to some extent. It’s also the "generation of heirs" who, considering inherited assets, will be in a better position to reduce the breadth of their work without having to restrict their lifestyle. The possible consumption of the inherited property may not be in the interest of the bequeather, but it is a well-known phenomenon. Let us avoid misunderstandings: the current generation of pensioners is doing better than ever before and forever. They too can now be expected to contribute to the stabilisation of the pay-as-you-go system. What’s at stake here is rather the potentially grievous misunderstandings that the choice of words "pension insurance" lends itself to.

Second, another well-known example lies in the popular adjective "structural," in connection with unemployment or public budget deficits. What is meant in both cases is "non-cyclical," but even this designation doesn’t actually amount to anything, since the undesirable developments as such are trivialised precisely by leaving their causes unspoken. On the other hand, terms such as "unemployment due to malfunctioning labour and goods markets" or "budget deficit due to improper fiscal policy" seem somewhat cumbersome. They have the invaluable advantage, however, that they immediately provoke the question as to which dysfunctions are specifically meant and how an appropriate financial policy should have been designed, with which the "usual" (sic!) suspects are pilloried, i.e. a wage policy hostile to employment and an insufficient reduction in subsidies, to name only two candidates. The use of "structural" carries the risk of giving wrong impression (which, however, may not always be unwelcome everywhere)—namely, that the corresponding undesirable developments are stalwart and arduous to deal with because they are, after all, "structural".Second, another well-known example lies in the popular adjective "structural," in connection with unemployment or public budget deficits. What is meant in both cases is "non-cyclical," but even this designation doesn’t actually amount to anything, since the undesirable developments as such are trivialised precisely by leaving their causes unspoken. On the other hand, terms such as "unemployment due to malfunctioning labour and goods markets" or "budget deficit due to improper fiscal policy" seem somewhat cumbersome. They have the invaluable advantage, however, that they immediately provoke the question as to which dysfunctions are specifically meant and how an appropriate financial policy should have been designed, with which the "usual" (sic!) suspects are pilloried, i.e. a wage policy hostile to employment and an insufficient reduction in subsidies, to name only two candidates. The use of "structural" carries the risk of giving wrong impression (which, however, may not always be unwelcome everywhere)—namely, that the corresponding undesirable developments are stalwart and arduous to deal with because they are, after all, "structural".