Browsing national accounts may be an inexhaustible source of insight on the current debate about austerity. Take this figure, which shows the evolution of real GDP and of its components for the US and the EMU, making the first quarter of 2008 equal to 100.
I tracked in particular the evolution of private (consumption plus investment) and public expenditure on good and services.
Update: An edited version of this piece appeared as a Project Syndicate commentary
A few weeks ago on Project Syndicate Raghuram Rajan offered his view on inequality and growth, thought provoking as usual. His argument can be summarized as follows:
- Inequality increased starting from the 1970s, across the board
- Two different explanations of this increase can be offered: a progressive one, that blames pro-rich policies, and an “alternative” one, that focuses on skill biased technical progress. I do not understand Rajan’s restraint, and as I like symmetry, I will label this alternative view “conservative”.
- Both views agree that inequality led to excessive debt and hence to the crisis.
- According to Rajan, nevertheless, the alternative/conservative view is more apt at explaining what happened to Europe, that remained more egalitarian, but was able to hide the ensuing low growth and competitiveness through the euro and increased debt.
- The exception is Germany where, following the reunification, structural reforms had to be implemented to reduce workers’ protection. This explains why Germany today is so strong in Europe.
- Thus the solution is for Southern Europe to implement structural reforms and accept increased inequality through lower workers’ protection; the alternative is sliding into an “egalitarian decline” like Japan.
The way I see it, there are a number of problems with Rajan’s analysis, and more importantly a fundamental (and unproven) assumption that underlies his argument. Let me start with the problems in his analysis, and then I’ll turn to the core of this piece, i.e. challenging the underlying assumption.
Give a look at Dani Rodrick on Project Syndicate (in a number of languages). The scary thing is that it is not completely implausible…
European institutions and policy makers seem to share a narrative of the crisis essentially centered on sovereign debt, which they consider as the sole obstacle to a return to a normal state of affairs. Yet, it suffices to look at the other side of the Atlantic, or to go back to the events of 2008, to question this narrative. With the exception of Greece (whose GDP represents 2.5% of that of the eurozone), sovereign debt is today more a consequence than a cause of the crisis. This does not imply that it should be the object of a benign neglect; but understanding why we came to a systemic crisis of this magnitude is crucial for having a coherent discussion of future perspectives.