A follow-up of the post on public investment. I had said that the resources available based on my calculation were to be seen as an upper bound, being among other things based on the Spring forecasts of the Commission (most likely too optimistic).
And here we are. On Friday the IMF published the result of its Article IV consultation with Italy, where growth for 2013 is revised downwards from -1.3% to -1.8%.
In terms of public finances, a crude back-of-the-envelop estimation yields a worsening of deficit of 0.25% (the elasticity is roughly 0.5). This means that in the calculation I made based on the Commission’s numbers, the 4.8 billions available for 2013 shrink to 1.5 once we take in the IMF numbers. It is worth reminding that besides Germany, Italy is the only large country who
can could benefit of the Commission’s new stance.
And while we are at Italy, the table at page 63 of the EC Spring Forecasts (pdf) is striking. The comparison of 2012 with the annus horribilis 2009 shows that private demand is the real Italian problem. The contribution to growth of domestic demand was of -3.2% in 2009, and -4.7% in 2012! In part this is because of the reversed fiscal stimulus; but mostly because of the collapse of consumption (-4.2% in 2012, against -1.6% in 2009). Luckily, the rest of the world is recovering, and the contribution of net exports, went from -1.1% in 2009 to 3.0% in 2012. This explains the difference in GDP growth between the -5.5% of 2009 and the -2.4% of 2012.
Italian households feel crisis fatigue, and having depleted their buffers, they are today reducing consumption. I remain convinced that strong income redistribution is the only quick way to restart consumption. Looking at the issues currently debated in Italy, this could be attempted reshaping both VAT and property taxes so as to impact the rich and the very rich significantly more than the middle classes. The property tax base should be widened to include much more than just real estate, and an exemption should be introduced (currently in France it is 1.2 millions euro per household). Concerning VAT, a reduction of basic rates should be compensated by a significant increase in rates on luxury goods.
Chances that this will happen?
In the past weeks I have argued at length that the eurozone is in recession because of a strong contraction of aggregate demand; and that in spite of this fact the overall fiscal stance is restrictive.
I also argued that in the current situation the best that can be hoped for peripheral countries is a more gradual consolidation (ideally a neutral stance, but this is too much to ask). I do believe that a fiscal expansion, even in the periphery, would be sustainable and growth-enhancing. But at this stage this is just daydreaming. It won’t happen.
The fiscal stance of the eurozone will not become expansionary (as is sorely needed), if the core (and in particular Germany) does not implement robustly expansionary fiscal policies.
If their fiscal space is limited or non-existent, what can peripheral countries do, besides waiting for an improbable fiscal stimulus in Germany? A lot, actually. If public demand cannot be significantly increased (and will actually be further compressed, albeit at a slower pace), it is all the more important that the governments of Italy, Greece, Spain and so on, find ways to restart private demand.
There is a lot of discussion about structural reforms. They are not the answer. First, because they have an impact mostly on supply (and the problem, let me repeat it, is demand); second, because their benefits, if any, won’t materialize before a few years. And there is no time. The cumulate effect of five years of crisis is now threatening social cohesion in most peripheral countries.
A more straightforward policy, that could be implemented in the next few months with immediate effects, is a strong redistribution of the tax burden towards higher incomes. The increasing inequality of income of the past three decades is in my opinion one of the deep causes of the crisis; inequality has further increased since 2008. The squeeze of revenues for low incomes, coming from the combination of high unemployment and fiscal adjustment, is depressing both the capacity to spend and the morale of households. Increased inequality contributed to global imbalances in the past, and is recessionary in the current crisis.
In September, when the season of budget laws begins, governments in the periphery should propose to their parliaments revenue-neutral tax adjustments, lowering taxes on low income households and increasing them on the rich and very rich. This would be fair, and more importantly, effective to boost morale and consumption. I am talking about a substantial shift of the burden, large enough for its macroeconomic impact to be significant. This is all the more necessary if standard Keynesian deficit spending can not be implemented.
Paul Krugman hits hard on one of the most cherished american myths, the golden years of Reaganomics. He shows that using the middle class as a benchmark (the median family income of the economy), the Reagan decade saw a disappointing performance; this, not only if compared to the longest expansion in post war history, during the Clinton presidency, but also with respect to the much less glorious 1970s.
But, maybe, Krugman is telling a story of inequality, and not of sluggish growth. The fact that median income did not grow much during the Reagan years may not mean that growth was not satisfactory, but simply that somebody else grasped the fruits.
For curiosity, I completed his figure with average yearly growth rates for two other series: Income of the top 5% of the population, and the growth rate of the economy.
Well, it turns out that Reaganomics yielded increasing inequality and unsatisfactory growth. And well beyond that, median income consistently under-performed economic growth in the past forty years.
What seems extremely robust is the performance of the top 5% of the population. Their income increased significantly more than output over the past decades. It is striking in particular, how the very wealthy managed to cruise through the current crisis, when income of the middle class was slashed.
Nothing new, Ken Loach in 1993 said it beautifully: it is always raining stones on the working class. But I guess it does no harm to remind it from time to time…
Thanks to Mark Thoma I have read a very interesting piece by David Altig on technological change and inequality. Altig weighs in the debate that Bob Gordon started a few months on the possible slowdown of trend productivity in the next decades. Bob’s argument is known, and makes sense: no current innovation, not even the fanciest ones, seems to have the potential to change our life as did railroads, jet planes, or, even more importantly, running water! But it is undeniable that he ventured in uncharted lands (innovation, future inventions, the future), and I am in the end incapable to take sides on the issue. I am just very satisfied that Bob’s argument is taken seriously, even by those opposing it.
I found interesting Altig’s remark that “game-changing technologies have, in history, been initially associated with falling capital prices, rising inequality, and falling productivity“. He ends asking whether these trends, that we are nowadays observing, could be the indicator of yet another major “game changer”. But this is also not what I want to point out. Read More
Wolfgang Munchau has another interesting editorial on austerity, in yesterday’s Financial Times. He argues that the US may become the next paying member of the austerity club, thus making the perspective of another lost decade certain.
Munchau’s article could be the n-th plea against austerity, as one can by now read everywhere (except in Berlin or in Brussels; but this is another story). What caught my attention are two paragraphs in particular.
I have been busy organizing a workshop on Inequality and Macroeconomic Performance, to be held in Paris on October 16-17.
If you happen to be around and are interested, just send a mail to the address provided in the program.
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.
I just published an editorial on the Italian daily il Corriere Della Sera (in Italian), that summarizes my views on the causes of the crisis and of global imbalances. It is a reprise of one of my first posts, written with Jean-Paul Fitoussi. It is useful to summarize and refresh the argument:
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.