The Real Structural Reforms
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:
- The crisis was triggered by trouble in financial markets (subprimes, financial engineering, and the like). But the roots of it are structural
- Global imbalances, notably excess savings in some parts of the planet (e.g. China, Germany) , and excess demand in other parts (e.g. the US, the eurozone periphery), are the source of speculative flows that perturbed financial markets, and inflated bubble after bubble.
- Paradoxically both excess savings and excess demand have the same source, i.e. increasing inequality that exerted downward pressure on aggregate demand (transfering wealth to the rich decreases the average propensity to consume).
- Countries where institutions, culture, policies allowed debt were able to substitute consumption out of income with consumption out of debt. Typically the US, but also Spain, the UK, etc. This resulted in high but ultimately unsustainable growth.
- Countries where debt did not increase suffered from the compression of demand, and either relied on exports (the core eurozone economies), or had disappointing economic performances (Italy).
- The conclusion is obvious: Unless the trend towards increasing inequality is reversed, we will keep being trapped between the alternative of high and unsustainable growth versus soft growth. Only a more equitable distribution may guarantee sustainable growth.
- The measures to reverse the trend are also rather straightforward:
- Increase the progressivity of the tax system, that has constantly been decreasing in the past three decades
- Stop the slow erosion of automatic stabilization, that constitutes a powerful insurance for low income workers/consumers
- Renew emphasis on the provision of public goods, that guarantee once again the provision of safety nets and sustain aggregate demand
In a sentence: Simply do the opposite of what has been done in the past thirty years. These are the real structural reforms that we should be discussing.