Sunday, July 25, 2010

Rising inequality in a declining country

Italy is no doubt a rich country. It is probably among the richest economies in the world, mostly concentrated in North America and the core Europe. But Italy is a country where exists a large part of the population living in poverty conditions, not only in the southern part as well as intolerable disparities in individual incomes and wealth.

The main feature is that there is no social mobility between the rich, upper classes and the poor, low income groups. The wealth produced by the economy is not redistributed, flows in the system and feeds the perverse logic of making the richest even richer. Over the last decade, the Gini coefficient - a measure of income inequality- rose from 0.29 in 1990 to 0.35 in 2005, following the rising trend in OECD countries. According to ISTAT, the national statistical office, relative poverty rose to 10,9% of the population in 2009 and absolute poverty to 4.7%; the respective figures for the Mezzogiorno- where more than two thirds of the poor live- are 22,7% and 7,7%. Furthermore, it notes a worsening of economic conditions among the blue collars and the elderly.

Fig.1: Growth of GDP in Italy 2000-2011

The main difference with other rich nations is that Italy has performed poorly over the last two decades (see Fig.1). Growth has remained sluggish from 2001 until now, with a dramatic drop in GDP in 2009 due to the global crisis. Yet, low growth does not allow any durable narrowing of income gaps, also given the magnitude of public debt.

Policies inspired by values of social justice should be pursued in order to dismantle the perverse logic of enriching the rich and to restore a virtuous circle in the distribution of income. The thrust is to act quickly through tax reforms which should benefit primarily the low and middle classes. But, it requires, above all, an effective partnership between the government and social parties as it was the case in 1993 under the Ciampi government.

Thursday, July 22, 2010

The false debate on austerity

The debate on austerity has brought a harsh confrontation between keynesians and anti-keynesians. This has been going on for sometime in the US with the 'deficit hawks' who claim that the US fiscal stimulus plans will lead to an unsustainable path of public finance . As Krugman argued, they just mess up with numbers; the US economy can cope with the federal debt burden- which is just above 60% of US GDP- which is exactly what the Maastricht criteria set as a limit for debt sustainability - thanks to low interest rates. Furthermore, it is rather obvious that ending the fiscal stimulus - or even tightening fiscal policy would just put the economy and jobs in peril.

Now, Niall Ferguson, a British historian, claims that keynesians haven't learnt anything from the 30s (FT July 20) . It is true that the world has changed since the 30s; we are much wealthier than at that time, although that wealth has led to greater inequalities among people. It is therefore difficult to compare deficits in the 30s with the fiscal situation today. In 1930, governments did not use monetary and fiscal policy to offset the contraction of economic activity as they did in 2008-2009.

In replying to Ferguson's anti-keynesian argument, Lord Skidelsky, author of a voluminous biography of Keynes, points out that ... expansionary fiscal policy (in the UK and the US) was ruled out by adherence to the doctrine of balanced budget; in the US, a large part of the banking system was allowed to collapse. Public policy, that is, was not used to counteract the fall in private spending. In 2008-09 all the tools available to government were broght into play - bail-out of banks, open market operations, fiscal stimulus. the reason for the different response was the change of theory associated with the name of Keynes" (FT July 22).

Another point made by Skidelsky is on the economics which underpins the anti-keynesian argument. There is, in fact, some analogy with the supporters of the 'Treasury view' which keynes fought vigorously and which argue that 'bond financed government spending was bound to "crowd out" private sector spending". The other well known argument is that multipliers are quite small because of the openness of the economies and therefore the demand effect leaks out to other economies. Recently, the Congressional Budget Office estimated that each dollar spent to assist the unemployed brought about $1.90 dollars in additional economic output.

Fiscal conservatism is not the solution to reduce uncertainty and restore confidence among private investors. Governments have allowed banks to act as they wanted, being aware of the risks of a financial meltdown. As a result of the banking crisis, millions of people lost their homes and savings and were left without any protection.

The debate is less between austerity and fiscal stimulus; it is about a fundamental choice in favour of policies which create jobs and provide decent incomes for those most in need.

Sunday, July 18, 2010

Are Europeans going conservative?

The FT (12 July) reports the results of its survey* which indicates an overwhelming support - from citizens in the largest five EU countries and the US -for the spending cuts made by European governments led by conservative governments, with the exception of Spain. It also highlights that aid to developing countries and defence - adding unemployment benefits in the UK- should bear the bulk of the cuts, but on the other hand, there was barely no support for cutting public expenditure on police, healthcare and education.

This 'fiscal conservatism' is largely influenced by the debt crisis which resulted in a rescue plan for Greece and a resolution crisis mechanism for any other euro area countries in default. This also reflects a fear from middle class citizens- who already lost a fraction of their real incomes over the last decade- for any further taxes which might result from a rise in public deficits. This appears to be a natural reaction to protect their incomes and savings as the crisis deepens.

This survey is in fact biased as questions were not addressed to a representative sample of the population in those countries. It depends who are the respondents : if you ask public servants affected by wage cuts, the answer would not be the same. In fact, we don't know who are the citizens who answered to the survey. But, more importantly, it is difficult to draw a conclusion that there is support for a review of Europe's social model, except perhaps the UK . We know that the majority of the population in France and Germany are reluctant to any cuts in healthcare and pensions.

In its last issue (17 July) , the Economist is even more contemptuous: "the ideal of progress has been a myth for longer than Europeans may care to admit". The argument is that social progress in Europe was just an illusion and that European countries were living beyond their means by financing their welfare State with hefty debts. It continues: 'Europe has put its values before growth'' [...] the euro-zone crisis has exposed such hypocrisy". And it concludes: " "It may still take time before Europeans conclude that they must compromise their ideals in order to secure the growth needed to preserve what they can of their lifestyles".

The European social model is often associated with social reforms, especially in France, such as retirement at 60 and the 35 hour working week agreed under a socialist government. Why is this not a mark of progress? In most European countries, labour is heavily taxed compared to capital and land. The scandal is to rescue banks which have made gigantic profits with derivatives and other speculative instruments to the detriment of entrepreneurs and workers. The issue here is again about social justice. No government should restore a situation just to continue rewarding greed instead of protecting their citizens. This message should be understood by European citizens.

* The FT/Harris poll was conducted on line among 6.164 adults aged 16 to 64 in France, Germany, Spain, the UK and the US, and adults between 18 and 64 in Italy between June 22 and July 1.