Sunday, February 22, 2015

Europe's turning point

The European Central Bank's grand plan to purchase massively government bonds - around a trillion at the pace of 60 billion a month until September 2016- will certainly help prevent deflation. But Draghi's manoeuvre will not be enough - it needs to be accompanied by reforms and a realistic investment plan to revive the European economies. In the meantime, the euro has reached almost parity with the dollar, boosting exports especially in the southern economies. 

It is a turning point.because it raises the issue of eurobonds and a common fiscal policy. The EU treaty explicitly says that the EU should have a political configuration by means of transfers of sovereignty of the single states.

Germany should take the initiative and if it does not, the other States should force it to do so or go ahead without it. The only problem is that national leaders are reluctant to adopt such decisions. This does not look good for the future: in a global economy, continents are competing, not single States, most of which are irrelevant without an integrated space. But for the time being, the European Central Bank is leading the recovery process in Europe, clashing with Germany's interests. . 

P.S: The querelle  between Greece and Germany has led, temporarily to a satisfactory outcome. Greece has obtained 7 more billion euros of loans but in turn will have to commit to reforms. The issue is which reforms: those of the Troika"s memorandum or Tsipras's electoral promises? 

Sunday, February 1, 2015

Tackling inequality involves more State, maybe a different one

The Davos World Forum has shown  consensus about  inequality as a global issue and that governments should find ways to tackle it. This has little to do with generosity or equity issues. it is juts the recognition that economy recovery cannot happen if income inequality is not reduced substantially in order to increase aggregate demand. The problem is that there is wide disagreement on how to tackle inequality and the role of the State.  

Liberal optimists think that open markets are the best remedy against inequality using as their best argument how globalization contributed to lift out from poverty hundreds of million people. This is of course arguable as many economists believe that unregulated markets have produced - before and after the financial crisis of 2007-08- brought wages down and increased poverty. 

However, much of the discussion concerns the role of redistribution - through many instruments, including taxation of the wealthy people or more public spending for the poor, or even a combination of both. Classical redistribution should not be ruled out to combat poverty and alleviate the social crisis for the middle classes.    

In a critical note to Piketty's work, R.Haussman, Harvard academic and former Venezuelian minister, argues that redistribution is "just  palliative, not curative". He's right: productivity is the problem - and all firms are not equal in terms of productivity and therefore the income they can distribute varies too. 

Given productivity constraints, the inequality problem has to be addressed  by investing in people, providing them with the right skills and creating job opportunities. The issue is to connect poor places (countries or regions) to inputs but this requires means to reduce existing economic disparities. It is a matter of  policy trade-offs. 

There may be more innovative redistribution policies such as the ones suggested by Mazzucato and  Rodrik. In substance, governments should finance their spending from the earnings in investing public venture funds. It means, however, a bigger role of the State in investing in funding new technologies and  to socialize the gains from innovation for citizens.