After mass reaction, we need social dialogue

It was largely predictable that austerity measures would cause a mass reaction among those who are most affected by them, that is middle class workers with lower income. It started in Greece after the government decided to cut wages in the public sector and to increase taxes; now, demonstrations are taking place in several European countries, and not the least in Brussels, in the heart of Europe. Trade unions led those strikes in a responsible manner. One can expect that social dialogue takes place as it should in any democracy.

The question is whether governments confronted with huge deficits have an alternative to austerity. It is also interesting to note that most demonstrations took place in countries governed by socialist parties which belong to the so-called European periphery . It might not be a coincidence, but this is revealing of the social climate there.

We should not forget that tax payers had to bear the burden of the financial crisis to rescue the banks heavily affected by toxic assets, especially in the US, UK and Ireland, whilst many banks continued to give substantial bonuses to their managers. In all countries, tax payers are paying the price of the greed and stupidity of those bankers, because systemic risks have triggered a much wider crisis in the real economy, with devastating effects on businesses and workers. And now governments have decided savage public spending cuts  to reduce budget deficits. It is odd that the Uk government - which was elected on the issue of a fairer society- has now abolished children benefits for more than a million families, with savings of a billion a year. Instead of welfare cuts, it would have been fairer to ask bankers to pay for the crisis more than they actually do.

Welfare accounts for 30-50% of public spending in European countries, even more in Sweden. But, many governments are taking regressive measures rather than tackling effectively income inequality through changes in taxes and spending. The problem is not so much tight public finances, but the way they are utilized to sustain the economy. It is true, that, despite some redistributive measures in favour of poorer families and pensioners, income distribution in the United Kingdom was more unequal at the end of the Labour term that at the beginning.But this has more to do with the financial system than the budget priorities.

Unfair austerity measures will aggravate poverty and joblessness. We need a genuine social dialogue to ensure that budgetary measures are promoted with a sense of equity and social justice and do not affect once more the poor. If governments are scared about default, they should also care about uncontrolled mass reaction.

Poverty rises in times of crisis

The US Census Bureau* has published last Thursday (16 Sept.) a report on the impact of the recession on poverty. The economic crisis has brought four additional million of Americans in poverty in 2009, reaching in total 44 million, or one in seven citizens. The poverty rate climbed to 14,3%, the highest level since 1994. For a single adult, the poverty line was $10,830 in income (before tax) and for a family of four, $ 22,050.

Given the depth of the recession, some economists had expected an even larger rise in poverty. It has hold down because of unemployment insurance or other assistance. But millions of Americans are still struggling with poverty, in sharing homes with parents and even non-relatives. The Census report found a dramatic increase in the number of such multi-family households over the last two years. Another sign of the crisis is the rise in food stamp recipients, which affects nearly one in seven adults.

According to Lawrence Katz, a Harvard economist, if the two recession years are considered, the decline was 4,2 percent and median family incomes in 2009 were 5 percent lower than in 1999. This means basically no gains achieved for the average American household on an entire decade.

The number of US residents without heath insurance climbed to 51 million in 2009 from 46 million in 2008, although it is expected that these numbers will shrink as a result of the healthcare reform which begins to take effect.

There are, however, strong signs, that high poverty will continue to rise as unemployment remains stable and recovery weakens. the decline in incomes in 2008 had been greater than expected. Experts know that the poverty line is a flawed measure, and that poverty is a multi-dimensional phenomenon (as Sen called it in his works on poverty), but it remains a consistent measure of need for deprived populations and its variations reflect genuine trends.

Increase in poverty is intolerable in the richest country of the world, especially because it affects historically Black and Hispanic communities. This has a dramatic impact on the social life of the nation, its cohesiveness but also on the future of these young generations, who, for a large share of them, had never had a stable job and income.

* http://www.census.gov/prod/2010pubs/p60-238.pdf

We should care about Pakistan

The world neglects aid to Pakistan - if we compare it to Haiti- given the scale of the disaster. In his blog*, Robert Reich, an academic and former US secretary of Labor, explains why we should be concerned about it:

Flooding there has already stranded 20 million people, more than 10 percent of the population. A fifth of the nation is underwater. More than 3.5 million children are in imminent danger of contracting cholera and acute diarrhea; millions more are in danger of starving if they don’t get help soon. More than 1,500 have already been killed by the floods.

This is a human disaster. It’s also a frightening opening for the Taliban.

*http://robertreich.org/post/978427354/why-the-unfolding-disaster-in-pakistan-should-concern

On Corruption

In recent times, there are worrying signs of increasing corruption in our most advanced democracies. This is not a new phenomenon, but what matters are the new forms that it is taking. According to many sources (Transparency International, World Bank, etc.) the level of corruption has reached in some countries, such as Italy and Greece, its highest level. In fact, the corruption index is based on surveys which capture the perception of the phenomenon by citizens, but it difficult to measure it accurately. In a survey carried out by Eurobarometre in 2009, most European citizens consider it a very serious problem, especially in Italy. Again, in this country, 17% of those interviewed declared to have experienced corruption in the last twelve months.

Economists have started dealing with this issue two decades ago. But the findings remain still controversial. For instance, the excess of bureaucracy is regarded as a major cause of corruption, but there is still an open debate on the issue of its relationship with economic development. Although most economists consider that corruption has a negative incidence on growth, there are still some views on an inverse causal relationship, that is low growth determines the level corruption. The channels of influence may differ insofar corruption allows inefficient businesses to survive and thus distorts competition, discourages new entrepreneurship and increases the price of good and services delivered by the public sector. Furthermore, it contributes to an inefficient allocation of ‘talents’ and skills: as D. North, a former Nobel price put it, a system which rewards pirates produces pirates not engineers. It is interesting to note that countries more prone to corruption are characterized by a plethora of lawyers- who make up a great deal of the unproductive class. If corruption in Italy would drop to, say, German levels, economic growth would improve by 0,8% per annum, using econometric coefficients derived from a recent study*.

In Italy, four decades of economic development – between the 50s and the 80s- were not conducive to similar institutional standards of the other founding members of the European countries. This means that the quality of institutions has not improved over time. It has been an era of growth without institutions for which the Italian economy is paying the price with a lower growth. The decline of institutions and the loss of control of corruption are, in fact, associated with recent evolutions in the political system, with Berlusconi’s aversion for the rule of law. There are also specific channels of transmission such as electoral rules and decentralization. In the current electoral system, candidates are chosen by political leaders irrespective of merit or competence, which creates opacity and a risk of corruption as compared to a system based on open lists based on the expression of preferences. Local governments are also more prone to corruption relative to central governments, especially if they are supported by very large majorities built around networks of ‘clientelism’ giving little space to a political opposition making a case for good governance.

Yet, we don't have a full understanding of the phenomenon of corruption, its causes and its effects on economic growth. But, it is clear that without it, policies would be fictive or not effective, and the gap between the political class and civil society will keep growing, economic growth will remain sluggish and we might end up with some kind of authoritarian State.

* T.S.Aidt, Corruption, Institutions and Economic Development, Oxford Review of Economic Policy, 2009

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.

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.

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.