June 25, 2017

Today’s Economist: Dispatch From Europe: Learning, or Not, From Policy Mistakes

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

In contemplating American political gridlock, I’ve often written that one of the most disconcerting aspects of our current economic policy is an inability, or at least an unwillingness, to diagnose what’s wrong and prescribe solutions. Still, our economy is resilient and flexible, our central bank has been aggressively applying monetary stimulus (while fruitlessly importuning Congress to help), and our currency is our own and the one other countries hold in reserve.

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As a result, we do not face recessionary risks, as in Europe, where I’m enjoying a working vacation (a concept that gets you lots of eye-rolls in France). Yet we slog along at growth rates that are too slow to move the jobless rate down from its still elevated level of 7.6 percent, officially, and above 14 percent if you count the underemployed.

It’s worse in Europe. In France, growth is flat-lining if not slightly negative, and unemployment is creeping up on 11 percent. But at least among economic elites, many continue to defend the fiscal consolidation, or austerity measures, that have reduced the French budget deficit, e.g., from 7.5 percent of gross domestic product in 2009 to 4.8 percent last year (according to Eurostat).

These numbers came up in a discussion with one French economist who insisted the nation’s main economic problem was politicians’ refusal to lower the deficit. When these declining deficit values were pointed out, her response was, “It should be 3 percent.”

Another prominent economist argued that my criticisms of austerity measures must be wrong because the American budget cuts prescribed by sequestration don’t appear to be hurting our economy. Except for the fact that (a) they are, and (b) “not hurting” is not equal to “helping.” (Thanks in part to sequestration and other fiscal headwinds, the United States gross domestic product was only 1.8 percent in the first quarter, as government subtracted 0.9 percentage points from growth. See also Catherine Rampell’s review of sequestration’s significant employment impacts.)

In fact, the essential problem with the debate in Europe is the same as in the United States: reducing deficits and debt is seen as a solution in and of itself, not as the outcome of actual solutions. Let me explain.

While your spending must broadly align with your revenues over business cycles, it is a mistake to think that when you’re facing large output gaps, if you only make the “hard choices” to reduce your budget deficit, your fiscal rectitude will be rewarded with growth and jobs. Closing the budget deficit won’t close the jobs deficit.

This relates to the Reinhart-Rogoff mistake that gave policy makers a paper to wave around allegedly arguing that high debt levels slow growth. Again, the causality is reversed. Stronger growth right now would solve problems that debt reduction can only create.

In other words, they’re aiming at the wrong variables and yet adamantly defending results that quite plainly show their mistakes. And I’m not just talking about rising unemployment. Note that even as the French budget deficit has gone down since 2009, the debt-to-G.D.P. ratio has gone up, from 79 percent to 90 percent.

To be fair, American Keynesians too often suggest that if only European Union countries would increase government spending and backstop the banks, everything would fall into place. But as I’ve heard from even the occasional sympathetic policy makers and advisers over here, life is a lot more complicated than that in the currency union.

As one German asked me, “How do you think New Yorkers would feel about bailing out Texans or vice versa?” — an excellent question that we never have to think about. Another high-ranking German official told me, “Look, we know what we have to do … we just can’t let anyone see us doing it.” Good luck with that.

Yet when I say European policy makers aren’t learning from their mistakes, I mean that quite literally. Two economists for the International Monetary Fund recently published an important and rigorous analysis of austerity in action. Their work asks the following question: so far, have the results of fiscal consolidation come out the way what we expected? It’s a statistical exercise that asks how far off the mark the conventional European wisdom turned out to be by looking at what forecasters thought would happen to G.D.P. growth given fiscal consolidation plans versus what actually happened.

And the answer is off the mark by a factor of three. That is, they found the fiscal multiplier to be around three times as large as the consensus, meaning deficit reduction was that much more hurtful to growth than they expected.

But when you’re focused so intensely on the problem of public debt, the idea that reducing it is more damaging than you thought apparently creates too much cognitive dissonance. And it’s easy to dismiss a study that goes against your strongly held assumptions. Another economist said the I.M.F. analysis just proves that economists are poor forecasters, as if we didn’t already know that (in fact, their study shows systematic mistakes in the same direction — all underestimating the cost of premature consolidation).

So, if my short sojourn is any indication, Europe will continue to slog even more slowly than we will. It may well be a while until policy makers begin to learn from their mistakes. I’m sorry I can’t share happier news from abroad, but perhaps the smart thing to do at this point is to turn off the laptop, start the vacation part of the vacation, and be very thankful that I’m privileged enough to do so in such beautiful, historic places.

Article source: http://economix.blogs.nytimes.com/2013/07/08/dispatch-from-europe-learning-or-not-from-policy-mistakes/?partner=rss&emc=rss

Little Clarity in Italian Vote, Aside from Anger

In an election marked by voter anger and low turnout, the center-left Democratic Party appeared to be leading in the Lower House with a third of the votes counted and in the Senate with two-thirds of the votes counted by 8 p.m. local time. But the results were not a clear victory, because the center-right People of Liberty Party of former Prime Minister Silvio Berlusconi was leading in several populous regions that carry more Senate seats, raising the prospect of political gridlock.

Even without a final result, the election was a victory for the Five Star Movement of the former comedian Beppe Grillo, which in its first-ever national elections appeared, at this stage of the count, to win 25 percent of the vote in the Lower House. Italians from both right and left — and the wealthier north and poorer south — were drawn to Mr. Grillo’s opposition of austerity measures and cries to oust the existing political order.

And it was a stinging defeat for the caretaker prime minister, Mario Monti, a newly minted politician whose lackluster civic movement appeared to win around 10 percent in both houses. “Grillo had a devastating success; the rest of the situation is very unclear,” said Stefano Folli, a political columnist for the business daily Il Sole 24 Ore.

Either the center-left and center-right “will form a grand coalition committed to reforms and changing the electoral law, which would be very difficult, or Italy will be ungovernable,” Mr. Folli added.

The results would appear to make it difficult for any party to form a governing coalition strong enough to prevail for long, let alone to manage an economy with rising unemployment and a credit crunch, or push through structural changes to the ossified economy.

“Italy remains a question mark,” said Nicolas Véron, an economist and a senior fellow at Bruegel, a Brussels-based research institute. Regardless of who ultimately controls the levers of government, he said, “The key question is whether we can have serious structural reform.”

“It was a work in progress before the elections,” Mr. Véron said, “and I think investors understand that it will remain a work in progress for some time.”

When he came to power in November 2011, after Mr. Berlusconi stepped down amid intense market turmoil, Mr. Monti was praised for restoring international confidence in Italy. Although he won plaudits from European leaders and President Obama, Italians remember him for raising the retirement age and taxes.

“Taxes, taxes and more taxes, that’s what voters remember the most from Monti,” said Stefano Sacchi, a professor of political science at the University of Milan. “When he stopped being a technocrat and became a politician, he came under fire for the same issues Italians blame other politicians for.”

While Mr. Monti said repeatedly that if Italy managed to make its economy more competitive, taxes could eventually be lowered, his message was drowned out in the final days of a chaotic campaign by Mr. Grillo’s anti-austerity message, as well as by Mr. Berlusconi’s ploys.

The former prime minister told voters that he would reimburse them for an unpopular property tax and sent campaign literature in envelopes that read “2012 Tax Refund” in the same typeface used by Italy’s tax collection agency.

Although his limping party took far fewer votes than ever before, it was able to win in the powerful Lombardy region, after forming an alliance with the Northern League party. That will affect the Senate, where seats are partially assigned regionally. Thus Mr. Berlusconi managed to guarantee that his party, now in the opposition, would have significant veto power.

But the most startling result of the election was the success of the Five Star Movement, which triumphed after Mr. Grillo campaigned tirelessly while leading a powerful Web-based initiative that drew young people and first-time voters, as well as former supporters of Mr. Berlusconi, all united more by their anger at the current system than by any shared ideology.

The Five Star Movement drew votes that might have gone to the Democratic Party, especially after the Democrats’ leader, Pier Luigi Bersani, a former industry minister who grew up in the Communist Party, defeated Matteo Renzi, the charismatic 38-year-old mayor of Florence, in a party primary.

Davide Barillari, the Five Star Movement candidate for president of the Lazio Region, said in a television interview that the so-called “Grillini” would not ally with any coalition, but would vote according to their own views on individual laws. “People want to send them all home,” he said of the current Parliament. “Old politics is over.”

Mr. Grillo, who has a conviction for manslaughter after a car accident in which three people died, cannot serve in Parliament under his self-imposed rule that no one with a conviction can be elected. Political analysts wondered how the likely 100 or more members of Parliament from the Five Star Movement, most of them first-time politicians, would vote.

“The risk is a block in policy activities, a Parliament incapable of making decisions, a stalemate,” Mr. Sacchi said.

Gaia Pianigiani contributed reporting from Rome and Nicola Clark from Paris.

Article source: http://www.nytimes.com/2013/02/26/world/europe/Italy-elections.html?partner=rss&emc=rss