Marginal Revolution
Not now, at least. You don’t have to buy into the more extreme forms of Keynesian economics. In the short run, what the country needs is more revenue, relative to expenditure. If you cut the government expenditures, in the short run revenues go down, including tax revenues. Maybe you substitute in some private sector outputs for public sector outputs and furthermore maybe those private sector outputs bring higher utility to the citizenry. But they don’t bring higher revenue, not in the short run.
The financial crisis, now exacerbated by a revenue shortage, destroys the economy before the potential gains from the expenditure-switching have a chance to kick in. Furthermore, if the broader economy is dysfunctional, the gains from expenditure-switching to the private sector may not show up even in the medium run. Growth-enhancing reforms can take many years to pay off, as we see from the histories of New Zealand, Chile, or the ex-communist countries. Yet even the Italian two-year note shows default risk, yielding twice as much or more as the American 30-year bond.
That said, more government spending probably won’t work either, unless you think that spending is extremely effective in targeting unemployed resources, which in Italy I believe it is not. Neither contractionary nor expansionary fiscal policy will succeed.
The only answer, if that is the right word, is a central bank. Right now central banks need to be doing everything they can to avoid a second Great Depression. I talk to many smart people, and I am continually surprised how many of them do not realize the urgency of the current situation.
By the way, some of the worst features of the Italian economy — paying people to do nothing, or to do the wrong thing — can in the abstract be described as “automatic stabilizers.” Automatic stabilizers play an important and largely positive role in macroeconomic response, but if not designed properly they too can bring or hasten downfall. The automatic stabilizers in Italy have thwarted productive incentives and thus lowered the growth rate. And furthermore, dismantling some of those automatic stabilizers eventually needs to be done, but in the short run again could hurt revenue. When a country uses automatic stabilizers for growth-damaging ends, it paints itself into an especially difficult corner. How to move forward?
The economic policies of the Nordic countries look better all the time, and actually you can add the United States to that list, believe it or not.
64 comments
Everyone lists debts. How about assets, or are govt assets typically too illiquid to be much help?
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> and actually you can add the United States to that list
If economic disaster like US recently is on the good list, it’s only because Eurozone is even worse.
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Out of curiosity, which countries top your list?
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Tyler, there are too many elephants dancing very close to you but you prefer to ignore them and pay attention to Italy. Is that your comparative advantage?
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On Tyler’s behalf let me assure you that Italy is the closest “elephant,” or if you prefer, “ticking time bomb” to him, and to anyone else in any economy that is linked to the economy of the Eurozone (which is a lot of people). Oh and by the way – he’s right.
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Relax, I understand that for fear-mongers Italy is the Flavor of the Day. Just remember that they take advantage of your ignorance.
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Ignorance? Strong words.
In the short run I don’t think there’s any argument that Greece and Italy (and maybe even Argentina?) are closer to impending disaster than the US is.
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We’ve got Big Ben.
We serve the Flavor of the Day! (but not only…)
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The scary version is it will allow our leaders to hit the snooze buttion. Maybe since economists have a stone tablet above their door that says “no evidence of crowding out” we can call this “crowding in.”
“But they don't bring higher revenue, not in the short run.”
Why is that?
“dismantling some of those automatic stabilizers eventually needs to be done, but in the short run again could hurt revenue.”
Why is that if they’re paid to do nothing?
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Because the 20 traffic officers in that mountain town of 800 (described in that great nyt article a few weeks back) now don’t have an income, on which they don’t pay tax. Plus, they no longer have the money to buy the cappucinos while sitting in the cafe while not directing the nonexistent traffic.
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It does seem like it would have to be a net positive revenue effect. You give a salary of X and collect whatever, .5X in taxes, then that money goes around and helps businesses and they pay taxes. But it’s not going to end up being more than X in tax revenue, that doesn’t make any sense.
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What are the unemployment insurance policies there? One of the problems with government downsizing as a short-term austerity method is that all those laid-off government workers are just going to turn around and apply for unemployment insurance, which is still a drain on the government’s coffers.
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It can make sense. Paying that salary could create a potential market, cappuccinos for lazy government employees. Someone whose skills were previously unused or underutilized puts in more work in order to satisfy that demand and make a buck, in turn creating a new market for “lawnmowers for suppliers of cappuccinos to lazy government employees.” Each step brings added revenue, and there’s no reason, per se, that the new revenues generated by money circulating has to add up to less than the initial salary.
Indeed, that’s the entire basis of both the Keynesian multiplier and the Laffer Curve, which whatever you think of it does exist.
That isn’t the issue here, though, of course. What would happen is that by disrupting the currently existing economic structure, it would increase uncertainty and destroy value, as time and effort have been spent to create and know the “cappuccino for lazy government employee” market. Eventually it would recover, but when you’re starving on an island you don’t turn down McDonald’s because it’s unhealthy.
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It can make sense. Paying that salary could create a potential market, cappuccinos for lazy government employees. Someone whose skills were previously unused or underutilized puts in more work in order to satisfy that demand and make a buck, in turn creating a new market for "lawnmowers for suppliers of cappuccinos to lazy government employees." Each step brings added revenue, and there's no reason, per se, that the new revenues generated by money circulating has to add up to less than the initial salary.
What you’re describing is the whole structure of production being warped to satisfy demand for cappucinos by bureaucrats with nothing to do. Eventually, the malinvestments pile up to the point that no real wealth is being produced and the structure crashes.
The activity is dependent solely upon a continued infusion of new dollars and artificially cheap credit because nobody will voluntarily pay for government clerks to sit around and drink coffee. It’s actually destroying wealth, because all other sectors are now that much poorer from resources being diverted to supply cappucino to bureaucrats with nothing to do.
Housing bubble, education bubble, sovereign debt bubble. We are going to learn this lesson, like it or not.
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