Monday, January 31, 2011

Why Italy Needs Berlusconi, part 2

So much for the electoral logic. But surely people vote with their pocketbooks, and a failing economy should lead to governments being turfed out. So why does Berlusconi survive, despite scant evidence that his policies have done anything to improve Italy's declining economic performance?

This is indeed a tricky one. It would be foolish to blame Berlusconi for Italy's economic problems, although his record is pretty terrible. Berlusconi entered the political arena in 1994, winning office immediately, although his government was quickly overturned, with various centre-left administrations taking over from 1995-2001. However, since 2001 Berlusconi has been in power for all but 18 months, and with a comfortable governing majority for most of this time. So since 1995 Berlusconi has been Prime Minister for 8 out of a possible 15 years. How has Italy done in this period? The answer is revealed in this neat chart from the US Bureau of Labor Statistics (via Paul Krugman):


Italy has the lowest growth rate of any major economy over this period, even worse than deflation-ridden Japan. Why, and what has it got to do with Berlusconi?

Here we need to look a bit deeper into Italy's economic and social institutions. At the risk of falling into the standard narrative about Italy's problems, the Italian economy needs reform. It has 1) an inefficient bureaucracy, 2) an impenetrable legal and regulatory system, 3) endemic corruption (in part a result of 2)) and tax evasion, 4) a failing education and skills system, 5) a failing worker representation and wage bargaining system, 6) an ill-designed welfare state, 7) a heavy burden of public debt, 8) large parts of the country in the hands of criminal gangs and locked in a cycle of stagnation and social decay.

Given these problems, it's actually slightly miraculous that Italy is doing as well as it is. But there is no way Italy can grow again without doing something about these issues. And here's the rub: Berlusconi's political support rests in large part precisely on the guarantees he offers that few of any of these reforms will ever be introduced. He could do something about 1), since public sector workers tend to vote for the centre-left, and he could do something about 5), since unionized workers, the main losers from reforms, also lean left. He has shown some interest in education reform (4), but most changes have involved simply cutting funding (or favouring subsidized church schools).

But in every other compartment, reforms run up again entrenched interests which in many cases vote for the centre-right. Berlusconi stands opposed to substantial deregulation (most deregulatory measures recently have been introduced by the centre-left), he opposes any serious measures to combat corruption, he opposes more stringent tax collection and therefore debt reduction, he has reached a fairly stable accommodation with southern mafias, and he has shown no signs of addressing the iniquities of the welfare system, which spends most of its money on pensions and offers little protection to the most vulnerable social groups.

In the end, Italy is locked in an impasse which produces stable, resigned decline. Reforms that might increase efficiency and productivity cannot be introduced because the affected groups are either too politically powerful, or too exposed to huge social risks that the welfare state cannot absorb. As Matthew Iglesias reminds us here, progress is often destructive, and new ways of producing things more efficiently cause real harm to people, hence the need for redistributive institutions to allow societies to embrace change rapidly and at the lowest social cost.

Italy's economy is stuck in a lousy equilibrium, and it has neither the institutions nor the political leadership required to dig it out. As long as the decline is gradual, things could stay the same for years - in fact, despite the appearance of chaos, the dominant tone of Italian politics and society over the past two decades has in fact been stability, even stasis. But if it were to suddenly accelerate, I'm not sure whether Berlusconi or anyone else would be able to hold it together.

Why Italy Needs Berlusconi, part 1

With Berlusconi's latest escapades, the perplexity of the outside world has moved on to a new level: how can a political leader survive not only multiple financial and corruption misdemeanors, but also sexual and other misconduct with potential penal consequences (paying for sex with a minor, as well as, more recently, alleged involvement in illegal drug use)? Amongst others, the New York Times has run a number of articles addressing the mystifying survival of the most obviously flawed leader of any western country in recent times.

There is a lot that could be said here (I've also blogged about Berlusconi before here, here, here and here), but I'll stick with one basic point: Italians have very low expectations of their political leaders, and certainly do not see political leadership as involving any kind of moral example-setting. Instead, Italians voting for Berlusconi are mostly, I imagine, as disgusted with his antics as everyone else, but reluctant to contemplate voting for the other parties because Berlusconi actually does deliver the goods. What goods?

Well, Berlusconi looks after key voter groups: he subsidises the church and opens up new opportunities for Vatican involvement in Italian social life, he protects Italian professions and industries which rely on state-regulated monopoly status, he instructs the fiscal authorities to lay off on the rampant tax evasion of small businesses and the self-employed, and he discourages local authorities and judges from clamping down on building and other abuses which provide private benefits for some companies and households at the expense of the broad principle of the rule of law.

Most beneficiaries of these policies are smart enough to realize that the goods Berlusconi provides are worth a lot to them, whereas his own behaviour has no impact on their lives at all, apart from provoking slight embarrassment to the nation (and let's face it, it's not the first time Italians have had to put up with this). Hence, continued support for the man, and continued loyalty towards him from the servile politicians he elects on his ticket, and the equally servile journalists on his payroll (or who hope to be).

Tax the rich

Hot on the heels of evidence that voters are keen to see the wealthy pay more tax: according to polling by YouGov (reported here), "49% think the top rate of 50p should be made permanent, 33% think it should eventually be brought down. 51% would like to the see the threshold for the top rate brought down to £100,000, 29% would oppose this".

At the same time, evidence is coming out that some of the tax and benefit changes brought in to deal with the deficit could end up penalizing middle- to low-income groups heavily, with some households facing effective marginal tax rates of up to 83%, according to the IFS.

This creates a big political opportunity for someone to build a coalition of middle and low income voters in favour of a fairer tax and benefit system. Of course, reforming tax laws is politically risky, but on the back of a desperate recession and a strong feeling amongst most voters that the whining bankers have got off lightly, there has rarely been a better time to start arguing for radical redistributive reform.

Friday, January 28, 2011

Inequality and the Crisis part 267

Even some business leaders are starting to wonder if inequality might be a problem... (courtesy of Mark Thoma).

God, Darwin and Big Government

I wish I'd written this:

Intelligent Economic Design by Brad DeLong

DeLong uses the metaphor of debates about evolution and intelligent design to illustrate a few straightforward points about the role of politics in economic development. The neat trick, rhetorically, is that the same people who find the natural world too complex to have evolved without divine intervention often also believe that the modern-day American economy is a wondrous product of spontaneous private initiative, and that attempts by politicians to interfere with it ('intelligent economic design') will surely mess it up. In other words, when it comes to the natural world, God is a kind of socialist government making sure everything comes out right. But earthly politicians of course have the opposite effect...

The fact that nothing in an economy happens without significant government involvement (money, for a start) means that arguments for getting the government out of the economy are actually no such thing. It also means, unfortunately, that there is always a way to blame the government when the market screws up - witness the scandalous behaviour of Republicans on the Financial Crisis Investigation Commission.

Wednesday, January 26, 2011

Would you smash Richard Keys?

This just gets worse and worse. Probably ol' werewolf hands needs to crank up the moronic macho discourse to compensate for his lack of real-world experience of dressing-room banter. But this is truly grotesque, and if he survives in Sky we can finally give up on the idea of there being any integrity there.

Tuesday, January 25, 2011

Growth-friendly fiscal consolidation...

.. is what we're hoping for.

What we got last quarter was a 0.5% contraction. Might be just a blip, or might be the collapse of the government's economic strategy. We'll see.

Gray takes the fall. Keys in the clear?

So Andy Gray has been sacked, with this choice bit of misogeny proving the tipping point.
But although Richard Keys didn't unbutton his trousers in front of a female presenter, what he said about Sian Massey was actually worse than Gray's pearls of wisdom. Yet he's still in a job.

Has the fact that Gray is sueing NewsCorp, whilst Keys isn't, got anything to do with this?

Either way, one thing is clear. There is one hell of a battle going on over the BSkyB takeover, and Coulson, Cable, and the Metropolitan police have all found themselves caught up in the turbulence in one way or another. Makes you worry about the state of democracy, really. It's difficult not to conclude that the government want to push it through, and are just hesitating because they're not sure they'll get away with it.

Gray of course deserved the sack. I would have shown him the door in about 1995. I would just like to think that his sacking had at least something to do with his outrageous sexism.

Monday, January 24, 2011

Richard Keys, football genius

There is a delicious irony in the fact that Sky's sexist broadcaster Richard Keys, along with Andy Gray, predicted that Sian Massey would need the offside rule explaining to her before running the line at Wolves-Liverpool.

First, Massey made a crucial call on the first Liverpool goal, which appeared a mile offside in real time, but which on replays was clearly valid. A game-changing decision, that she got right under tremendous pressure.

The second irony is that Keys, despite his macho posturing, actually had the body hair on his knuckles lasered a few years back at the request of his producers. Maybe that's why he got so mad at Karren Brady.

Remember Ron Atkinson?

Sunday, January 23, 2011

Spin that

Andy Coulson's memorable departure, the day after we found out about Alan Johnson's marital troubles, shows what being a spin doctor really means - you even have to spin your own sacking (or at least bury it on a big news day).

The most sinister side of the whole Coulson saga is that being perceived as having condoned (if not commissioned) criminal behaviour doesn't prevent you becoming a senior government official, nor indeed does it lead to any effective police action, provided you work for Rupert Murdoch of course.

On the other side of the Atlantic, you can broadcast incitements to violence and slander individuals and organizations with impunity - again if you happen to work for Rupert Murdoch.

All of which is tragic, because I'm sick of my Virgin media package and would like to switch to Sky, but how can I?

It's not Brown, it's Balls!

Ed Balls first came to our attention in 1994 when Michael Heseltine attempted to ridicule Gordon Brown by exploiting the surname of his young advisor. After reading out some Brownite ponderings about neoclassical endogenous growth theory or suchlike (jargon of the kind Tories are loathe to use, since trained economists are thin on the ground in the party) Heseltine proudly concluded 'it wasn't Brown's, it was Balls'.

Well, that's what passed for humour amongst Tory grandees in the 1990s.

So what does Ed's elevation to George Osborne's nemesis really mean? The upside is that one would expect Balls to wipe the floor with Osborne in the Commons, all else equal. The downside of course is that Balls is associated with Gordon Brown and his policy errors in a way no other Labour politician - and certainly not the other Ed - could ever be. Will this matter?

The Tories will clearly seek exploit Balls' record. Their opening line is that Balls is a 'deficit enthusiast' who was responsible for the entire edifice of economic governance that came crashing down in 2007-8. And they are right, at least about the second bit. But that doesn't mean that Balls cannot prove an effective Shadow Chancellor.

For a start, I would doubt that most members of the public had any idea of who Balls is and what jobs he has done before this week. Do voters really care that Balls drew up the framework for the tripartite system of regulatory oversight in 1997-8? Of course they don't. David Cameron was Norman Lamont's right-hand man at the Treasury on Black Wednesday, Britain's last-but-one economic meltdown in 1992, and nobody ever mentioned it during his march to power. I would guess voters are rather more interested in the government being held to account than in demonizing anyone who worked for Gordon Brown. How will the 'deficit enthusiast' line play in 4 years time if unemployment is still 2.5 million and living standards have eroded?

If Ed has any sense, he will be trawling the archives for quotes circa 2005 by Cameron, Osborne and - for that matter - Clegg complaining about Labour's propensity for regulation and scrambling over each other to offer higher public spending into the future. To any accusations of blame he should simply shout back that Conservative policies would have freed the bankers to lose even more money. In six months time, that Conservative line of attack will be worn out, and Balls can go for them on the shambolic and inequitable nature of the cuts.

In any case, the starting point is that Balls and Osborne are already level pegging in the polls on who would make the best Chancellor, and Labour still have a 5 point lead in voting intentions. Interesting times.

Wednesday, January 19, 2011

PMQs

Today I broke the habit of a lifetime and tuned into Prime Ministers' Questions. As usual, Cameron handled it well, and is certainly a smooth and convincing performer. Ed Miliband remains a little hesitant, although he's attempting to make up for it with an aggressive approach to challenging government policy.

Only political anoraks pay any attention to PMQs, so it probably has barely any effect beyond Westminster. However, a couple of points with wider implications that struck me today.

First, Cameron currently enjoys the luxury of being able to bat back any criticism with the easy line 'we have to do this to sort out the mess left behind by the party opposite'. This line has a sell-by date which is fast approaching, so he's going to have to dream up something new, especially by the time of the next election.

Second, Cameron's smoothness could well prove a problem. Unlike Tony Blair, who came across as simply dishonest once reality began to clash with his convincing rhetoric, Cameron faces another threat: he's posh, so sounding too convincing makes him appear 'born to rule'. Of course, some voters might like that, but in hard times with bankers partying at everyone else's expense, this is probably not an attitude Cameron wants to be adopting. The trouble is, with his background it's probably impossible to sound down to earth or to empathize with the masses.

So, the message for Ed is: keep plugging away. The time could come when Cameron's mastery of PMQs  becomes a millstone, and voters might appreciate a tenacious voice of opposition prepared to challenge him with some unpalatable facts from the real world.

Sunday, January 16, 2011

Fiscal responsibility and why nobody wants it

So Labour comfortably won the Old and Sad by-election, affording Ed Miliband a bit of breathing space. Given the circumstances of the election - the Labour MP being turfed out of Parliament by judges on the grounds of lying during his campaign - this is quite a result. It reflects Labour's steady, though narrow, lead in the opinion polls over the past few weeks, as left-leaning Lib Dem voters drift into opposition to the coalition, almost certainly because of discomfort about the various unpopular measures of fiscal adjustment being implemented.

This result suggests a problem for the coalition: although voters may claim that they want to see the deficit cut and the books balanced - in June, 59% approved of the coalitions spending plans - there is less clarity over what kind of pain voters are really prepared to take. The abstract notion of fiscal responsibility is more attractive than the prosaic reality of job loss and service decline.

The US, as ever, blazes a trail in this. The new House Speaker, Republican John Boehner, made an idiot of himself a couple of weeks ago by failing to identify a single government programme that he would cut, despite protestations that his party would take an axe to government spending. This is not surprising - Republican voters benefit just as much from government spending as Democrats (Red States are mostly net beneficiaries of government largesse, Blue States net contributors).

This is yet another example of perhaps the most important political science intuition: that people like public goods, but try to avoid contributing to them if they can. Balanced budgets are very definitely public goods, but individual tax burdens and benefits are largely stubbornly private. In the same way we all want clean air but burn fossil fuels all the same, budget deficits are someone else's problem.

Thursday, January 13, 2011

Polarization in America: sound and fury, signifying what exactly?

Matthew Yglesias, linking to Noam Scheiber, points out that America's frenetic, famously 'polarized' political debate is not actually backed up by real policy polarization. In other words, the two sides trade blows furiously, and then in practice follow policies that are not wildly different from each other (Bush increased social spending, Obama looks after financial interests, etc).

With Mark Blyth and Riccardo Pelizzo, I've been studying the increasing 'cartelization' of party systems in western democracies - the reluctance of the mainstream parties to actually compete over the broad contours of economic and social policy. The US is one of the neatest examples of this, with the Republicans tracked fairly closely by the Democrats in their shift to the right over the past quarter century. This table maps party positions on the left-right scale during presidential election campaigns over the post-war period (positive numbers on the vertical axis mean right-wing positions, negative mean left):



There's a hint of a growing divergence in the mid-2000s, but what's most striking is how the Democrats have drifted rightwards over the post-war period. Evidence assembled by Bartels, Poole and Rosenthal and others neglect the substantive political convergence that has taken place whilst partisan polarization in Congress and public opinion have been developing.

In view of recent events, it would seem particularly grim if the purported polarization was in fact a facade concealing substantial agreement on the same set of - largely conservative - policy positions.

Sunday, January 9, 2011

Political violence and rhetoric

In a sane world, this and this would mean the end of a political career. Sure, Sarah Palin has plausible deniability. She never literally asked anyone to kill Rep. Giffords or anyone else, the militaristic language was obviously 'metaphorical', the guy responsible was clearly mentally ill.

But still, if I published a map with a crosshairs target on your house, and then somebody takes a pop at you, you might think I had some explaining to do.

Sarah Palin clearly can't apologize, since that would be tantamount to admitting that her incendiary brand of politics inevitably leads to violence in a land where nutjobs often own guns. So she will bluff it out, expressing her sympathy and suchlike, and outrage if anyone suggests she's to blame. But will it wash? Surely even right-wing Republicans angry about Obama's vaguely centrist policies can see that the Tea party/shockjock/Fox News approach to politics was bound to end in blood.

This all helps Obama who, to the frustration of many of his supporters, is playing the bipartisan/honest broker/statesman above the fray to perfection. Let's just hope his security detail doesn't drop the ball.

Anyway, I suggest reading this, this and this on the tragedy.

Friday, January 7, 2011

What caused the deficit?

Just a bit of comparative data to back up the points made by Miliband in his Times article. I ran a few scatterplots of 2010 deficit levels against likely explanatory variables in advanced industrial democracies. The graph below shows government deficits on the y axis, and levels of govenrment spending just before the crisis on the x axis. This rough and ready test shows there is no relationship between deficits (here expressed as negative values) and past levels of spending:


Some countries with very high spending - eg Sweden - have very small deficits, whilst countries with low spending - Ireland, the US - have very big deficits. (Norway is excluded because of its oil resources which make it a huge outlier). There is no real relationship, and certainly nothing that would support the notion that today's government fiscal problems are anything to do with too much public spending. Britain, interestingly, has higher spending than other countries with similar deficit problems, but that doesn't seem grounds for believing that the deficit was caused by its having very average levels of public spending.

However, in the spirit of The Spirit Level (excuse me), inequality levels do prove a reasonable predictor of deficits:



There are a lot of other things going on here, and the causal effect is probably indirect or maybe even entirely spurious. But it seems that societies that sort out the income distribution problem are pretty good at sorting out their macroeconomy too.

Just saying.

Thursday, January 6, 2011

Stop press: leading politician offers sensible analysis of deficit

Here Ed Miliband comes perilously close to a balanced and informed view of our economic problems. Surely this will never work politically! Aren't we supposed to give voters pious noises about the importance of tightening our belts and not leaving burdens for future generations?

At this rate Miliband may end up committing himself to fair taxation, higher public investment, tighter financial regulation and constitutional reform. This man must be stopped!

The Market for Lemons

I spent New Year on the island of Ischia, in the Gulf of Naples. Apart from the natural beauty of the place and its weird array of volcanic tricks (hot water in the sea in January, water sources with allegedly miraculous powers), it set me thinking of the limitations of mainstream social science.

The first point is that, by any of the usual indicators used to measure quality of life (and many are published and eagerly consumed in Italy), the province of Naples is an economic, social and political disaster zone. Most of the injuries (and often deaths) occurring during New Year celebrations in Italy happen in Naples and around. Rubbish is not collected, and when it is, very often toxic waste finds its way into illegal landfills in densely populated areas. Unemployment is high, average income low. However, anyone with a garden can grow fabulous lemons and oranges. But still, is that enough to compensate for the very obvious - often tragic - problems?

All of this poses a paradox because Naples is one of the most densely populated areas in Europe. People have flocked there from around the rest of Southern Italy for generations, and houses have been built (usually illegally) most of the way up the brooding and potentially deadly Vesuvius volcano. So, if life there is so bad, why do people stay? Are Neapolitans too stupid to realize a better life lies elsewhere? This seems unlikely, as Neapolitans are famed for their wit and reluctance to be fooled - 'cca' nisciuno e' fesso'.

So, we have a paradox on our hands. I can't pretend to have any compelling answers, but... how about the fruit? Of course, the lemons made famous by Akerlof are if anything more of a problem here than anywhere, with lack of social trust at unmatchable levels (a point made by Putnam two decades ago). But, citrus fruit may still tell us something. What is a lemon worth? In Naples, it can be as near to free as you get, and will taste incomparably better than any 50p lemon bought in a Northern Italian supermarket.

So do people stay because of the fruit? Well, probably not, but food is important to Italians, and many Neapolitans with very low incomes live on wonderful food at low prices. That's the utility side of it. But fruit also evokes the emotional attachment people have with the territory - the well known Neapolitan song Turna a Surriento famously cites the smell of the oranges that grow as abundantly as lemons in the province.

All of this is as soft as social analysis gets. But these days Neapolitans are more likely to stay and grind out a meagre living than earn European-style wages in the cold, fog-bound North of Italy. There must be a reason for this, and until someone comes up with something better than my citrus fruit theory of economic mobility, I'm sticking with it.

Successful leadership

According to any number of knowing newspaper remarks, Ed Miliband's leadership is in crisis. Yet, after only four months in charge, Labour has been behind in only one of the last 14 opinion polls published by UK Polling Report.

Which begs the question: if Ed was doing it right, how would we know?