Monday, January 30, 2012

Krugman and the UK Austerity Debacle

Well, the British public seem to be strangely relaxed about our embrace of double-dip recession, but at least Paul Krugman (the Austerity Debacle. - NYTimes.com) is on the case.

Let's just recap: the Tory-Lib Dem government insisted two years ago that the only way to deal with our economic crisis was a sharp retrenchment in public spending, to bring down the deficit and create the kind of climate in which business would invest. (Labour, it must be admitted, also proposed cuts, although not quite so swingeing).

Some (notably Krugman, and on this side of the pond Martin Wolf and Samuel Brittan) objected that this was crazy - the global scarcity of safe assets meant that our debt could easily be refinanced and that deficits would be necessary to avoid a crunch in demand and a return to recession.

Who was right?

What's alarming about all this is that so many people who should know better embraced the theory that an economy suffering a brutal demand shock could return to growth whilst the private and public sectors both set about reducing their debts, at the same time as most of our key trading partners were going through the same experiment.

Of course, debt levels need to go down, but sustainably. The best analogy I can think of is of an obese patient who needs to lose weight. Any sensible doctor would recommend a steady reduction in calories over a long period of time to get the patient's weight back down to a healthy level, given that research shows that weight lost quickly is easily regained.

But what we've decided to do is to starve the patient to death.

Friday, January 20, 2012

Italy in crisis. Again.

Not much action on these pages in the last few days, largely because I've been writing a piece on Monti and the Italian crisis. And you lucky readers get to see the draft first. Here goes:


Italy has long been seen as a weak link in the Euro. Back in the 1980s, when plans for monetary union first began to take shape, fears that Italy’s political instability and fiscal indiscipline might derail the project were a serious obstacle to progress. The stringent criteria laid down by the Maastricht Treaty for participation in the Euro were designed with Italy and its large public debt in mind, and the Growth and Stability Pact which unsuccessfully governed the Eurozone’s public finances through the 2000s was principally aimed at curbing deficit spending south of the Alps. The current scenario, in which Italy’s creditworthiness is doubted by the financial markets and its debt problems are beginning to seem unsustainable, is the nightmare European policymakers have long dreaded. With Italy in trouble, the once apocalyptic danger of a Greek default is now seen as no more than a little local difficulty. 

Thursday, January 12, 2012

Santorum's Calvinism

This (Santorum To Mother Of Cancer Survivor: Sick To Blame For Pre-Existing Conditions, Should Be Charged More) is pretty amazing coming from a man hoping to be elected president. I wonder how many Americans with pre-existing conditions would be happy to accept individual moral responsibility for their ailments?

Apart from the apparently suicidal electoral politics here, it speaks eloquently of the difficulties of the market-based approach to health. Santorum freely admits that the insurance market has to charge higher risk patients more if it is to work properly, and that means that a cancer survivor will pay more, even if the cancer struck them as a child. At least he's up front about that unattractive conclusion.

This is doubly interesting as an expression of the brutal individualism of Puritan religious thought analyzed by Weber in The Protestant Ethic. Weber highlights the purely individual nature of salvation, and cites the exhortations of Puritan literature to shun the help of others, and embrace an ascetic programme of moral self-control (for example in Bunyan's The Pilgrim's Progress). In Calvinist thought, God has chosen the saved and the damned, and that choice cannot be altered by man. Santorum's acceptance of the harsh consequences for someone of suffering a serious illness seems to reflect this view of the world.

As it happens, Santorum is a Catholic, but the Weberian account fits his words neatly.

Friday, January 6, 2012

UK hasn't got a gang problem

From the Evening Standard: US supercop dismisses our gang problem as 'laughable'. Looks like the American brought int to act as our 'gang czar' hasn't learnt the first rule of crime politics in Britain - you have to pretend that poor people are very dangerous and must be brought to heel.

Thursday, January 5, 2012

Tax evasion on ice

Looks like the Italian revenue services are taking tax evasion a bit more seriously (did they read this?). Repubblica.it reports that the Venetian tax inspection office "raided" Cortina d'Ampezzo, an emblematic ski resort for the wealthy, and ran a series of inspections of bars and restaurants, with the result that their declared takings since New Year's Day have increased by several hundred per cent compared with the same period last year. A parallel investigation of over 200 luxury automobiles revealed that dozens of them were owned by people whose tax returns reported gross incomes of less than €30,000 per year.

Similar raids have happened before, and they are never sustained over time. Let's see if things change under Monti. If they do, we can be sure that Berlusconi's Pdl party will be ready to bring the government down: the only reactions from the Pdl to the Cortina operation were critical of the 'police state' tactics deployed.

Monday, January 2, 2012

Happy new year

Oh, and by the way, Happy New Year.

Make them pay

Reflecting on the notion of collective moral hazard, I have been thinking about ways of disaggregating the responsibility for the budget crises facing most advanced democracies. Of course, I don't buy the austerity argument, and I am totally unconvinced that deficit reduction serves any useful purpose in the current climate. But if sacrifices have to be made, how are we supposed to allocate the pain?

In the Italian case, there is a pretty clear line of responsibility. In periods of centre-left rule (1995-2001, 2006-7), the deficit went down, whilst in periods of centre-right rule (up to 1995, and then from 2001 to the present, save the short-lived Prodi II government) deficits have remained stable or increased. The picture is made clear enough here:


So, we can attribute a chunk of the responsibility to the Berlusconi-led centre-right coalition for Italy's failure to reduce its debt substantially over the past two decades (an argument I made here in a piece for Foreign Affairs). We can make a case that citizens who voted for these administrations should therefore be first in line to pay the costs of their mistakes, particularly in view of the fact that the failure to reduce the deficit was also motivated by the need to distribute favours to this very electorate.

In fact, what seems to have happened is that centre-right voters got most of the benefit of deficit spending (in the form of distributive spending and tax concessions, including a light touch for tax evasion) whilst centre-left voters got little direct benefit from the briefer periods of centre-left government, in which the focus was on repairing the damage caused by their opponents (as is indeed the case for the Monti government, so far robustly supported by the centre-left).

So as a matter of social justice, centre-right voters should pay more to get the deficit down. They tend to be wealthier, are more likely to have evaded tax, and are more likely to have received material benefit from the deficit-inducing policies of their governments. But more than all of this, they are directly responsible for the policies followed, in much the same way that drivers of gas-guzzling cars should pay more of the cost for addressing global warming.

Of course, a policy like this is difficult to apply, since voting in Italy, as in all democracies, is by secret ballot. Arguments have been made for changing this, to encourage voters to exercise moral responsibility for their choices (eg here). I propose a further refinement: tax liabilities should be adjusted according to the degree of voter responsibility for good and bad fiscal outcomes: so a 100% Berlusconi voting record could imply a 100% increase in the differential tax burden for deficit reduction, whilst a 100% Prodi/centre-left record could imply a 50% discount.

This is merely an extension of the notions of liability which already apply to other activities with the potential for negative externalities. And it is also consistent with the notion of encouraging a stricter correspondence of duties and rights in democratic societies, as advocated by Maurizio Viroli here. It won't solve Italy's problems, because the people I would target already evade much of their tax liability - just getting them to comply with the law would be a start. But the fact that the burden of deficit reduction in most countries is falling on those who did least to create the problem in the first place offends any notion of social justice I can think of.