Monday, June 15, 2009

The Italian Economy: Day 10

We spent today discussing the Italian budget defecit, focusing on a variety of issues.

It's interesting to me to learn about the Italian economy and gov't, because I naturally think of the current state of affairs in Italy as some sort of an equilibrium. After all, this system has evolved over time to its current form, therefore it must be in balance somehow.

However, one look at the system and you see it's completely unsustainable in the long-term. We think we have problems with social security in America, but in Italy, "dependent workers" are promised 80% of their salary from their last three years upon retiring (62 for women, 65 for men). Forecasts for the Italian population are worse than forecasts for the American equivalent - aka their population is aging to a greater extent than our own. Oh, and did I mention that their history of fiscal irresponsibility is far worse than ours? Their budget defecit, as a percentage of GDP, is expected to go over 110%, likely higher, by the end of the next two years (which is assumed to be the end of the recession). They have absolutely no room to spend their way out of this mess.

One way that the Italians could fix this, in theory, is to tap into the black/grey economy, which represents 15-25% of GDP, depending on who is estimating. However, the concept of equilibrium returns here. Italians have this "you scratch my back, I'll scratch yours" philosophy which maintains the economic situation. The government has no flexibility to attack the black market because everyone has a vested interest in extending the current conditions.

It was also interesting to hear my professor talk about the "dependent employees" as victims today, because they do not have the flexibility to evade taxes of the self-employed or owners of SMEs. They have been villanized in every other class session, but today his portrayal almost made me feel sorry for them (okay, not really, but take today independently and you would've felt bad for these guys). They are the equivalents of the workers in the airline industry 5-6 years ago, or GM employees in the last year. Powerful unions have put them in an unsustainable equilibrium, and it seems eventual that they will get screwed out of generous pension/healthcare when the money runs out, and they will be left with nothing. Are the Italians concerned? I don't think many of them even realize it's coming.

Other things: To try to collect a little tax revenue, Berlusconi has issued candones, or decrees that allow you to pay only 10% of previously unpaid taxes in exchange for forgiveness of all prior debts. Interestingly, the centre-left is against these policies, because it knows that these encourage tax evasion in the long-term. However, Berlusconi needs money, and he'll take it however he can get it. The backwards nature of the parties and their policies is just comical.

Direct quotes from class: How is it that Berlusconi can have so many supporters? Manipulation of Information. I haven't even mentioned the story of Alitalia's privatization, it's too long for this already ridiculous post, but I might put it up tomorrow. Needless to say, it's a pathetic story.

"Normally you don't fight for new rights. You fight to retain old ones." This one resonated with me and I'm not sure why - definitely the subject of a future post.

Thanks for reading, if you didn't get lost in that whole mess. There's a lot here but what it basically comes down to is, Italy is screwed in the not-too-distant future, but there's no desire on their part to face that problem. I suppose there's some question in my mind of whether the whole global system is facing collapse eventually, and whether in that case it's better to be Italy and fall first, or America and hold on until the bitter end. Hmmmm...


Ravi said...

This is really interesting stuff. I guess MUN doesn't teach you about the internal politics and legal machinations of each country, huh? Keep it up and I look forward to reading that story tomorrow!

Pete Abbate said...

From Hayek's fantastic essay, "Competition as a Discovery Procedure":

"We are accustomed to calling the order brought about by competition an equilibrium-
a none-too-felicitous expression, since a true equilibrium presupposes
that the relevant facts have already been discovered and that the process
of competition has thus come to an end. The concept of order, which I prefer
to that of equilibrium, at least in discussions of economic policy, has the
advantage of allowing us to speak meaningfully about the fact that order can
be realized to a greater or lesser degree, and that order can also be preserved
as things change. Whereas an equilibrium never really exists, one can
nonetheless justifiably claim that the kind of order of which the "equilibrium"
of theory represents a sort of ideal type is realized to a great extent."

Gets right at my first paragraph. I suppose I could substitute the word "order" and the rest of the post would be relatively unchanged, but it somehow seems more okay to me that things in Italy have fallen into an "order" that doesn't make any sense than an "equilibrium" with the same qualities.

Compared with the totality of knowledge which is continually utilized in the evolution of a dynamic civilization, the difference between the knowledge that the wisest and that which the most ignorant individual can deliberately employ is comparatively insignificant. ~Fredrich Hayek in The Constitution of Liberty