Sunday, October 9, 2016

Domenico Viola — Italy is Hungry for Expansionary Fiscal Policy

In a meeting with Angela Merkel and Francois Hollande on August 22, the Italian President Matteo Renzi proudly announced that Italy has the lowest public deficit of the last 10 years, and will continue with structural reforms to reduce it further. Monti has long aimed to “restore credibility” by cutting the public deficit, and now enjoys praise on his achievement of a deficit as small as 2.4% of GDP. The FED (Financial and Economic Document) goes so far as say this makes Italy “among the most virtuous countries in the Eurozone.”
A closer look at Italy’s economy, however, shows this “virtuosity” has no basis in reality. In 2015, 1.5 million households lived in absolute poverty. Another 4.5 million individuals saw stagnant incomes. The situation has not been this bad since 2005. It is clear that Italy is stuck in a deep depression. And it’s not alone. Many other euro countries are suffering the same fate. Cutting public spending cannot help them recover. We turn to Keynes to see why it cannot, and consult the work of Minsky and Wynne Godley to see what can.
The Minskys
Italy is Hungry for Expansionary Fiscal Policy
Domenico Viola, UMKC

18 comments:

Ignacio said...

I was in London last week, it's becoming the economic refugee capital of the EU, not only there were many young people from South Europe, but now also a lot of young French.

Pretty sad state of affairs (and is not like there is a lot of quality employment in London, but is still better than no jobs at all).

MRW said...

Warren's 2013 talk in Italy is what the head of Italy (and everyone else) should watch. One of the better jobs handling translation too.
https://www.youtube.com/watch?v=LaqbZm_y15g

Matt Franko said...

I,

Sounds like Brexit in real terms...

Matt Franko said...

"So when they say that Italy has the lowest budget deficit of the last 10 years, they are actually stating that the government is draining more financial assets from the private sector than it has in a decade."

Not True....

You have to look at the deposits into the Italian Treasury accounts to determine this...

And more savings isnt going to help increase employment/reduce poverty...

And these are the new young MMTers at this "Minsky's" thing out there so they have now got all the young screwed up on this "deficit too small" thing .... great...

Auburn Parks said...

Should definitely be "Govt adding less financial wealth" only surpluses drain FAs.

MAtt- Taxes are a flow also, thats why the deficit matters more than spending. Spending is just 1\2 of the analysis, as are taxes, only the "deficit" is the net of the two.

Matt Franko said...

Ok so you are saying a govt expenditure of 4T is not better than 1T if the savings resulting from the two are inverse.... no way Jose...

Matt Franko said...

year 1: Govt spends 1T and taxes are 900B for 10% deficit..

Year 10: govt spends 10T and taxes are 9.5T for 5% deficit...

So you are saying in year 10 it will be worse than year one?

In year 10 govt withdrawals will lead to less employment?

they are saying that people are not saving enough meanwhile they are complaining that people save... ????

Matt Franko said...

"If someone saves, then that means we cant buy all of our output, so therefore, the solution is to increase savings..."

???????

Auburn Parks said...

Matt-

I'm not saying any of those things, you are saying them.

What I'm saying is spending is a flow and taxes are a flow, the deficit is the measure that incorporates both. Thats all I'm saying.

But I can play your game too. Say Govt spending goes from $4T this year to $5T next year, whats the impact? The Answer is "I dont know, because you included only half the analysis, what happened to taxation?"

If Taxes get increased by legislation an estimated $1T also, then the economic impact of the spending would be less obviously. Again, the point is that spending is just 1/2 of the whole.

Matthew Franko said...

" $4T this year to $5T next year, whats the impact?"

GDP = C + I + G + (Ex - Im)

If its a 25% increase in (G + bottom up xfers) then Id assume a > proportional increase in GDP... what I wouldnt know is what is the impact to the deficit as that depends on a lot of other things...

What they are doing is similar to confusing Efficiency with Input Power...

Six said...

What Matt is doing is similar to pretending that thrust is the only force that matters in flight and and pretending that lift, drag and weight play no role in determining if an airplane gets off the ground. I haven't yet determined what his point is.

Matt Franko said...

Six what have you been trained in?

These people have been going all around saying "the deficit is too small!" and continue to do so... with out even looking at what the govt is spending/withdrawing...

You could run a system like we have with zero deficit (similar to 100% efficiency) and get better results than we have at present spending/withdrawal levels of $4.5T/yr

Matt Franko said...

Tax all USD in 100% at 5pm on the 30th of the month and then credit all personal accounts for $10,000 at 8am the morning of the first... deficit zero... that would be a financial disaster????

Six said...

Mostly Air Traffic Control. My degree is in Finance/Accounting, so I guess I've been trained in those areas. And I have a lot of knowledge/experience in antiquated Typography/Graphic Arts systems (1880s-1980s technology).

And your example might not be a financial disaster ... I haven't thought it through. The ensuing bank run (withdraw cash to avoid 100% tax) would probably be troublesome.

Six said...

And your example doesn't apply since we don't currently deposit $10,000 in everyone's account on the first of each month. You are saying tax doesn't matter if ...

The "if" is very important to your argument.

Matt Franko said...

assume 100% electronic then...

And I'm not saying tax doesnt matter Im saying the deficit doesnt matter...

Tax rate as we have a lot of witholding type taxes and user fees, will act as a proportional action on the leading flow so if we modify the taxes, it will result in a one time linear adjustment to the leading system flow... but it is still like "pump priming" which is false...

It would be like somebody you drive with sometimes who doesnt have a very good accelerator foot... they tramp down on the pedal and the car races up to speed limit, then they take their foot off completely and the car decelerates and then they push down hard again and the car races back up and then they take their foot off and the car decellerates again, and they tramp back down, etc... meanwhile your head is snapping back and forth... this is how trying to regulate it with taxes works...

ie "Proportional Control":

https://en.wikipedia.org/wiki/Proportional_control

Six said...

This is great news, Matt. We can tax more than we spend until the national debt gets to $0. This will make the "debt is too high!" crowd happy and there will be no negative effect on the US economy. Sounds like a win-win situation. What could possibly go wrong?

Tom Hickey said...

The size of the deficit is based on demand leakage to savings, therefore, on shifting liquidity preference. An increasing deficit makes space for increasing saving desire by providing more safe assets in the form of aggregate nongovernment financial assets.

Otherwise, unless need exports offset, the economy will shrink and unemployment rise, or the private sector will increase its debt-income ratio, which is not sustainable.

Basic sectoral balance analysis and functional finance. Throw in a MMT JG to mop up residual UE and that's MMT in a nutshell.