The Debt the Italians Owe to Themselves

The Wall Street Journal reports on generational conflict in Italy.

Over the past two decades Italy has run €1.3 trillion in such [primary] surpluses, averaging 4% of GDP a year, says Giuseppe Alvaro, an economist in Rome and an expert on Italy’s national accounts. Public debt has nonetheless risen—it is now €2 trillion—and the austerity must continue. Because much of today’s working population has never benefited from excess public spending, “they may feel rather reluctant to give back what they never received,” Mr. Alvaro says.

Pointer from Tyler Cowen.

As I pointed out in Lenders and Spenders, the problem with deficit spending is that it creates an arbitrary distribution of burden within a country, causing political conflict.

We are very likely to replicate the Italian experience. Local governments are going to raise taxes and reduce services, in order to pay pension benefits to retired government workers. And at some point the Federal government will have to run large primary surpluses, just as Italy has been forced to do, with similar consequences.

In an earlier post, Tyler comments on the observation that few people in Washington are worried about the deficit. Tyler’s riposte:

That is why you should care about the budget deficit.

I have been thinking along similar lines. The arguments that Thoma, Krugman, and others make for not worrying about the deficit are, in fact, a major reason why I worry about the deficit. Conversely, if they would argue in favor of worrying about the deficit, then I might be less worried about it.

10 thoughts on “The Debt the Italians Owe to Themselves

  1. It would seem to me that a wealth tax is one way to solve this problem. Let the winners of the past spendthrift regime make up the gap.

    • In principle, taxing the winners of the past spendthrift regime is exactly what to do. However, a wealth tax would hit many innocent victims. What you want to do is tax the cronies who got corporate subsidies, the workers who retired early on generous pensions, etc. Not easy to arrange such a tax.

    • Isn’t the run-up to such a tax essentially paying the wealthiest an enormous amount of money to leave the country? Is that a good idea?

  2. Much attention has been, and is being, given to redistribution of incomes.

    Equally serious if not more so, is the issue of the redistribution of costs.

    Redistribution of incomes through governmental actions (coercion) as tax legislation and related establishment of specific benefits is capable of much more accurate analysis than redistribution of costs.

    The redistribution of costs are much more disruptive and “inaccurate” in that the reassignment of the burdens of of the costs are not necessarily related to burden bearing capacities; nor to any form of effectiveness of the transfer of the costs.

    Nevertheless, the current trends in issues such as health care, education, reconstitution of certain environmental conditions, etc., are producing actions based upon redistribution of costs.

  3. This is a great post–you just can’t repeat this point enough. The next step is to say how this can be converted into compelling political rhetoric.

  4. I would love to see some data on how many members of the upper X% (1, 5, 10, etc.) are those who make their money off the govt. In Canada, there are jurisdictions where such individuals are the majority of high earners (mostly health care and gov execs). I’m sure this is the case in the US too, if you factor in defense, all of DC, etc.

    This is part of the failure in the Italianate economies. When many of the wealthy are getting fat off leveraged income, their wealth is illusory and the political conflict is about grabbing at a resource that doesn’t exist.

  5. I wonder, with youth unemployment sky high, bad economies, none of the benefits that previous generations received in the socialist paradise, how long it will take young people to become radicalized and violent. Hopelessness can only be borne for so long

  6. “deficit spending…creates an arbitrary distribution of burden within a country”

    If you don’t like the way the burden is distributed, then lobby to change the composition of tax and spending! Distributional concerns do not warrant changing the size of the deficit. Shrinking the deficit only makes sense if private spending is too high – which it clearly isn’t at present.

    The thing that really creates an _arbitrary burden_ is monetary policy. A monetary boost will benefit debtors at the expense of creditors, and will benefit debt-reliant industries such as construction and auto at the expense of consumer goods. Fiscal policy is the right place to address head-on what is the correct burden.

  7. Inflation is another form of redistribution, right? It’s a wealth tax, although not only a wealth tax. Maybe it could be said that inflation is to the wealthy what immigration is to the poor, a form of redistribution, just in the opposite direction. Inflation is a tax on capital and immigration is a tax on labor. Of course economists will say that the effects of immigration are temporary and local, but so are the effects of inflation.

  8. I can’t help but feel you’re drawing the wrong conclusion from the Italian experience. Read the WSJ quote again:

    Over the past two decades Italy has run €1.3 trillion in such [primary] surpluses, averaging 4% of GDP a year, says Giuseppe Alvaro, an economist in Rome and an expert on Italy’s national accounts. Public debt has nonetheless risen—it is now €2 trillion—and the austerity must continue. Because much of today’s working population has never benefited from excess public spending, “they may feel rather reluctant to give back what they never received,” Mr. Alvaro says.

    Primary surpluses, but rising debt. That means low growth. If you want to avoid “today’s working population” not benefiting from “excess” public spending, isn’t economic growth the best way to do that? Krugman et al are arguing for supporting an economic recovery that will leave the next generation wealthier.

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