Another European Fiscal Crisis?

Why did many European nations, most notably Greece, suffer fiscal crises about a dozen years ago?

Because the burden of government spending, which already was excessive, increased even further.

And with taxes already very onerous in those countries, much of that new spending was financed with borrowing.

Investors then realized it was very risky to finance the various spending sprees. And when they stopped buying bonds from these governments (or started demanding higher interest rates to compensate for risk), that triggered the crises.

One would think that the nations most affected – Portugal, Italy, Greece, and Spain (the PIGS) – would have learned a lesson.

Nope.

As you can see from this IMF data, those governments did not use the post-crisis recovery as an opportunity to get debt under control. Instead, every nation has more debt today than it did when the crisis occurred.

And why do these nations have higher debt levels?

For the simple (and predictable) reason that they have not reduced the burden of government spending.

Instead, as you can see from this next chart, governments are now consuming even greater shares of national economic output. Which means a greater chance of more crises.

To make a bad situation even worse, the European Central Bank cranked up the figurative printing press starting in 2020 by massively expanding its balance sheet.

Dumping all that money into the system quite predictably caused prices to soar. And now that the ECB is belatedly trying to undo its mistake.

That puts the PIGS under more pressure, as Desmond Lachman explained for National Review.

Christine Lagarde, the president of the European Central Bank (ECB)…has to raise interest rates at a time when governments in the euro zone’s economic periphery are more indebted today than they were at the time of the 2010 euro zone sovereign-debt crisis. This more hawkish interest-rate policy, coupled with a shift to quantitative tightening, now risks triggering another round of the euro zone debt crisis. …One of the ECB’s problems in having to raise interest rates aggressively to contain inflation is that such a course risks exacerbating the cracks that are now emerging in the European banking system. …if current trends continue, then another round of euro zone sovereign-debt crisis, where investors lose faith in the government’s ability to repay its debt, could be just around the corner. …This is especially true for Italy, where until recently the ECB had been buying Italian government bonds equivalent to that government’s net borrowing needs.

By the way, Lachman seems to think the Fed should allow continued inflation in order to help bail out Italy and the other PIGS.

That would be a big mistake. The long-run damage of that approach would be much greater than the long-run damage (actually, long-run benefits) of letting Italy and the others go bankrupt.

P.S. The problem in Europe is too much government spending, not the euro currency.

P.P.S. Eurobonds will make things worse in the long run.

P.P.P.S. It is possible to reduce large debt burdens, so long as governments simply restrain spending.

P.P.P.P.S. From the archives, here’s some comedy (and more comedy) about Europe’s fiscal mess.

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Hopes and Fears for 2023

It’s not easy being a libertarian, especially when your job is to protect economic liberty. Politicians have a natural incentive to increase the size, scope, and power of government.

In almost all cases, our freedoms are best protected when politicians do nothing. Which is why, in general, I’m a fan of gridlock.

But I also realize that we’re on a very bad path (thanks to demographic change and poorly designed entitlement programs), so we need to hope and pray that lawmakers at some point affirmatively take enact reforms to restrain the burden of government spending.

But that won’t happen this year.

Instead, let’s review my hopes and fears on things that might actually happen. We’ll start with the things I hope to see.

Rejuvenated interest in spending restraint – While I don’t have any hope of actual spending discipline with Joe Biden in the White House, I will be very interested to see whether congressional Republicans go back to caring about fiscal responsibility. In my fantasy world, we see a reincarnation of interest in genuine entitlement reform. But I’ll be happy if they simply acknowledge that there’s a problem.

More school choice – More education freedom was one of the good things that happened in 2022 and I am uncharacteristically optimistic that we will see more progress in 2023. In part, this is because the evidence for choice is so strong. But it is also because Republican politicians are learning that there they may lose their jobs if they side with teacher unions over families.

The Supreme Court Ends Civil Asset Forfeiture – I mentioned this as a hope for 2022, 2021, and 2020, so maybe the fourth time is the charm. My fingers are crossed that the odious practice of “theft by government” is finally rejected by the Supreme Court (especially since America’s best Justice is very aware of the problem).

Now let’s look at the things I’m afraid will happen.

Bipartisanship – It’s possible that Republicans and Democrats cooperate to improve policy (the Clinton years, for instance), but normally bad things happen when the Evil Party and the Stupid Party agree on something. So I’m worried that the two parties will work together in 2023.

Green protectionism – I’ve written about how Europe’s politicians want to throw a monkey wrench in the global trading system by imposing protectionist barriers against products from nations that are deemed to be insufficiently green. Sadly, Biden is interested in doing the same thing and US trade law unfortunately cedes a lot of unilateral power to the president.

A Bursting Bubble in Italy – Back in 2017, I speculated that an Italian fiscal crisis could be either a good thing or bad thing depending on whether the moral-hazard-promoting folks at the IMF did a bailout. But there has not been a crisis. What I did not foresee is how the European Central Bank would break its own rules by doing an indirect bailout (basically, by buying up the new debt the Italian government has been issuing). At some point, though, bubbles burst. In this case, it won’t be pretty.

P.S. Having just survived an emotionally draining Georgia Bulldog victory over Ohio State last night, my far-and-away biggest hope for 2023 is a victory over TCU on January 9. National champions, again!

P.P.S. I’m trying to figure out my all-time biggest fail. Was it when I listed trade liberalization as a hope for 2021 (wildly wrong since Biden has been just as bad as Trump)? Or was it back in 2018 when I expressed hope that Venezuela’s socialist government might be on the verge of collapse?

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European Fiscal Policy Week, Part II: The Right Response to Italy’s Fiscal Crisis

I wrote yesterday to speculate about a possible fiscal crisis in Italy.

Today, here are my thoughts on why there should not be a bailout if/when a crisis occurs.

I have moral objections to bailouts, but let’s focus in this column on the practical impact.

And let’s start with this chart, which shows debt levels in Portugal, Italy, Greece, and Spain (the so-called PIGS) ever since the misguided bailout of Greece about a dozen years ago.

As you can see, OECD data reveals that there’s been no change in these poorly governed nations. They have continued to over-spend and accumulate ever-higher levels of debt.

This certainly seems like evidence of failure, in part because of Greece’s continued bad policy.

But I’m equally concerned about how other Mediterranean nations did not change their behavior.

So why did those nations accumulate more debt, even though they had an up-close look at Greece’s fiscal collapse?

I suspect they figured they could get bailouts, just like Greece. In other words, the IMF and others created a system corrupted by moral hazard.

Defenders of bailouts assert that Greece was forced to engage in “austerity” as a condition of getting a bailout.

I have two problems with that argument.

• First, notice how Greece’s debt has continued to go up. If that’s a success, I would hate to see an example of failure.
• Second, the main effect of the so-called austerity is a much higher tax burden and a somewhat higher spending burden.

If there’s a bailout of Italy (or any other nation), I suspect we’ll see the same thing happen. Higher taxes, higher spending, and higher debt.

I’ll close by acknowledging that there are costs to my approach. If Italy is not given a bailout, the country may have a “disorderly default,” meaning the government simply stops honoring its commitments to pay bondholders.

That is bad for individual bondholders, but it also could hurt – or even bankrupt – financial institutions that foolishly decided to buy a lot of Italian government bonds.

But there should be consequences for imprudent choices. Especially if the alternative is bailouts that misallocate global capital and encourage further bad behavior.

The bottom line is that the long-run damage of bailouts is much greater than the long-run damage of defaults.

P.S. Just like it’s a bad idea to provide bailouts to national governments, it’s also a bad idea to provide bailouts to state governments. Or banks. Or student loan recipients.

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European Fiscal Policy Week, Part I: Italy’s Looming Fiscal Crisis

I’m in Europe to give a couple of speeches about fiscal policy, so I’m going to spend all week commenting on the continent’s (mostly miserable) fiscal policy.

Let’s start with comments about Italy, the nation most likely to suffer a crisis.

Normally, I tell people to focus on government spending rather than red ink. After all, the economy is hurt whether spending is financed by taxes or borrowing (or printing money).

But I’ve also noted that governments sometimes spend so much money and incur so much debt that investors decide it is very risky to buy or hold debt from those governments. In other words, they begin to fear default.

When investors (sometimes known as “bond vigilantes”) reach that stage, they probably try to get rid of their holdings and definitely refuse to buy more debt. The net result is that profligate governments have to offer much higher interest rates to compensate for the risk of a possible default.

That happened earlier this century in Greece.

And if peruse this data from the OECD, you find that Italian government debt has jumped to levels that may be unsustainable.

So why has Italy avoided a crisis?

As noted in this article by Desmond Lachman, published by Inside Sources, the nation is being propped up by the European Central Bank.

In Europe, when the European Central Bank (ECB) soon dials back its bond-buying program, we are likely to find out that it is the Italian economy that has been swimming naked. This should be of deep concern for the Eurozone and world economies. While the Italian economy might be too large for its Eurozone partners to allow it to fail, it also might prove to be too large for them to bail it out. …The main factor that has allowed the Italian government to finance its ballooning budget deficit on favorable terms has been the ECB’s massive government bond-buying…the ECB used its emergency bond-buying program to more than fully finance the Italian government’s borrowing needs. …it must be only a matter of time before we have another round of the Italian sovereign debt crisis. …no longer being able to count on ECB bond-buying, the Italian government will have to increasingly finance itself in the market. It will have to do so with its public finances in a worse state than they were in during the 2012 debt crisis.

In the article, Lachman thinks a crisis is all but inevitable because the ECB is unwinding its pandemic-era money creation.

I agree about the ECB’s harmful role, but I fear the central bankers in Frankfurt will continue to do the wrong thing.

P.S. I mentioned demographics at the start of the video. Here’s some more information about how aging populations are contributing to fiscal meltdown.

P.P.S. Italy can solve its problems, but I doubt it will choose the only effective solution.

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Fascism, Socialism, and Mussolini

Based on Sunday’s election in Italy, the nation’s next Prime Minister almost certainly will be Giorgia Meloni, which has some worried that Italy is returning to the “far right” fascism of Benito Mussolini.

From an economic perspective, though, it would be more accurate to say that Mussolini is “far left.”

Or to say that he is a collectivist, which puts him in the same camp as socialists and communists.

In an article for the Independent Institute, Angelo Codevilla discussed how Mussolini began his career as a socialist activist, but ultimately was forced out of the party because of his nationalist views..

He was active in socialist circles, both Italian and international, giving speeches to workers and helping to organize strikes… He got to know Vladimir Lenin… Benito became a full-time socialist activist…as editor of its socialist newspaper. …he supported himself writing essays and editing a journal called Lotta di classe—class struggle… In 1911 the party entrusted the 28-year-old with editorship of its flagship publication, Avanti!. …He had become Italian socialism’s brightest star. …In…1914…he committed socialist heresy by writing that class struggle is a bad idea because the nation is more important than social class. He called his few scattered followers fasci, bundles, of individuals. …Hence he labeled the movement “Fasci Rivoluzionari d’Azione Internazionalista” and its members “Fascisti.” …the party expelled him.

In other words, Mussolini was part of the conflict between “national socialism” and “international socialism.”

Both versions of socialism favored big government, but they differed in how they viewed the nation state.

And this conflict, driven in part by the events of World War I, led Mussolini to develop fascism as a distinct strain of statism.

…continuing to call himself a socialist and propagandizing his evolving blend of nationalism and socialism…Mussolini shifted to building fascism into a party. …Hegel, following Napoleon, had made patriotic worship of the scientifically administered, progressive state the political essence of modernity. Mussolini’s vision of Italy followed from that. “The bureaucracy is the state,” he said. …Mussolini explained, …The state personifies the country, and disciplines its several elements to its service. “Soon, we will be the state.”

And he was right, at least in the sense that he and his fascists soon took over the government.

In the 1921 elections, Mussolini’s Fascists had gained only .04% of the vote. But chaos reigned in the streets because of socialist, Communist, and anarchist mobs, as well as because of the perhaps 40,000 fascist squadristi (the Blackshirts) who fought them. …Mussolini organized the descent of some 30,000 squadristi on Rome to demand he be named prime minister. …the king appointed Mussolini to head a government with almost no fascists. But…Mussolini gradually dispossessed the rest. …Fascist Italy was the first country in which the elected legislature gave up its essential powers to the executive…thus establishing the modern administrative state. …Socioeconomic organization was fascism’s defining feature. Only employers’ and employees’ organizations approved by the government were allowed. …No longer would corporations be responsible to owners.

Mussolini’s fascism was different than traditional socialism in that the goal was to have the government control the economy, but not to have government take over “the means of production.”

Both approaches were very hostile to free markets, of course.

I’ll close with some excerpts about Italian fascism and FDR’s failed New Deal.

After Franklin Roosevelt’s inauguration in 1933, Mussolini’s enthusiasm for likening the New Deal to fascism’s political-economic order… he made clear that “the spirit of [FDR’s program] resembles fascism’s since, having recognized that the state is responsible for the people’s economic well-being, it no longer allows economic forces to run according to their own nature.” …Fascists rejoiced that FDR had forsaken liberal for corporativist principles… It could hardly have been otherwise since the essence of the National Industrial Recovery Act—the involuntary inclusion of all participants in categories of economic activity and their subjection to government-dictated prices, wages, and working conditions—was at least as detailed as those in fascism’s corporate law. 

Since I’ve written about how the New Deal (and much of modern leftism) is based on fascist economics, I obviously agree.

But I’ve also explained that it’s better to refer to such policies as corporatist or interventionist since fascism nowadays also implies support for some of Hitler’s lunatic ideas about race and conquest.

P.S. The main message of today’s column is that it’s silly to label Mussolini (and his political heirs) as being on the far right. But it’s also true that Mussolini’s nationalist approach to statism is different than the ideas advocated by Marx (and his political heirs).

Dissecting and explaining these differences is why I think the left-right ideological spectrum should be replaced by this triangle.

By the way, the top of the triangle could say “Classical Liberalism,” but I used “Libertarian” so American readers would easily understand.

P.P.S. There’s a “Political Compass Test” that does a good job of determining one’s philosophical orientation, but it completely botches where Mussolini belongs.

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Another Reason for Spending Caps

The United States needs a constitutional spending cap, sort of like the “debt brake” that has been producing positive results in Switzerland for the past two decades.

Imposing a limit on annual spending increases would be a much-needed way of stopping politicians from saddling the nation with “Goldfish Government.”

The best-case scenario is that a spending cap is very stringent (say, limiting annual spending increases to 2 percent annually). This level of fiscal restraint reduces the burden of government spending compared to the private sector (i.e., it fulfills fiscal policy’s Golden Rule).

The avoid-harm scenario is that a spending cap prevents government from becoming a bigger burden. Given dismal long-run fiscal forecasts (a consequence of demographic change and poorly designed entitlement programs), this actually would be an impressive achievement.

There are also some auxiliary benefits of a spending cap.

A new working paper from Italy’s central bank, authored by Anna Laura Mancini and Pietro Tommasino, considers whether spending caps can mitigate the problem of dishonest budgeting by politicians.

…policy-makers have an incentive to “plan to cheat”. That is, they promise an amount of expenditures higher than what they will actually deliver, because this allows them to cater to the demands of the various groups of voters, and at the same time they present overoptimistic revenue forecasts, in order to preserve the appearance of fiscal discipline. Once the extra revenues hoped for by the government fail to materialize, budgeted investment expenditures are downsized or abandoned altogether. In this context, caps on realized spending can contribute to more realistic ex ante spending plans. Indeed, politicians have less room to inflate planned expenditures, once there is a legal ceiling in place.

The authors crunch the numbers and conclude that spending caps result in a greater level of fiscal honesty.

In this paper, we provide evidence in favour of this theoretical intuition, exploiting a unique dataset including the ex-ante budget plans as well as ex-post budget outcomes of…a rule that constrains capital expenditures in municipalities with more than 5,000 residents. …Our analysis show that the municipalities subject to the new capital-spending rule significantly reduced their over-optimism in expenditure projections… Furthermore, in the new regime revenue projections are also more accurate (less over-optimistic). …The reform reduced the forecast error concerning capital expenditures… The effects is significant both statistically and in economic terms. …the introduction of the cap on investment reduced the forecast error on investment expenditures by almost €1 mln, or 35% of the pre-reform average error.

For wonky readers, Figure 1 shows some of relevant data.

For what it’s worth, we seem to have a different problem in the United States.

Rather than exaggerate potential spending on so-called public investment, as seems to have been the case in Italy, American politicians generally low-ball cost estimates for infrastructure projects.

And then, once the projects get started, we get absurd cost overruns (with the high-speed rail project in California being an especially absurd example).

The good news is that a spending cap solves both the Italian version of the problem and the American version of the problem.

As the authors found in their research, it removes the incentive for dishonest budgeting in Italy. And, if adopted in the United States, politicians would learn that it doesn’t help to produce laughably low cost estimates if a spending cap means there is no way of financing cost overruns in the future.

P.S. There is a spending limit in Hong Kong’s constitution, and it has generated very positive results. Given China’s increasing control, it’s unclear how effective it will be in the future.

P.P.S. There’s also a spending limit in Colorado’s constitution, known as the Taxpayers Bill of Rights. It has been very successful.

P.P.P.S. Last month, I wrote about research from both the IMF and the ECB about the benefits of spending caps.

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Preventing Fiscal Meltdowns with a Spending Cap

As part of my recent interview about European economic policy with Gunther Fehlinger, I pontificated on issues such as Convergence and Wagner’s Law.

I also explained why a Swiss-style spending cap could have saved Greece and Italy from fiscal crisis. Here’s that part of the discussion.

For those not familiar with spending caps, this six-minute video tells you everything you need to know.

Simply stated, this policy requires politicians to abide by fiscal policy’s Golden Rule, meaning that – on average – government spending grows slower than the private economy.

And that’s a very effective recipe for a lower burden of spending and falling levels of red ink.

One of the points I made in the video is that spending caps would prevented the fiscal mess in Greece and Italy.

To show what I mean, I went to the International Monetary Funds World Economic Outlook database and downloaded the historical budget data for those two nations. I then created charts showing actual spending starting in 1988 compared to how much spending would have grown if there was a requirement that the budget could only increase by 2 percent each year.

Here are the shocking numbers for Greece.

The obvious takeaway is that there never would have been a fiscal crisis if Greece had a spending cap.

That also would be true even if the spending cap allowed 3-percent budget increases starting in 1998.

And it would be true if the 2-percent spending cap didn’t start until 2000.

There are all sorts of ways of adjusting the numbers. The bottom line is that any reasonable level of spending restraint could have prevented the horrible misery Greece has suffered.

Here are the numbers for Italy.

As you can see, the government budget has not increased nearly as fast in Italy as it did in Greece, but the burden of spending nonetheless has become more onerous – particularly when compared to what would have happened if there was a 2-percent spending cap.

I’ve written many times (here, here, here, and here) about Italy’s looming fiscal crisis. As I said in the interview, I don’t know when the house of cards will collapse, but it won’t be pretty.

And tax reform, while very desirable, is not going to avert that crisis. At least not unless it is combined with very serious spending restraint.

P.S. For those who want information about real-world success stories, I shared three short video presentations back in 2015 about the spending caps in Switzerland, Hong Kong, and Colorado.

P.P.S. It’s also worth noting that the United States would be in a much stronger position today if we had enacted a spending cap a couple of decades ago.

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Comparing Prosperity: The United States vs. Europe

I periodically write about the importance of long-run growth and about the importance of convergence (whether poorer countries are catching up with richer countries, as suggested by theory).

This is because such data, especially over decades, teaches us very important lessons about the policies that are most likely to generate prosperity.

I’m revisiting these issues today because John Cochrane, a Senior Fellow at the Hoover Institution and a former professor of economics at the University of Chicago, recently wrote a column that contains a must-see chart showing how some of the major European nations have been losing ground to the United States over the past several decades.

The main thing to understand is that European nations were catching up to the United States after World War II, which is what one would expect.

But that trend came to a halt about 40 years ago and now these nations are suffering divergence instead of enjoying convergence.

Here’s some of Cochrane’s analysis.

…the US is 54% better off than the UK.. France…50% less than US. …the US is 96% better off than Italy. …And it’s been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy… Once noticeably better off than the UK, and contending with France, Italy’s GDP per capita is now lower than it was in 2000. GDP per capita is income per capita. The average European is about a third or more worse off than the average American, and it’s getting worse.

What’s most remarkable, as I wrote about back in 2014, is that the gap between the United States and Europe is “getting worse.”

Cochrane wonders if this is evidence against the European Union’s free-trade rules.

This should be profoundly unsettling for economists. Everyone thinks free trade is a good thing. The European union, one big integrated market, was supposed to ignite growth. It did not. The grand failure of the world’s biggest free trade zone really is a striking fact to gnaw on. Sure, other things are not held constant. Perhaps what should have been the world’s biggest free trade zone became the world’s biggest regulatory-stagnation, high-tax, welfare-state disincentive zone. Still, “it would have been even worse” is a hard argument to make.

For what it’s worth, I don’t think it’s “a hard argument to make”. I’ve pointed out – over and over again – that Europe’s reasonably good policies in some areas are more than offset by really bad fiscal policy.

Think of the different types of economic policy as classes for a student. If a kid flunks one class, that’s going to produce a sub-par grade point average even if there was good marks in all the other classes.

That’s what has happened on the other side of the Atlantic Ocean. Europe is suffering the consequences of a stifling tax burden and an onerous burden of government spending.

Besides, I suspect some of the benefits of free trade inside the European Union are offset by the damage of the E.U.’s protectionist barriers against trade with the rest of the world.

P.S. Some people may wonder why Germany was not included in Cochrane’s chart. I assume that’s because the reunification of West Germany and East Germany about 30 years ago creates a massive discontinuity in the data. For those interested, Germany is slightly better off than France and the U.K., according to the Maddison data, but still lagging well behind the United States.

P.P.S. Speaking of Germany, the divergence between East Germany and West Germany teaches an obvious lesson.

P.P.P.S. I don’t think it’s a coincidence that America started out-performing Europe after Reaganomics was implemented.

P.P.P.P.S One obvious takeaway from Cochrane’s data (though not obvious to President Biden) is that the United States should not be copying Europe. Unless, of course, one wants ordinary Americans to be much poorer.

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The Pro-Growth Impact of Deregulation

Regulatory policy is one of the five ingredients in the recipe for growth and prosperity.

Ideally, there should be a minimal amount of red tape, and it should be governed by sensible cost-benefit analysis (i.e., so it deals with genuine externalities such as pollution).

Unfortunately, politicians rarely favor this light-touch approach, in part because of unseemly “public choice” incentives and in part because they focus only on the benefit side of the cost-benefit equation.

But the cost is very real.

And that means that there are substantial benefits when governments reduce the regulatory burden.

Let’s look at some research published by Italy’s central bank. Sauro Mocetti, Emanuela Ciapanna, and Alessandro Notarpietro investigated the impact of liberalization last decade. Here’s what they looked at.

…the importance of structural reforms, aimed at promoting sustainable and balanced growth, has been at the center of the economic debate, in Italy… Structural reforms are measures designed for modifying the very structure of an economy; they typically act on the supply side,i.e. by removing obstacles to an efficient (and equitable) production of goods and services, and by increasing productivity, so as to improve a country’s capacity to increase its growth potential… The aim of this paper is to assess the macroeconomic impact of three major structural reforms carried out in Italy over the last decade. They include (i)liberalization of services, (ii) incentives to “business innovation” (included in the so-called “Industry 4.0” Plan) and (iii) several measures in the civil justice system aimed at increasing the courts efficiency.

And here are their results.

Our results indicate that the three reforms, introduced in different years and with different timing, starting in 2011 and up to 2017, have already begun to produce their effects on the main macroeconomic variables and on Italy’s potential output. In particular, and taking into account the uncertainty surrounding our micro-econometric estimates, by 2019 GDP was between 3 and 6% higher than it would otherwise have been in the absence of these reforms, with the largest contribution being attributable to the liberalizations in the service sector. A further increase of about 2 percentage points would be reached in the next decade, due to the unfolding of the effects of all the reforms considered here. Therefore, the long-run increase in Italy’s potential output would lie in between 4% and 8%. We also detect non-negligible effects on the labor market: employment would increase in the long term by about 0.4%, while the unemployment rate would be reduced by about 0.3 percentage points.

More output and more jobs. Hard to argue with that outcome.

Here are some charts from the study. Figure 7 shows the impact on some macroeconomic aggregates.

And Figure 8 shows the estimated improvement in the labor market.

These results are good news, but Italy still has a long way to go. It’s only ranked #51 according to Economic Freedom of the World, and it’s score for regulation has only improved by a slight margin over the past decade.

P.S. I shared some research earlier this year about the positive impact of another type of deregulation in Italy.

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For a Competitive Tax System, the U.S. Should Copy Estonia Rather than Italy

Whether we’re examining Economic Freedom of the World, Index of Economic Freedom, World Competitiveness Ranking, the Global Competitiveness Report, or the World Bank’s Doing Business, publications that endeavor to give us apples-to-apples comparisons of economic policy provide useful measuring sticks.

• We can learn how Hong Kong compares to Singapore.
• We can determine the freest nation in Latin America.
• We can find a bright spot in Africa.
• We can assess whether any European nation is avoiding statism.

I’m especially interested in comparisons that focus on fiscal policy.

So I was very interested to see that the Tax Foundation just released its annual International Tax Competitiveness Index, which measures the quality of tax policy of nations that are part of the Organization for Economic Cooperation and Development.

Here are highlights from the report, starting with some background.

The structure of a country’s tax code is an important determinant of its economic performance. A well-structured tax code is easy for taxpayers to comply with and can promote economic development… In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies. Many countries have recognized this and have reformed their tax codes. Over the past few decades, marginal tax rates on corporate and individual income have declined significantly… Not all recent changes in tax policy among OECD countries have improved the structure of tax systems; some have made a negative impact. …The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. …To measure whether a country’s tax system is neutral and competitive, the ITCI looks at more than 40 tax policy variables. These variables measure not only the level of tax rates, but also how taxes are structured.

The ITCI is a very useful publication. Indeed, I’d like it to be expanded. When writing about last year’s edition, I mentioned it should cover more nations and also include the aggregate tax burden as one of the variables.

But let’s not make the perfect the enemy of the good. With regards to this year’s version, what nations have the best and worst tax regimes?

Estonia ranks #1 (not a big surprise) and Italy is at the bottom (also not a big surprise).

For the seventh year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax system. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system… Italy has the least competitive tax system in the OECD. It has a wealth tax, a financial transaction tax, and an estate tax. Italy also has a high compliance burden associated with its individual tax system. It takes businesses an estimated 169 hours to comply with the individual income tax.

American readers presumably are most interested in the United States, so here’s the data showing that the United States has a mediocre grade, ranking #21 out of 36 nations.

If you dig through the details, the good news is that the United States has a very high score for “consumption taxes,” which largely is because we haven’t copied the mistake of other nations and imposed a value-added tax.

The U.S. also gets credit for “expensing,” though the report notes that policy is scheduled to expire.

The bad news, by contrast, is that America ranks below average for corporate taxes and individual taxes and way below average for property taxes and international tax rules.

The report also notes that America’s “progressive tax” is a weakness that undermines competitiveness.

But let’s look at the glass as being half full rather than half empty. When the Tax Foundation launched this publication back in 2014, the United States was a lowly #32 out of 34 nations. And we were still mired near the bottom in 2016, ranked #31 out of 35 countries.

Thanks to the Trump tax reform, however, the United States has subsequently enjoyed the biggest improvement of any nations. There’s still plenty of policy mistakes that need to be addressed, but at least we’re moving in the right direction.

July 29, 2021 Addendum: This chart shows how Estonia has benefited from pro-market reforms.

Even though the country was hit hard by the financial crisis of 2008, it is far ahead of where it was in the pre-reform era.

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Evidence from Italy: Less Regulation = More Jobs and Higher Earnings

There are all sorts of regulations, some of which affect the entire economy and some of which target certain sectors. Moreover, regulations vary widely since – depending on the example – they may tell people and business what to do, how to do it, when to do it, and who to do it with.

This is why it’s probably best to think of government red tape as an obstacle course that increases the difficulty of engaging in commerce.

An expensive obstacle course.

Some new research published by Italy’s central bank gives us an opportunity to understand the consequences of red tape.

The study, authored by Lucia Rizzica, Giacomo Roma, and Gabriele Rovigatti, looked at a real-world example of product market regulation (PMR) governing retail hours in Italy.

In this paper we focus on how the regulation of shops opening hours affects the relevant market size and structure. This dimension of PMR has traditionally been a controversial issue in the policy debate, as it involves social, political, economic, and even religious considerations. …we tackle these questions empirically and estimate the effects of full deregulation in shop opening hours on the level and composition of employment and on the number of shops and their size distribution…we focus on Italy and build a novel dataset of Italian municipalities 2007-2016, including their regulatory status, and exploit the variation provided by the staggered implementation at the municipal level of a deregulation reform enacted from1998 onwards.

Here’s a visual from the study, showing the variation over time in the number of municipalities with no regulation, medium regulation, and heavy regulation.

The good news is that Italy actually got rid of rules dictating when stores could be open and this gave the economists an opportunity to measure what happened.

Our estimates show that, in the context of a general contraction of the retail sector and of the economy as a whole, deregulating shops opening hours helped lowering the decrease in both the number of workers and establishments, with an estimated positive impact of about 3% and 2%, respectively. …On top of it, individual-based estimates show that the sector’s labor force structure changed towards a higher prevalence of employees over self-employed, together with a general increase in the number of hours worked and earnings of employees, especially of those with permanent contracts. Our results are robust to a number of checks… In Table 2 we present our baseline results. In columns (1)-(2) we report the estimates of the liberalization effect on the number of workers, and in columns (3)-(4) those on the number of plants in each municipality. …the resulting estimated effect of liberalization in the newly liberalized municipalities is a 3.4% increase in the number of individuals working in the wholesale and retail sector, and a 2.1% increase in the number of shops. …Finally, we show that the reform also had a positive effect on the activity of complementary services, such as restaurants and financial services and, overall, on total employment in affected areas.

For wonky readers, here’s the table mentioned in the above excerpt.

So what’s the bottom line?

…from a policy perspective, our results provide support to the idea that a more flexible regulation of the business environment boosts economic growth… We find no evidence that this leads to a worsening of employment conditions, on the contrary permanent dependent workers enjoyed an increase in their earnings.

It’s great to see that deregulation produced more jobs and higher earnings.

But one thing that we don’t find in the study, unfortunately, is any estimate of how deregulation also benefited consumers thanks to lower prices and greater convenience.

In other words, eliminating or reducing red tape is a win-win situation for just about everybody (with the only exception being the cronyists who gain undeserved advantages because of regulation).

P.S. While I’m glad that Italy got rid of rules limiting retail hours, the country – as measured by the World Bank – still has a lot of needless red tape.

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Italy’s Grim Outlook

There are many reasons to be depressed about Italy.

Bad policy is part of the problem, of course, but this chart shows that the country also is facing a demographic crisis. The blue lines show that there are now more deaths than births.

The chart comes from a Bloomberg column by Flavia Rotondi and Giovanni Salzano, and they explain some of the adverse consequences of this demographic change.

Italy isn’t just in an economic slump, its population is also sagging, pushing the country into its biggest demographic crisis in more than a century. The number of people in the country fell for a fifth year in 2019, and deaths exceeded births by almost 212,000, the biggest gap since 1918. …Italy already has huge long-term economic challenges, and the population trends, if they continue, are going to make surmounting them even harder. Italy won’t have enough young workers, and funding a rapidly aging population will strain an already stretched fiscal situation. Pension costs now amount to almost 17% off the economy. …“With an aging population and a consistent decrease of workers who pay taxes, our retirement system may go haywire” said Pietro Reichlin, a professor of economics.

Politicians naturally will want to compensate for these changes by raising the tax burden.

But Italy already is at a breaking point because of punitive taxation. Writing for the Foundation for Economic Education, Daniel Di Martino discusses that nation’s dirigiste system.

Italy’s problem, similar to many of its southern European neighbors, is an oppressively high tax burden, irresponsible welfare programs that encourage high measured unemployment and increase the debt, and high levels of regulation. …the share of average wages collected by the Italian government via income and social security taxes is 48 percent, among the highest in the Organization for Economic Co-operation and Development (OECD). In addition, Italy imposes a value-added tax of 22 percent on most goods and services, one of the highest in Europe. Plus, Italy’s corporate, capital gains, gift, and myriad other taxes are passed on to individuals and borne directly by workers. …At the same time, Italy’s complex regulations are a barrier to starting or continuing productive activities. A study by economist Raffaela Giordano of the Bank of Italy concluded that the main reason behind Italy’s underperformance was burdensome regulations and corrupt and inefficient government structure.

Adam O’Neal makes similar points about bad policy in a column for the Wall Street Journal.

Even before the pandemic, Italy hadn’t recovered fully from the 2008-09 financial crisis. Unemployment hovered around 10% in 2019. Adjusting for inflation, the average Italian worker earned the same as he did 20 years ago. Italian banks were Europe’s weakest. …What ails Italy? …Italy’s greatest challenge is a gargantuan government that destroys wealth as efficiently as the private economy creates it. …In 2018 government revenue was 42% of GDP, nearly 8 points above the Organization for Economic Cooperation and Development average. Yet profligate outlays—Rome spent 16.2% of GDP on public pensions in 2015—brought debt to about 135% of GDP last year.

The net effect of all this misguided policy is that Italy’s economy is moribund.

In his column for Bloomberg, Professor Tyler Cowen summarizes the problem.

One striking fact about Italy is that, over the last 20 years, growth in per capita income has been close to zero. …a zero-growth environment cannot be stable forever. …If the pie doesn’t grow, eventually it becomes harder to sustain productive activity… Aging is another reason economic growth is necessary. …many countries (including Italy) have expensive pension systems. Someone has to pay the bill, and without innovation and economic growth, taxes will have to rise. That in turn discourages work, pushing people into untaxed black-market activity, necessitating higher tax rates, and the vicious cycle starts again.

And when you combine bad demographics and bad policy, that not only means stagnation in the short run, it also could mean fiscal crisis in the long run.

Except “long run” may be just around the corner.

Desmond Lachman of the American Enterprise Institute warns that an Italian fiscal crisis will make the mess in Greece seem trivial by comparison.

…markets are displaying remarkable complacency toward a rapidly deteriorating Italian political and economic situation. They are doing so in a manner that is painfully reminiscent of how complacent they were in 2009 on the eve of the Greek sovereign debt crisis. This could have major consequences for global financial markets considering that the Italian economy…has around 10 times as much public debt as Greece had at the time of its crisis. …One has to hope that while markets might be turning a blind eye to Italy’s deteriorating economic and political fundamentals, global economic policymakers are not. As experience with the Greek sovereign debt crisis reaffirmed, crises often take a lot longer than one would have thought to occur, but when they do occur they do so at a very much faster rate than one would have expected.

Some people argue that a fiscal crisis can be avoided if the European Central Bank buys up Italy’s government debt.

That certainly can avert a panic, at least for a while, but this approach can cause a different set of problems.

Joseph Sternberg opines for the Wall Street Journal that the European Central Bank’s easy-money policy has backfired by giving politicians in Rome the leeway to postpone desperately needed reforms.

If the ECB had not stepped in as a buyer of government debt, Rome long since would have faced fiscal catastrophe. Only a miracle—or €365 billion in ECB purchases of Italian sovereign debt since 2015—can explain how in recent years a country whose debt has ballooned to 130% of gross domestic product paid nearly the same interest rate as Germany… Even after selling so many sovereign bonds to the central bank, Italy’s banks continue to be large holders of their government’s debt. Such bonds constitute around 10% of Italian bank assets, nearly three times the eurozone average. …Mr. Draghi hoped his interventions would give wayward governments such as in Rome breathing room to overhaul the supply side of their economies—deregulating markets, privatizing state assets, trimming welfare programs and the like. But Rome has mainly slid backward.

While intervention by the European Central Bank isn’t the solution to Italy’s problems (and may actually make problems worse), this is also a good opportunity to make the related point that the euro currency also shouldn’t be blamed for the nation’s stagnation.

I’m not a big fan of the European Union and the crowd in Brussels, but Italy’s challenges overwhelmingly are the fault of policies adopted by Italian politicians.

Indeed, if you look at the data from the most-recent edition of the Fraser Institute’s Economic Freedom of the World, you can see monetary policy isn’t a problem. Instead, the nation’s big impediment to prosperity (highlighted in red) is terrible fiscal policy.

To put this data in perspective, Italy has the next-to-lowest-ranked economy in Western Europe, with only Greece having less economic liberty.

The numbers from the Heritage Foundation’s Index of Economic Freedom tell a very similar story.

If you peruse the data from the most-recent edition of that publication, you’ll see that Italy gets weak scores for its approach to labor issues, the judiciary, and taxes.

But it gets an utterly dismal score (highlighted in red) for government spending.

Sadly, there’s no political party in Italy that wants to solve the problem of excessive spending – even though I explained how it could be done while in Milan many years ago. And without spending restraint, that means it’s almost impossible to adopt pro-growth tax reform.

P.S. No wonder some people in Sardinia want to secede from Italy and instead become part of Switzerland.

P.P.S. Amazingly, a New York Times’ columnist actually argued that the United States should be more like Italy.

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European Fiscal Crisis, Round 2?

I’m not an optimist about Europe’s economic future.

Most nations have excessive welfare states and punitive taxes, which is hardly good news. You then have to consider demographic trends such as aging populations (i.e., more people relying on government) and falling birthrates (i.e., fewer future taxpayers).

That’s a very grim combination.

Indeed, this is a big reason why I favored Brexit. Yes, it was largely about escaping an increasingly dirigiste European bureaucracy in Brussels, but it was also about not being chained to a continent with a dismal long-run outlook.

More than one year ago, before there were any concerns about a coronavirus-instigated economic crisis, Vijay Victor, an economist from Szent Istvan University in Hungary, expressed concern about Europe’s fiscal future in a column for the Foundation for Economic Education.

The debt crisis in the Eurozone is getting no better, even in the wake of the new year. The five countries in the Eurozone with the highest debt-to-GDP ratio in the third quarter of 2018 were Greece, Italy, Portugal, Belgium, and Spain. The total debt of Greece is around 182.2 percent of its GDP and that of Italy is 133 percent… Dawdling economic growth coupled with low-yield investment options are dragging these indebted economies toward insolvency… Unemployment rates, for example, are still very high in most of these highly indebted European economies. Despite the recurrent monetary assistance and policy support, job creation is weak, which might imply that the debt financing is channelized in a nonproductive direction.

By the way, I can’t resist taking this opportunity to remind people that debt is a problem, but it also should be viewed as a symptom of en even-bigger problem, which is an excessive burden of government spending.

A bloated welfare state is a drag on economic performance, whether it’s financed by borrowing or taxes.

Though nations that try to finance big government with red ink eventually spend their way into crisis (as defined by potential default).

And we may be reaching that point.

Desmond Lachman of the American Enterprise has authored a very grim assessment, focusing primarily on Italy, for the National Interest.

Today, with Italy at the epicenter of the world coronavirus epidemic, it would seem to be only a matter of time before the durability of the Euro is again tested by another full-blown Italian sovereign debt crisis. …even before the coronavirus epidemic struck its economy was weak while its public finances and banking system were in a state of poor health. After having experienced virtually no economic growth over the past decade, the Italian economy again entered into a recession by end-2019. At the same time, at 135 percent its public debt to GDP ratio was higher than it was in 2012 while its banks’ balance sheets remained clogged with non-performing loans and Italian government bonds. …the coronavirus epidemic will seriously damage both Italy’s public finances and its banking system…by throwing the country into its deepest economic recession in the post-war period. That in turn is bound to cause Italy’s budget deficit to balloon and its banking system’s non-performing loans to skyrocket as more of its households and companies file for bankruptcy. …all too likely that the Italian economy will shrink by at least 10 percent in 2020.

All this matters because the people and institutions that purchase government debt may decide that Italy’s outlook is so grim that they will be very reluctant to buy the country’s bonds (i.e., they’ll be very hesitant about lending money to the Italian government because of a concern that they won’t get paid back).

This means that the Italian government will have to pay much higher interest rates in order to compensate lenders for the risk of a potential default.

So what are the implications? Will Italy default, or will there be some sort of bailout?

If the latter, Lachman predicts it will be huge.

One way to gauge the amount of public money that might be needed to prop up Italy is to consider that over the past decade it took around US$300 billion in official support to keep Greece in the Euro. Given that the Italian economy is around ten times the size of that of Greece, this would suggest that Italy might very well need around $3 trillion in official support to keep Italy in the Euro. …Meanwhile, Italy’s US$4 trillion banking system could very well need at least US$1 trillion in official support to counter the capital flight and the spike in non-performing loans that are all too likely to occur in the event of a deep Italian recession.

For what it’s worth, Lachman thinks a bailout would be desirable.

I disagree. Default is a better choice because it will discipline the Italian government (it would mean an overnight balanced budget requirement since nobody will lend money to the government) and also discipline foolish lenders who thought Italian politicians were a good bet.

Simply stated, we should minimize moral hazard.

I also think it’s worth noting that Italy isn’t the only government at risk of fiscal crisis. Here’s the OECD data for major nations, including a few non-European examples.

Japan wins the prize for the most red ink, though this doesn’t mean Japan is most vulnerable to a default, at least in the short run.

A fiscal crisis is driven by investor sentiment (i.e., when will people and institutions decide they no longer trust a government to pay back loans). And that depends on a range of factors, including trust.

The bottom line is that investors trust the Japanese government and they don’t trust the Italian government.

That being said, I think all of the PIGS (Portugal, Italy, Greece, and Spain) are very vulnerable.

And politicians in Ireland, Belgium, and France should be nervous as well.

I’ll close by sharing some calculations, based on the aforementioned OECD data, showing which nations used last decade’s economic recovery to improve their balance sheets.

Congratulations to Germany and Switzerland for fiscal responsibility, and mild applause for the Netherlands and Sweden.

I’ve highlighted (in red) the nations that were most reckless.

Though keep in mind that you want to look at both the trend for debt (far-right column) and the existing level of debt (the next-to-far-right column). So I’m not overly worried about Australia. Debt is still comparatively low, even though it almost doubled last decade.

But all of the PIGS are in trouble.

So if economic conditions deteriorate in Europe, the fallout could be significant.

P.S. The United Kingdom, like Japan, benefits from a high level of trust – presumably in part because the country paid off enormous debts from the Napoleonic wars and World War II. That being said, the numbers for the U.K. are worrisome, which hopefully will lead to a renewed commitment to spending restraint by Boris Johnson’s government.

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Coronavirus Lessons from Europe

I wrote recently how government regulation and bureaucratic inefficiency are hindering an effective response to coronavirus in the United States.

And I also wrote yesterday about one foolish response from Washington to the crisis.

But what about developments in other nations? Are there lessons to be learned?

Henry Olsen, writing in the Washington Post, contemplates how Italy is very vulnerable because of stagnation, dependency, and debt.

Italy…has essentially shuttered its economy to fight its enormous health crisis. …Effectively, millions of Italians are out of work. These actions would shock any economy. But Italy’s economy is already weak, and has been for decades. Its gross domestic product has barely grown over the past 20 years. Its unemployment rate, at 9.8 percent, is one of the highest in Europe. Worse still, Italy is one of the most heavily indebted nations in the world. Government debt stood at 138 percent of GDP before this crisis hit… Italy’s economic crisis will ultimately put serious pressure on the euro. …If Italy’s economic hit weakens its banks sufficiently, the European Central Bank could be forced to step in with a large bailout. …Italians would likely face years of depression and stagnation… Italy’s economic lockdown is sending clear warning signs that a fiscal meltdown is coming.

Henry also speculates in the column that Italy’s current left-populist government will be replaced by a right-populist government. Furthermore, he thinks this could lead to the country abandoning the euro (the currency shared by many European nations) and going back to a national currency.

For what it’s worth, that would be a mistake.

A major problem in Italy is that populist politicians want people to believe the fairy tale that it’s possible to consume more than you produce.

That currently happens in Italy when politicians borrow money and spend it.

If the country gets rid of the euro and goes back to the lira, politicians will also be able to print money and spend it.

In other words, Italy’s populist politicians would have another way of undermining prosperity.

(I’m not a big fan of the European Central Bank’s easy-money policies, but it’s always possible to go from bad to worse.)

Meanwhile, Joseph Sternberg of the Wall Street Journal opines about lessons that can be learned from Europe about government-run healthcare.

Scientists around the world have worked overtime to get a handle on Covid-19, yet one great unknown remains. We still don’t know for sure whether this is only a medical crisis, or also a medical system crisis. …Doctors in Italy know what to do to treat severe cases, such as using ventilators in intensive-care units. But hospitals lack the beds and equipment for the influx of patients and Italy doesn’t have enough doctors even to make the attempt. Ill patients languish in hospital corridors for want of beds, recovering patients are rushed out the door as quickly as possible, and exhausted (and sometimes sick) doctors and nurses can’t even muster the energy to throw up their hands in despair. …U.K. policy makers understand what such analyses portend—because underinvestment in Britain’s creaking health-care system is even worse. …As a result, British authorities…are desperate to hold off on a mass outbreak until the socialized National Health Service has recovered from its chronic winter crisis. …the NHS…already falls to pieces every year with the normal ebb and flow of cold-weather ailments. Each winter crisis becomes a bit more acute, and this year was no exception. As of December, only 80% of emergency-room patients were treated within four hours of arrival, down from 84% in the depths of the previous two winters.

Interestingly, not all European nations are created equal.

…the U.K. and Italy are significantly more dependent on direct government financing of health-care than is France or Germany. Government accounted for 79% of total health-care spending in the U.K. in 2017, according to Eurostat, and 74% in Italy. Germany and France both rely on compulsory insurance schemes with varying degrees of subsidy and government meddling, but outright government expenditure amounts to only 6% of total health spending in Germany and 5% in France. …politicians already have made decisions that may seal a country’s coronavirus fate…the important choices may have already come in the guise of technocratic health spending and investment decisions made largely out of public view over many years. How lucky do Europeans feel?

The moral of the story is that coronavirus vulnerability may be worse in nations where government has the most control over healthcare.

Since the disease is a “black swan” (i.e., an unexpected big event), we should be cautious about drawing too many policy conclusions. After all, any nation with a severe coronavirus outbreak is going to face major problems.

That being said, it may be worth noting that Germany and France have an approach that’s more akin to Obamacare while the system in Italy and the United Kingdom is more akin to Medicare for All.

Either policy is greatly inferior to the free market, but it does raise the question of whether it’s a good idea to jump from a frying pan into a fire.

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Economic Lessons from Ancient Rome

I’ve been in Rome the past few days with my charming and beautiful daughter.

We visited the usual tourists spots, including the Coliseum and other remnants of Ancient Rome.

And I couldn’t help but wonder how such a powerful empire could collapse, driving people from relative prosperity to the economic misery of the Dark Ages.

I briefly addressed this topic in early 2016, but only to make a point about the (myriad) problems of modern Italy.

So let’s take a closer look at this issue and learn how excessive government helped bring down the Roman Empire.

The Foundation for Economic Education has an excerpt of Will Durant’s book, The Story of Civilization, Vol. 3: Caesar and Christ. And here are my excerpts from that article.

Diocletian, with his aides, faced the problems of economic decay. …he substituted a managed economy for the law of supply and demand. …He distributed food to the poor at half the market price or free, and undertook extensive public works to appease the unemployed. To ensure the supply of necessaries for the cities and the armies, he brought many branches of industry under complete state control, beginning with the import of grain… The state had long since owned most quarries, salt deposits, and mines; now it forbade the export of salt, iron, gold, wine, grain, or oil from Italy, and strictly regulated the importation of these articles. …the majority of industrial establishments and guilds in Italy were brought under the control of the corporate state. Butchers, bakers, masons, builders, glass-blowers, ironworkers, engravers, were ruled by detailed governmental regulations. …Such a system could not work without price control. In 301, Diocletian and his colleagues issued an Edictum de pretiis, dictating maximum legal prices or wages for all important articles or services in the Empire. …The weakness of this managed economy lay in its administrative cost. The required bureaucracy was so extensive that Lactantius, doubtless with political license, estimated it at half the population. …To support the bureaucracy, the court, the army, the building program, and the dole, taxation rose to unprecedented peaks of ubiquitous continuity. …Since every taxpayer sought to evade taxes, the state organized a special force of revenue police to examine every man’s property and income; torture was used upon wives, children, and slaves to make them reveal the hidden wealth or earnings of the household.

Torture?!? Let’s not give the IRS any new ideas.

Here’s an excerpt from FEE’s excerpt from Human Action, the classic tome by Ludwig von Mises.

…the Roman Empire in the second century, the age of the Antonines, the “good” emperors, had reached a high stage of the social division of labor and of interregional commerce. …What brought about the decline of the empire and the decay of its civilization was the disintegration of this economic interconnectedness… The policy of the annona, which was tantamount to a nationalization or municipalization of the grain trade…its effects were rather unsatisfactory. Grain was scarce in the urban agglomerations, and the agriculturists complained about the unremunerativeness of grain growing. …The interference of the authorities upset the adjustment of supply to the rising demand. …in the political troubles of the third and fourth centuries the emperors resorted to currency debasement. With the system of maximum prices the practice of debasement completely paralyzed both the production and the marketing of the vital foodstuffs and disintegrated society’s economic organization. …The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Führer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.

Just in case it’s not clear, Mises was referring to “classical liberalism.”

In a column for FEE, Professor Richard Ebeling explores the impact of government intervention in Rome.

The Roman government also set price controls on wheat. In the fourth century, B.C., the Roman government would buy grain during periods of shortages and sell it at a price fixed far below the market price. In 58 B.C., this was improved upon; the government gave grain away to the citizens of Rome at a zero price, that is, for free. The result was inevitable: farmers left the land… In 45 B.C., Julius Caesar discovered that almost one-third of the Roman citizenry was receiving their grain supply for free from the State. To deal with the financial cost of these supplies of wheat, the Roman government resorted to debasement of the currency, that is, inflation. Pricing-fixing of grain, shortages of supply, rising budgetary problems for the Roman government, monetary debasement and resulting worsening price inflation were a continual occurrence through long periods of Roman history. …In the Greek parts of the Roman Empire, archeologists have found the price tables listing the government-mandated prices. They list over 1,000 individual prices and wages set by the law and what the permitted price and wage was to be for each of the commodities, goods, and labor services.

Sounds like Elizabeth Warren’s platform.

But not all Roman leaders were economic illiterates. Writing for FEE, Marc Hyden has a reasonably favorable assessment of Antoninus Pius.

…most Roman emperors, at least at certain points in their lives, were little more than murderous megalomaniacs too willing to spark wars for their own benefit and chip away at the Romans’ liberties. This is true even for the most revered emperors, including Augustus, Hadrian, and Constantine. …one emperor finally came to mind: Antoninus Pius. While imperfect, for the most part, Antoninus ruled with prudence, restraint, and moderation. He is known as one of the so-called “five good emperors,”… Antoninus often seemed to eschew the grandeur of his office. He sold off imperial lands, reduced or eliminated superfluous salaries, and lived in his own villas rather than imperial estates. …he believed he simply could not justify draining the public treasury for travel. …He conscientiously guarded the public treasury while simultaneously reducing confiscations and his subjects’ tax burden. …He so prudently managed the state’s finances that when he died, he left the public treasury with a massive surplus—a rarity in old Rome. Part of this surplus appears to be related to Antoninus’ aversion to vanity projects and unnecessary wars. …His life is perhaps best summed up by his successor, Marcus Aurelius, who described Antoninus as a grounded, introspective, and humble man who was respectful of others’ liberties.

I guess we can say that Antoninus was the Grover Cleveland of the Roman Empire.

By the way, there is an alternative left-of-center explanation of Rome’s decline. Professor Mark Koyama of George Mason University summarizes that viewpoint.

In the Rise of Western Christendom, [Peter] Brown summarizes the new wisdom on the transition from late antiquity to the early middle ages. …Long distance trade contracted. Cities shrank and emptied out. The division of labor became less complex. Many professions common in the Roman world disappeared. All of this is relatively uncontroversial. At issue is what caused this decline? …according to Brown: “The fault lay with the weakening of the late Roman state. The state had been built up to an unparalleled level in order to survive the crisis of the third century. The “downsizing” of this state, in the course of of the fifth century, destroyed the “command economy” on which the provinces had become dependent.” …Brown contends that the Roman state was the engine of economic growth of late antiquity. …Brown argues that these high taxes were in fact the source of economic dynamism: “High taxation did not ruin the populations of the empire. Rather, high tax demands primed the pump for a century of hectic economic growth.”

He then explains why he is not impressed with that analysis.

This, then, is Brown’s explanation for the decline of the Roman economy. It turns out that when examined one by one each one of these premises is either on shaky grounds factually, economically, or requires us to make implausible assumptions. …For conventional Keynesians, the multiplier on government spending boosts short-run aggregate demand, but aggregate demand is not the binding constraint on long-run growth, supply is; growth depends on the productive capacity of the economy. If anything, the impact of the Roman tax state on the productive capacity of the economy was more likely to be negative rather than positive. Resources were diverted from the private hands of peasants, merchants and small landowners and diverted into the hands of soldiers and officeholders. …Brown’s argument requires that at the margin, peasants preferred additional leisure to the wide array of affordable manufactured consumers goods that were on offer in markets and shops across the Roman empire. This is not impossible. But it is at odds with what we know about peasant behavior in other commercial societies such as early modern Europe. …Brown’s argument requires us to believe that if, for instance, the Roman state stopped spending on armor and weapons in a city, then the blacksmith and armor manufacturer would go out of business. This is a classic case of focusing on the seen and missing the unseen. It neglects the fact that lower taxes would give individuals more disposable income and they would likely spend some of this income to purchase amphora, pottery, textiles or other urban goods that we know the Roman economy was capable of producing. The blacksmith might switch to producing pots and pans rather than swords but he would not then go out of business.

Needless to say (but I’ll say it anyway), I side with Koyama over Brown.

Yes, there is ample evidence that some degree of government is important for a thriving and successful economy.

• A national defense protects a country and gives people confidence to accumulate capital.
• A justice system protects against criminal activity.
• A legal system provides a mechanism of resolving disputes.

Rome prospered and grew when the degree of economic intervention was tolerable.

Over time, though, Roman officials went overboard. There was too much intervention, too much dependency, and too much taxation.

The moral of the story (as we see in modern nations such as Venezuela, Greece, and Argentina) is that nations can move in the wrong direction.

The great challenge, of course, is figuring out a way to confine government so it focuses solely on core “public goods.”

America’s Founders produced such a system, but sadly the courts have failed to protect and preserve the Constitution’s limits on the powers of the central government.

September 14, 2019 Addendum: In response to some of the very good comments below, I fully agree that many other factors contributed to Rome’s decline. This columns focuses solely on the role of economic policy.

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A Helpful Solution to Italy’s Budget Standoff with the European Commission

I’ve warned many times that Italy is the next Greece.

Simply stated, there’s a perfect storm of bad news. Government is far too big, debt is too high, and the economy is too sclerotic.

I’ve always assumed that the country would suffer a full-blown fiscal crisis when the next recession occurs. At that point, tax receipts will fall because of the weak economy and investors will realize that the nation no longer is able to pay its bills.

But it may happen even sooner thanks to a spat between Italy’s left-populist government and the apparatchiks at the European Commission.

Here’s what you need to know. There are (poorly designed) European budget rules, known as the Maastricht Criteria, that supposedly require that nations limit deficits to 3 percent of GDP and debt to 60 percent of GDP.

With cumulative red ink totaling more than 130 percent of GDP, Italy obviously fails the latter requirement. And this means the bureaucrats at the European Commission can veto a budget that doesn’t strive to lower debt levels.

At least that’s the theory.

In reality, the European Commission doesn’t have much direct enforcement power. So if the Italian government tells the bureaucrats in Brussels to go jump in a lake, you wind up with a standoff. As the New York Times reports, that’s exactly what’s happened.

In what is becoming a dangerous game of chicken for the global economy, Italy’s populist government refused to budge on Tuesday after the European Union for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks. …the commission rejected the plan, saying that it included irresponsible deficit levels that would “suffocate” Italy, the third-largest economy in the eurozone. Investors fear that the collapse of the Italian economy under its enormous debt could sink the entire eurozone and hasten a global economic crisis unseen since 2008, or worse. But Italy’s populists are not scared. They have repeatedly compared their budget, fat with unemployment welfare, pension increases and other benefits, to the New Deal measures of Franklin D. Roosevelt.

Repeating the failures of the New Deal?!? That doesn’t sound like a smart plan.

That seems well understood, at least outside of Italy.

The question for Italy, and all of Europe, is how far Italy’s government is willing to go. Will it be forced into submission by the gravity of economic reality? Or will Italian leaders convince their voters that the country’s financial health is worth risking in order to blow up a political and economic establishment that they say is stripping Italians of their sovereignty? And Brussels must decide how strict it will be. …the major pressure on Italy’s budget has come from outside Italy. Fitch Ratings issued a negative evaluation of the budget, and Moody’s dropped its rating for Italian bonds to one level above “junk” last week.

So now that Brussels has rejected the Italian budget plan, where do things go from here?

According to CNBC, the European Commission will launch an “Excessive Deficit Procedure” against Italy.

…a three-week negotiation period follows in which a potential agreement could be found on how to lower the deficit (essentially, Italy would have to re-submit an amended draft budget). If that’s not reached, punitive action could be taken against Italy. Lorenzo Codogno, founder and chief economist at LC Macro Advisors, told CNBC…“it’s very likely that the Commission will, without making a big fuss, will move towards making an ‘Excessive Deficit Procedure’…to put additional pressure on Italy…” Although it has the power to sanction governments whose budgets don’t comply with the EU’s fiscal rules (and has threatened to do so in the past), it has stopped short of issuing fines to other member states before. …launching one could increase the already significant antipathy between Brussels and a vociferously euroskeptic government in Italy. Against a backdrop of Brexit and rising populism, the Commission could be wary of antagonizing Italy, the third largest euro zone economy. It could also be wary of financial market nerves surrounding Italy from spreading to its neighbors… Financial markets continue to be rattled over Italy’s political plans. …This essentially means that investors grew more cautious over lending money to the Italian government.

For those who read carefully, you probably noticed that the European Commission doesn’t have any real power. As such, there’s no reason to think this standoff will end.

The populists in Rome almost certainly will move forward with their profligate budget. Bureaucrats in Brussels will complain, but to no avail.

Since I’m a nice guy, I’m going to give the bureaucrats in Brussels a much better approach. Here’s the three-sentence announcement they should make.

1. The European Commission recognizes that it was a mistake to centralize power in Brussels and henceforth will play no role is overseeing fiscal policy in member nations.
2. The European Commission (and, more importantly, the European Central Bank) henceforth will have a no-bailout policy for national governments, or for those who lend to national governments.
3. The European Commission henceforth advises investors to be appropriately prudent when deciding whether to lend money to any government, including the Italian government.

From an economic perspective, this is a far superior approach, mostly because it begins to unwind the “moral hazard“that undermines sound financial decision making in Europe.

To elaborate, investors can be tempted to make unwise choices if they think potential losses can be shifted to taxpayers. They see what happened with the various bailouts in Greece and that tells them it’s probably okay to continue lending money to Italy. To be sure, investors aren’t totally blind. They know there’s some risk, so the Italian government has to promise higher interest payments

But it’s highly likely that the Italian government would have to pay even higher rates if investors were convinced there would be no bailouts. Incidentally that would be a very good outcome since it would make it more costly for Italy’s politicians to continue over-spending.

In other words, a win-win situation, with less debt and more prudence (and maybe even a smaller burden of government!).

My advice seems so sensible that you’re probably wondering if there’s a catch.

There is, sort of.

When I talk to policy makers, they generally agree with everything I say, but then say my advice is impractical because Italy’s debt is so massive. They fret that a default would wipe out Italy’s banks (which imprudently have bought lots of government debt), and might even cause massive problems for banks in other nations (which, as was the case with Greece, also have foolishly purchased lots of Italian government debt).

And if banks are collapsing, that could produce major macroeconomic damage and even lead/force some nations to abandon the euro and go back to their old national currencies.

For all intents and purposes, the Greek bailout was a bank bailout. And the same would be true for an Italian bailout.

In any event, Europeans fear that bursting the “debt bubble” would be potentially catastrophic. Better to somehow browbeat the Italian government in hopes that somehow the air can slowly be released from the bubble.

With this in mind, it’s easy to understand why the bureaucrats in Brussels are pursuing their current approach.

So where do we stand?

• In an ideal world, the problem will be solved because the Italian government decides to abandon its big-spending agenda and instead caps the growth of spending (as I recommended when speaking in Milan way back in 2011).
• In an imperfect world, the problem is mitigated (or at least postponed) because the European Commission successfully pressures the Italian government to curtail its profligacy.
• In the real world, though, I have zero faith in the first option and very little hope for the second option. Consider, for instance, the mess in Greece. For all intents and purposes, the European Commission took control of that nation’s fiscal policy almost 10 years ago. The results have not been pretty.

So this brings me back to my three-sentence prescription. Yes, it almost certainly would be messy. But it’s better to let the air out of bubbles sooner rather than later.

P.S. The so-called Basel Rules contribute to the mess in Europe by directing banks to invest in supposedly safe government debt.

P.P.S. If the European Union is going to impose fiscal rules on member nations, the Maastricht criteria should be jettisoned and replaced with a Swiss-style spending cap.

P.P.P.S. Some of the people in Sardinia have the right approach. They want to secede from Italy and become part of Switzerland. The Sicilians, by contrast, have the wrong mentality.

P.P.P.P.S. Italy is very, very, very well represented in the Bureaucrat Hall of Fame.

P.P.P.P.P.S. You’ll think I’m joking, but a columnist for the New York Times actually argued the United States should be more like Italy.

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Italy’s Countdown to Fiscal Crisis

As a general rule, we worry too much about deficits and debt. Yes, red ink matters, but we should pay more attention to variables such as the overall burden of government spending and the structure of the tax system.

That being said, Greece shows that a nation can experience a crisis if investors no longer trust that a government is capable of “servicing” its debt (i.e., paying interest and principal to people and institutions that hold government bonds).

This doesn’t change the fact that Greece’s main fiscal problem is too much spending. It simply shows that it’s also important to recognize the side-effects of too much spending (if you have a brain tumor, that’s your main problem, even if crippling headaches are a side-effect of the tumor).

Anyhow, it’s quite likely that Italy will be the next nation to travel down this path.

This in in part because the Italian economy is moribund, as noted by the Wall Street Journal.

Italy’s national elections…featured populist promises of largess but neglected what economists have long said is the real Italian disease: The country has forgotten how to grow. …The Italian economy contracted deeply in Europe’s debt crisis earlier this decade. A belated recovery now under way yielded 1.5% growth in 2017—a full percentage point less than the eurozone as a whole and not enough to dispel Italians’ pervasive sense of national decline. Many European policy makers view Italy’s stasis as the likeliest cause of a future eurozone crisis.

Why would Italy be the cause of a future crisis?

For the simple reason that it is only the 4th-largest economy in Europe, but this chart from the Financial Times shows it has the most nominal debt.

So what’s the solution?

The obvious answer is to dramatically reduce the burden of government.

Interestingly, even the International Monetary Fund put forth a half-decent proposal based on revenue-neutral tax reform and modest spending restraint.

The scenario modeled assumes a permanent fiscal consolidation of about 2 percent of GDP (in the structural primary balance) over four years…, supported by a pro-growth mix of revenue and expenditure reforms… Two types of growth-friendly revenue and spending measures are considered along the envisaged fiscal consolidation path: shifting taxation from direct to indirect taxes, and lowering expenditure and shifting its composition from transfers to investment. On the revenue side, a lower labor tax wedge (1.5 percent of GDP) is offset by higher VAT collections (1 percent of GDP) and introducing a modern property tax (0.5 percent of GDP). On the expenditure side, spending on public consumption is lowered by 1.25 percent of GDP, while productive public investment spending is increased by 0.5 percent of GDP. The remaining portion of the fiscal consolidation, 1.25 percent of GDP, is implemented via reduced social transfers.

Not overly bold, to be sure, but I suppose I should be delighted that the IMF didn’t follow its usual approach and recommend big tax increases.

So are Italians ready to take my good advice, or even the so-so advice of the IMF?

Nope. They just had an election and the result is a government that wants more red ink.

The Wall Street Journal‘s editorial page is not impressed by the economic agenda of Italy’s putative new government.

Five-Star wants expansive welfare payments for poor Italians, revenues to pay for it not included. Italy’s public debt to GDP, at 132%, is already second-highest in the eurozone behind Greece. Poor Italians need more economic growth to generate job opportunities, not public handouts that discourage work. The League’s promise of a pro-growth 15% flat tax is a far better idea, especially in a country where tax avoidance is rife. The two parties would also reverse the 2011 Monti government pension reforms, which raised the retirement age and moved Italy toward a contribution-based benefit system. …Recent labor-market reforms may also be on the block.

Simply stated, Italy elected free-lunch politicians who promised big tax cuts and big spending increases. I like the first part of that lunch, but the overall meal doesn’t add up in a nation that has a very high debt level.

And I don’t think the government has a very sensible plan to make the numbers work.

…problematic for the rest of Europe are the two parties’ demand for an exemption from the European Union’s 3% GDP cap on annual budget deficits. …the two parties want the European Central Bank to cancel some €250 billion in Italian debt.

Demond Lachman of the American Enterprise Institute suggests this will lead to a fiscal crisis because of two factors. First, the economy is weak.

Anyone who thought that the Eurozone debt crisis was resolved has not been paying attention to economic and political developments in Italy…the recent Italian parliamentary election…saw a surge in support for populist political parties not known for their commitment to economic orthodoxy or to real economic reform. …To say that the Italian economy is in a very poor state would be a gross understatement. Over the past decade, Italy has managed to experience a triple-dip economic recession that has left the level of its economy today 5 percent below its pre-2008 peak. Meanwhile, Italy’s current unemployment level is around double that of its northern neighbors, while its youth unemployment continues to exceed 25 percent. …the country’s public debt to GDP ratio continued to rise to 133 percent, making the country the most indebted country in the Eurozone after Greece. …its banking system remains clogged with non-performing loans that still amount to 15 percent of its balance sheet…

Second, existing debt is high.

…having the world’s third-largest government bond market after Japan and the United States, with $2.5 trillion in bonds outstanding, Italy is simply too large a country for even Germany to save. …global policymakers…, it would seem not too early for them to start making contingency plans for a full blown Italian economic crisis.

Since he writes on issues I care about, I always enjoy reading Lachman’s work. Though I don’t always agree with his analysis.

Why, for instance, does he think an Italian fiscal crisis threatens the European currency?

…the Italian economy is far too large an economy to fail if the Euro is to survive in anything like its present form.

Would the dollar be threatened if (when?) Illinois goes bankrupt?

But let’s not get sidetracked.3

To give you an idea of the fairy-tale thinking of Italian politicians, I’ll close with this chart from L’Osservatorio on the fiscal impact of the government’s agenda. It’s in Italian, but all you need to know is that the promised tax cuts and spending increases are on the left side and the compensating savings (what we would call “pay-fors”) are on the right side.

Wow, makes me wonder if Italy has passed the point of no return.

By the way, Italy may be the next domino, but it’s not the only European nation with fiscal problems.

P.S. No wonder some people want Sardinia to secede from Italy and become part of “sensible” Switzerland.

P.P.S. Some leftists genuinely think the United States should emulate Italy.

P.P.P.S. As a fan of spending caps, I can’t resist pointing out that anti-deficit rules in Europe have not stopped politicians from expanding government.

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Can a Flat Tax Rescue Italy’s Economy?

To put it mildly, Italy’s economy is moribund. There’s been almost no growth for the entire 21^st century.

Bad government policy deserves much of the blame.

According to Economic Freedom of the World, Italy is ranked only 54th, the worst score in Western Europe other than Greece. The score for fiscal policy is abysmal and regulatory policy and rule of law are also problem areas.

Moreover, thanks to decades of excessive government spending, the nation also has very high levels of public debt. Over the last few years, it has received official and unofficial bailouts from the International Monetary Fund and the European Central Bank, and Italy is considered at high risk for a budgetary meltdown when another recession occurs.

And let’s not forget that the country faces a demographic death spiral.

You don’t have to believe me (though you should).

Others have reached similar conclusions. Here are excerpts from some VoxEU research.

Italy will increasingly need to rely on growth fundamentals to sustain its public debt. Unfortunately, the fundamentals do not look good. Not only was Italy severely battered by Europe’s double dip recession (its GDP is lower today than it was in 2005) but when we look at the growth of labour productivity…, we can see that Italy has been stagnating since the mid-90s. …At the end of 2016, Italy’s central government debt was the third-largest in the world…, at $2.3 trillion. …a debt crisis in Italy could trigger a global financial catastrophe, and could very possibly lead to the disintegration of the Eurozone. To avoid such a scenario, Italy must revive growth…a tentative policy prescription is for Italy, to remove those institutional barriers (such as corruption, judicial inefficiency and government interference in the financial sector) that stifle merit and contribute to cronyism.

Desmond Lachman of the American Enterprise Institute paints a grim picture.

Italy’s economic performance since the Euro’s 1999 launch has been appalling. …an over-indebted Italian economy needs a coherent and reform-minded government to get the country quickly onto a higher economic growth path. …since 2000, German per capita income has increased by around 20 percent, that in Italy has actually declined by 5 percent. Talk about two lost economic decades for the country. …if Italy is to get itself onto a higher economic growth path, it has to find ways improve the country’s labor market productivity… It has to do so through major economic reforms, especially to its very rigid labor market…being the Eurozone’s third largest economy, Italy is simply too big to fail for the Euro to survive in its present form. However, it is also said that being roughly ten times the size of the Greek economy, a troubled Italian economy would be too big for Germany to save.

Even the IMF thinks pro-market reforms are needed.

Average Italians still earn less than two decades ago. Their take-home pay took a dip during the crisis and has still not yet caught up with the growth in key euro area countries. …a key question for policymakers is how to enhance incomes and productivity… In the decade before the global financial crisis, Italy’s spending grew faster than its income, in important part because of increases in pensions. …The tax burden is heavy…a package of high-quality measures on the spending and revenue side the country could balance the need to support growth on the one hand with the imperative of reducing debt on the other. Such a package includes…lower pension spending that is the second highest in the euro area; and lower tax rates on labor, and bringing more enterprises and persons into the tax net. …together with reforms of wage bargaining and others outlined above, can raise Italian incomes by over 10 percent, create jobs, improve competitiveness, and substantially lower public debt.

There’s a chance, however, that all this bad news may pave the way for good news. There are elections in early March and Silvio Berlusconi, considered a potential frontrunner to be the next Prime Minister, has proposed a flat tax.

Bloomberg has some of the details.

A flat tax for all and 2 million new jobs are among the top priorities in the draft program of former premier Silvio Berlusconi’s Forza Italia party… The program aims to relaunch the euro region’s third-biggest economy…and recoup the ground lost in the double-dip, record-long recession of the 2008-2013 period. …Forza Italia’s plan doesn’t cite a level for the planned flat income tax for individuals, Berlusconi has said in recent television interviews it should be 23 percent or even below that. The written draft plan says a flat tax would also apply to companies. The program pursues the balanced budget of the Italian state and calls public debt below 100 percent of GDP a “feasible” goal. It is currently above 130 percent.

Wow. As a matter of principle, I think a 23-percent rate is too high.

But compared to Italy’s current tax regime, 23 percent will be like a Mediterranean version of Hong Kong.

So can this happen? I’m not holding my breath.

The budget numbers will be the biggest obstacle to tax reform. The official number crunchers, both inside the Italian government and at pro-tax bureaucracies such as the International Monetary Fund, will fret about the potential for revenue losses.

In part, those concerns are overblown. The high tax rates of the current system have hindered economic vitality and helped to produce very high levels of evasion. If a simple, low-rate flat tax is adopted, two things will happen.

• There will be more revenue than expected because of better economic performance.
• There will be more revenue than expected because of a smaller underground economy.

These things are especially likely in Italy, where dodging tax authorities is a national tradition.

That being said, “more revenue than expected” is not the same as “more revenue.” The Laffer Curve simply says that good policy produced revenue feedback, not that tax cuts always pay for themselves (that only happens in rare circumstances).

So if Italy wants tax reform, it will also need spending reform. As I noted when commenting on tax reform in Belgium, you can’t have a bloated public sector and a decent tax system.

Fortunately, that shouldn’t be too difficult. I pointed out way back in 2011 that some modest fiscal restraint could quickly pay big dividends for the nation.

But can a populist-minded Berlusconi (assuming he even wins) deliver? Based on his past record, I’m not optimistic.

Though I’ll close on a hopeful note. Berlusconi and Trump are often linked because of their wealth, their celebrity, and their controversial lives. Well, I wasn’t overly optimistic that Trump was going to deliver on his proposal for a big reduction in the corporate tax rate.

Yet it happened. Not quite the 15 percent rate he wanted, but 21 percent was a huge improvement.

Could Berlusconi – notwithstanding previous failures to reform bad policies – also usher in a pro-growth tax code?

To be honest, I have no idea. We don’t know if he is serious. And, even if his intentions are good, Italy’s parliamentary system is different for America’s separation-of-powers systems and his hands might be tied by partners in a coalition government. Though I’m encouraged by the fact that occasional bits of good policy are possible in that nation.

And let’s keep in mind that there’s another populist party that could win the election And its agenda, as reported by Bloomberg, includes reckless ideas like a “basic income.”

…economic malaise is increasingly common across Italy, where unemployment tops 11 percent and the number of people living at or below the poverty line has nearly tripled since 2006, to 4.7 million last year, or almost 8 percent of the population… “Poverty will be center stage in the campaign,” says Giorgio Freddi, professor emeritus of political science at the University of Bologna. …Five Star is a fast-growing group fueled by anger at the old political class. …a €500 ($590) monthly subsidy to the disadvantaged…is a key plank in Five Star’s national platform, and the group’s leaders have promised to quickly implement such a program if they take power. Beppe Grillo, the former television comedian who co-founded the party, says fighting poverty should be a top priority. A basic income can “give people back their dignity,”… The Five Star program echoes universal basic income schemes being considered around the world. …Five Star says the plan would cost €17 billion a year, funded in part by…tax hikes on banks, insurance companies, and gambling.

Ugh. Basic income is a very troubling idea.

I’ve already speculated about whether Italy has “passed the point of no return.” If the Five Star Movement wins the election and makes government even bigger, I think I’ll have an answer to that question.

Which helps to explain why I wrote that Sardinians should secede and become part of Switzerland (where a basic income scheme was overwhelmingly rejected).

In conclusion, I suppose I should point out that a flat tax would be very beneficial for Italy’s economy, but other market-friendly reforms are just as important.

P.S. Some people, such as Eduardo Porter in the New York Times, actually argue that the United States should be more like Italy. I’m not kidding.

P.P.S. When asked about my favorite anecdote about Italian government, I’m torn. Was it when a supposedly technocratic government appointed the wrong man to a position that shouldn’t even exist? Or was it when a small town almost shut down because so many bureaucrats were arrested for fraud?

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Two Reasons Why Policy Stability Means Economic Decline for Italy

I’m rather pessimistic about Italy.

Simply stated, it’s economy is moribund. If you peruse the OECD’s economic database, you’ll see that both inflation-adjusted GDP and inflation-adjusted private consumption expenditure (in some ways a more accurate measure of actual quality of life) have grown by an average of just slightly over one percent annually this century.

And even though Italy’s population growth has been anemic, there are more people. And when you add a larger population to the equation, you get per-capita changes in output and living standards that are even less impressive.

But not everyone shares my dour outlook. I recently exchanged views with someone who said that Italy hasn’t increased the burden of government in recent years.

And that person is right. Sort of.

Here’s a chart showing Italy’s score from Economic Freedom of the World since the start of the 21st century. As you can see, it’s been remarkably stable.

But I have two reasons why I think policy stability is a recipe for economic decline.

First, you don’t win a race by standing still if others are moving forward. If you look closely at the above chart, you will see that Italy used to be ranked #36 in the world for economic freedom but it now ranks #69. In other words, Italy’s absolute level of economic freedom barely changed over the period, but its relative position declined significantly because other nations engaged in reforms and leapfrogged Italy in the rankings.

Second, Italy is in the middle of dramatic demographic changes that will have a huge impact on fiscal policy. People are living longer and having fewer children, but Italy’s welfare state was set up on the assumption that there would be lots of working-age taxpayers to finance old-age beneficiaries. In other words, policy stability will lead to fiscal crisis thanks to changes in the composition of the population. Think Greece, but on a bigger scale.

And when I refer to Greece on a bigger scale, I’m thinking another fiscal crisis.

Demond Lachman of the American Enterprise Institute is pessimistic about Italy and warns that high levels of red ink could cause a big mess.

We’ve got an Italian economy that is categorized by extremely high public debt. Their public debt level is now something like 132% of GDP, they’ve got a banking system that is bust, that banks have something like 18% of their loans non-performing, that is a huge amount, the economy is completely sclerotic, that the level of Italian GDP today is pretty much the same as it was some fifteen years ago. There’s been practically no growth, declining living standards… What also makes Italy very important from a global point of view is that we’re now not talking about a small country like Greece which doesn’t have that much systemic significance. We’re talking about the third largest country in the Eurozone. We’re talking about a country that has the world’s third largest sovereign bond market with something like two and a half trillion dollars of debt.

And don’t forget that these grim fiscal numbers probably mean even higher taxes on Italy’s young workers.

But those taxpayers aren’t captives. Cristina Odone, in a column for CapX, points out that young people are getting the short end of the stick.

Gerontocracy, stifling regulations and huge unemployment have hindered Italy’s prosperity for decades now. The country hailed for its economic miracle and famed for its creative and industrious entrepreneurs (at the helm, usually, of family-run businesses such as Gucci, Prada, and Ferrero) today comes second only to Greece (among EU countries) for the size of its national debt. …Italy’s unemployed youngsters, who constitute 40 per cent of under-24-year-olds, gnash their teeth at the unfairness of national life, where fossils control the levers of power while flouting their sinecures. A quarter of under-30-year-olds classify as NEETS, young people who are not in education, work or training. Contrast this with the UK, where only one in 10 under the age of 30 is in the same position. …Labour laws continue to blight young people’s prospects. …This sclerosis risks turning Italy into the sick man of Europe.

No wonder many young Italians are migrating to nations with more economic opportunity. AFP has a story on the dour outlook in Italy.

With the country struggling to kick an economic slump, some 40,000 Italians between 18 and 34 years old set out to seek greener pastures elsewhere in 2015, according to the Migrantes Foundation. “Just talking with people (in Italy) it’s clear going away might be the only solution,” said D’Elia, 26, who has spent the last five years in London, where he currently works as a barman, and intends to stay for now despite high living costs. …most of Italy’s youths are unwilling to return — and the country is seen as offering little to attract foreign graduates. …GDP is forecast to inch up just 1.3 percent this year. The jobless rate hovers at over 11 percent, well above the euro area average of 9.3 percent. Among 15 to 24-year olds it leaps to 37 percent, compared with a European average of 18.7 percent. …Sergio Mello, who set up a start-up in Hong Kong before moving to San Francisco, said Italy “does not offer a fertile environment to develop a competitive business”. …Mello says there are other problems: “The bureaucracy wastes a lot of time”, the red tape “drives you crazy”.

Unfortunately, rather than ease up on government burdens so that young people will have some hope for the future, some Italian politicians want new mandates, new spending, new taxes, and new restrictions.

I’ve previously written about new destructive tax policies that shrink the tax base. And I’ve written about wasteful new spending schemes, like a €500 “culture bonus.”

And now there’s something equally silly on the regulatory front being proposed by politicians. Here are excerpts from a report by Heat Street on the initiative.

Italy could soon become the first Western country to offer paid “menstrual leave” to female workers. …If passed, it would mandate that companies enforce a “menstrual leave” policy and offer three paid days off each month to working women who experience painful periods. …The Italian version of Marie Claire described it as “a standard-bearer of progress and social sustainability.” But the bill also has critics, including women who fear this sort of measure could backfire and end up stigmatizing them. Writing in Donna Moderna, another women’s magazine, Lorenza Pleuteri argued that if women were granted extra paid leave, employers would be even more reluctant to hire women, in a country where women already struggle to integrate the workforce. …Miriam Goi, a feminist writer, …fears that rather than breaking taboos about women’s menstrual cycle, the measure could end up perpetuating the idea that women are more emotional than men and require special treatment.

It’s unclear if this policy was actually enacted, but it’s a bad sign that it was even considered. Simply stated, making workers more expensive is not a good way to encourage more job creation. Even a columnist for the New York Times acknowledged that feminist-driven economic policies backfire against women.

The bottom line is that Italy needs sweeping reductions in the burden of the public sector. Yet the nation’s politicians are more interested in expanding the size and scope of government. Perhaps now it’s easy to understand why I fear the country may have passed the tipping point. You can be in a downward spiral even if policy doesn’t change.

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Based on His Leaked 2005 Tax Data, Donald Trump Should Move to Italy (or the Isle of Man)

The multi-faceted controversy over Donald Trump’s taxes has been rejuvenated by a partial leak of his 2005 tax return.

Interestingly, it appears that Trump pays a lot of tax. At least for that one year. Which is contrary to what a lot of people have suspected – including me in the column I wrote on this topic last year for Time.

Some Trump supporters are even highlighting the fact that Trump’s effective tax rate that year was higher than what’s been paid by other political figures in more recent years.

But I’m not impressed. First, we have no idea what Trump’s tax rate was in other years. So the people defending Trump on that basis may wind up with egg on their face if tax returns from other years ever get published.

Second, why is it a good thing that Trump paid so much tax? I realize I’m a curmudgeonly libertarian, but I was one of the people who applauded Trump for saying that he does everything possible to minimize the amount of money he turns over to the IRS. As far as I’m concerned, he failed in 2005.

But let’s set politics aside and focus on the fact that Trump coughed up $38 million to the IRS in 2005. If that’s representative of what he pays every year (and I realize that’s a big “if”), my main thought is that he should move to Italy.

Yes, I realize that sounds crazy given Italy’s awful fiscal system and grim outlook. But there’s actually a new special tax regime to lure wealthy foreigners. Regardless of their income, rich people who move to Italy from other nations can pay a flat amount of €100,000 every year. Note that we’re talking about a flat amount, not a flat rate.

Here’s how the reform was characterized by an Asian news outlet.

Italy on Wednesday (Mar 8) introduced a flat tax for wealthy foreigners in a bid to compete with similar incentives offered in Britain and Spain, which have successfully attracted a slew of rich footballers and entertainers. The new flat rate tax of €100,000 (US$105,000) a year will apply to all worldwide income for foreigners who declare Italy to be their residency for tax purposes.

Here’s how Bloomberg/BNA described the new initiative.

Italy unveiled a plan to allow the ultra-wealthy willing to take up residency in the country to pay an annual “flat tax” of 100,000 euros ($105,000) regardless of their level of income. A former Italian tax official told Bloomberg BNA the initiative is an attempt to entice high-net-worth individuals based in the U.K. to set up residency in Italy… Individuals paying the flat tax can add family members for an additional 25,000 euros ($26,250) each. The local media speculated that the measure would attract at least 1,000 high-income individuals.

Think about this from Donald Trump’s perspective. Would he rather pay $38 million to the ghouls at the IRS, or would he rather make an annual payment of €100,000 (plus another €50,000 for his wife and youngest son) to the Agenzia Entrate?

Seems like a no-brainer to me, especially since Italy is one of the most beautiful nations in the world. Like France, it’s not a place where it’s easy to become rich, but it’s a great place to live if you already have money.

But if Trump prefers cold rain over Mediterranean sunshine, he could also pick the Isle of Man for his new home.

There are no capital gains, inheritance tax or stamp duty, and personal income tax has a 10% standard rate and 20% higher rate.  In addition there is a tax cap on total income payable of £125,000 per person, which has encouraged a steady flow of wealthy individuals and families to settle on the Island.

Though there are other options, as David Schrieberg explained for Forbes.

Italy is not exactly breaking new ground here. Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives. In 2014, some 60% of Swiss voters rejected a Socialist Party bid to end a 152-year-old tax break through which an estimated 5,600 wealthy foreigners pay a single lump sum similar to the new Italian regime.

Though all of these options are inferior to Monaco, where rich people (and everyone else) don’t pay any income tax. Same with the Cayman Islands and Bermuda. And don’t forget Vanuatu.

If you think all of this sounds too good to be true, you’re right. At least for Donald Trump and other Americans. The United States has a very onerous worldwide tax system based on citizenship.

In other words, unlike folks in the rest of the world, Americans have to give up their passports in order to benefit from these attractive options. And the IRS insists that such people pay a Soviet-style exit tax on their way out the door.

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Italy’s Continuing Downward Spiral

Early last month, in a column on my hopes and fears for 2017, I fretted about fiscal chaos in Italy leading to default and bailouts.

Simply stated, I fear that Italy, along with certain other “Club Med” nations, has passed the point of no return in terms of big government, demographic decline, and societal dependency.

And this means that, sooner or later, the proverbial wheels are going to fall off the bus.

And it might be sooner. I don’t always agree with his policy recommendations, but I regularly read Desmond Lachman of the American Enterprise Institute because he is one of the best-informed people in Washington on the fiscal and economic mess in Europe.

And Italy, to be blunt, is in a mess.

Here’s what Desmond just wrote about the country’s economy.

…while the euro could very well survive a Greek exit, it certainly could not survive in anything like its present form were Italy to have a full-blown economic and financial crisis that forced it to default on its public debt mountain. …Among the reasons that there should be greater concern about an Italian, rather than a Greek, economic crisis is that Italy has a very much larger economy than Greece. Being the third-largest economy in the eurozone, Italy’s economy is around 10 times the size of that of Greece. Equally troubling is the fact that Italy has the world’s third-largest sovereign bond market with public debt of more than $2.5 trillion. Much of this debt is held by Europe’s shaky banking system, which heightens the risk that an Italian sovereign debt default could shake the global financial system to its core. …the country’s economic performance since 2008 has been abysmal. Indeed, Italian living standards today are around 10 percent below where they were 10 years ago. Meanwhile, Italy’s banking system has become highly troubled and its public sector debt as a share of gross domestic product (GDP) is now the second highest in the eurozone.

And here’s some of what he wrote late last year.

…today there would seem to be as many reasons for worrying about the Italian economy as there were for worrying about the Greek economy back in 2009. Like Greece then, Italy today checks all too many of the boxes for the making of a full-blown economic and financial crisis within the next year or two. …the Italian economy today is barely above its level in 1999 when the country adopted the Euro as its currency. Worse still, since the Great Global Economic Recession in 2008-2009, the Italian economy has experienced a triple-dip recession that has left its economy today some 7 percent below its pre-2008 crisis peak level and its unemployment rate stuck at over 11 percent. …deficiencies of its ossified labor market that contributes so importantly to the country’s very poor productivity performance. As a result, since adopting the Euro in 1999, Italy’s unit labor costs have increased by around 15 percentage points more than have those in Germany. …Italian banks now have around EUR 360 billion in non-performing loans, which amounts to a staggering 18 percent of their loan portfolio. If that were not bad enough, the Italian banks also hold unhealthily large amounts of Italian government debt, which now total more than 10 percent of their overall assets. …the country’s public debt level has risen from 100 percent of GDP in 2008 to 133 percent of GDP at present.

The numbers shared by Lachman are downright miserable.

And he’s not the only one pointing out that Italy’s economy is in the toilet.

I shared numbers last year showing the pervasive stagnation in the country.

So what’s the Italian government doing to solve these problems? Is it slashing tax rates? Reducing the burden of government? Cutting back on red tape?

Of course not. The politicians are either making things worse or engaging in pointless distractions.

Speaking of which, I’m tempted to laugh at the Italian government’s campaign to boost birthrates. Here’s some of what’s been reported by the New York Times.

…a government effort to promote “Fertility Day” on Sept. 22, a campaign intended to encourage Italians to have more babies. …Italy has one of the lowest birthrates in the world… Italian families have been shrinking for decades. In 2015, 488,000 babies were born in Italy, the fewest since the country first unified in 1861. It has one of the lowest birthrates in Europe, with 1.37 children per woman, compared with a European average of 1.6, according to Eurostat figures.

By the way, I actually commend the government for recognizing that falling birthrates are a problem.

Not because women should feel obliged to have kids if that’s not what they want. But rather because Italy has a massive tax-and-transfer welfare state that is predicated on an ever-expending population of workers (i.e., taxpayers) to finance benefits to retirees.

But old people are living longer and low birthrates mean that there won’t be enough taxpayers to prop up the Ponzi Scheme of big government.

But while the government deserves kudos for acknowledging a problem, it deserves mockery for thinking empty slogans will make a difference.

Moreover, there’s also a problem in that Italian voters have been so conditioned to expect handouts that they think the answer to the problem is even more government!

The problem is not a lack of desire to have children, critics of the campaign say, but rather the lack of meaningful support provided by the government and many employers. …”I still feel very offended,” said Vittoria Iacovella, 37, a journalist and mother of two girls, ages 10 and 8. “The government encourages us to have babies, and then the main welfare system in Italy is still the grandparents.” …Italy’s government has tried to help families with a so-called baby bonus of 80 to 160 euros, or about $90 to $180, for low- and middle-income households, and it has approved labor laws giving more flexibility on parental leave.

Ms. Iacovella is crazy for thinking that more taxes, more spending, more regulation, and more mandates will make things better.

Heck, even leftists are now admitting such laws undermine employment and specifically hurt women by making them less attractive to employers.

Meanwhile, the Italian government is taking lots of other dumb steps. Including, as reported by the Telegraph, creating a new entitlement for teenagers.

Italian school leavers may face the dismal prospect of 40 per cent youth unemployment, but at least they have one thing to look forward to – a €500 “culture bonus”, courtesy of the government. From next month, every 18-year-old will be entitled to claim the money and spend it on culturally enriching pursuits such as going to theatres, concerts and museums, visiting archaeological sites, and buying books. The scheme, which starts on Sept 15, will benefit 575,000 teenagers, at a cost to the government of €290 million (£250 million).

By the way, is anyone shocked to learn that Italian teenagers look forward to these handouts?

…it has been welcomed by 18-year-olds, who face a difficult economic landscape when they leave school – high unemployment, a lack of secure, long-term contracts and an economy that has performed dismally for a decade. “Of course we’re happy…,” said Angelica Magazzino, a teenager from the southern region of Puglia who turns 18 in November.

If you read the entire story, you’ll learn that the government justifies this new entitlement by saying it will fight terrorism. I don’t know if that’s more crazy or less crazy than the American leftists who blame terrorism on climate change or inequality.

Last but not least, CNN is reporting that the government is also enabling other forms of Italian “culture.”

Italy’s highest court has ruled that masturbation in public is not a crime, as long as it is not conducted in the presence of minors.

No, this is not a joke.

The decision came down from the Italian Supreme Court…in the case of a 69-year-old man…The man was convicted in May 2015 after he performed the act in front of students on the University of Catania campus, according to documents filed with Supreme Court. The man was sentenced to three months in prison and ordered to pay a fine of €3,200 (around $3,600). However, the defendant’s lawyer appealed the case to the country’s highest court, which ruled on the side of the accused in June but only just made its decision public. Judges ruled that public masturbation out of the presence of minors is no longer deemed criminal conduct due to a change in the law last year, which decriminalized the act.

Great. I’m looking forward to my next trip to Italy. Though I guess it’s nice to see Italian seniors are staying active in their communities.

More seriously, this is why I’m sympathetic to Italians that are either privately dodging or publicly revolting when you have a government this profligate and senseless.

P.S. Amazingly, some leftists think the United States should have a bigger government and be more like Italy.

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Hopes and Fears for Policy in 2017

Since yesterday’s column was a look back on the good and bad things of 2016, let’s now look forward and speculate about the good and bad things that may happen in 2017.

I’m not pretending any of this is a forecast, particularly since economists have a miserable track record in that regard. Instead, the following lists are simply things I hope may happen or fear may happen.

We’ll start with the things I want.

• Reform of healthcare entitlements – Republicans in 2017 will control Congress and the White House, so they’ll have the power to fix our broken entitlement system and dramatically improve America’s long-run outlook. And since the House and Senate GOPers have voted for budgets that presume much-need structural changes to Medicare and Medicaid, that bodes well for reform. The wild card is Donald Trump. He said some rather irresponsible things about entitlements during the campaign, which suggests he will leave policy on autopilot (which is not a good idea when we’re heading for a fiscal iceberg). On the other hand, politicians oftentimes disregard their campaign commitments (remember Obama and “you can keep your doctor“?), especially when they get in power and finally take a hard look at budget numbers. Perhaps the most optimistic sign is that Trump has appointed Budget Committee Chairman Congressman Tom Price to be Secretary of the Department of Health and Human Services and Congressman Mick Mulvaney to be Director of the Office of Management and Budget.  I very much hope Trump seriously addresses the health entitlements.
• A lower corporate tax rate, “expensing,” and repeal of the death tax – During the campaign, Trump proposed a very large tax cut. With Republicans controlling both ends of Pennsylvania Avenue, some sort of significant tax cut should be feasible. It’s highly unlikely that Trump will get everything he wants, but the three items at the top of my wish list are lowering the corporate tax rate, ending the tax code’s bias against new investment by replacing punitive “depreciation” rules with “expensing,” and repeal of the death tax. Those reforms would have the strongest impact on long-run growth. And the icing on the cake would be a repeal of the state and local tax deduction, which subsidizes high-tax states such as California, Illinois, New York, and New Jersey (I’d also like to see repeal of the healthcare exclusion, but I’m focusing on things that might actually happen in 2017 rather than what’s on my fantasy list).
• Regulatory reform – The tentacles of the regulatory octopus are stifling the American economy. There’s no single fix for this problem. The overall system for approving regulations should be changed (I will write on the “REINS Act” in a few days), but that’s a partial solution for future red tape. To deal with the existing burden of red tape, a different set of answers will be necessary, including sensible political appointees so that bureaucrats will have a harder time pushing for regulations that are needlessly expensive and misguided and instead will be charged with undoing existing red tape. In some cases (Dodd-Frank, Obamacare, etc), it will be necessary to change current law in order to roll back regulatory excess.
• Italian default – I’m not hoping for Italy to face a fiscal crisis, but it almost certainly will happen in the near future. The nation’s demographic decline, combined with its bloated welfare state, are a horrible recipe. And while it’s theoretically possible to avert a mess by capping spending and fixing programs (just as it is still possible to fix the mess in Greece), I don’t think good policy is very likely. So Italy will soon face a fiscal crisis and the real question is whether there’s a good response. Ideally, if this happens in 2017, Italy will be allowed to default (presumably because Trump’s representative at the International Monetary Fund vetoes any sort of bailout). This will mean, a) the people and institutions who were silly enough to lend money to a profligate government will suffer losses, making them more prudent in the future, b) Italy will lose the ability to borrow more money, putting an end to additional red ink, c) Italian politicians will be forced to immediately balance the government’s budget, which hopefully means genuine budget cuts, and d) the Italian people will (hopefully) realize that a system based on looting and mooching can no longer be maintained.

Now here’s a list of things I’m afraid may happen.

• Punting on entitlement Reform – As noted above, the wild card for any sort of genuine entitlement reform is Donald Trump. If he decides to to be President Santa Claus by appeasing various interest groups (like the previous GOPer in the White House), then reform will be dead. Simply stated, House and Senate Republicans will not push good changes without support from the White House. But that’s only a partial worst-case scenario. Trump may choose to be like the previous Republican President and actually expand entitlements (perhaps by borrowing a page from Elizabeth Warren’s playbook and expanding Social Security). If Trump decides to punt (or, gulp, make things worse), that has very grim implications. Reform will be dead for at least eight years (either because Trump gets reelected or because he’s replaced by a Democrat who also opposes reform) and the longer we wait to address the problem, the harder it will be to save America from a Greek fiscal future.
• A “Poison Pill” in tax reform – While there is a great opportunity to fix some of the biggest warts in the internal revenue code, I worry that lawmakers will include some bad revenue raisers to help “pay for” the good provisions. I don’t think there’s any danger (at least for 2017) of a value-added tax, but the plan from House Republicans includes a “border adjustable”/”destination based” tax on imports (known as a DBCFT) that is not only protectionist, but could eventually morph into a VAT. A smaller tax cut without a DBCFT would be better than a bigger tax cut with a DBCFT.
• An infrastructure boondoggle – It appears that some sort of infrastructure plan will be approved in 2017. I wrote last year to suggest three guidelines for the incoming Trump Administration on this issue, but I fear that this initiative will become a typical DC feeding frenzy. Lots of spending with no accountability.
• Italian bailout – If the inevitable Italian fiscal crisis occurs in 2017, the worst possible outcome would be a Greek-style bailout. That approach has several undesirable implications. It will a) exacerbate moral hazard by rewarding the investors who bought Italian bonds, b) it will enable Italian politicians to incur more debt, and c) it will enable the Italian people to continue thinking that big government is good because someone else is paying for it. To be sure, because there’s so much more debt involved, bailing out Italy will be much harder than bailing out Greece. But so long as the corrupt and venal IMF plays a role, it’s always prudent to assume the worst policy will be imposed.

I hope all readers have a happy new year. And I hope. for the sake of America and the rest of the world, that the first half of today’s column is more accurate than the second half.

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The Italian Version of Everything You Need to Know about Bureaucracy and Government

In 2014, I was outraged that more than 80 percent of senior bureaucrats at the Veterans Administration were awarded bonuses, even though this is the bloated bureaucracy that caused the death of many veterans by putting them on secret waiting lists. This, I argued, was a perfect example (in a bad way) of federal bureaucracy in action.

In 2015, I put together a version about bureaucracy in action at the local level, noting that the number of firefighters has climbed by 50 percent since 1980, even though the number of fires has declined by more than 50 percent during the same period.

This year, let’s look at the overseas edition of bureaucracy in action. Our story comes from Italy, where there’s been a government shutdown. Though only in the town of Boscotrecase. And not because of an Obamacare-style budget fight, but rather because a bunch of the local bureaucrats got arrested for routinely skipping work.

The mayor of a small town outside Naples had to shut down most municipal offices after police arrested 23 of his staff in the latest revelations of absenteeism in Italy’s public sector. Staff were filmed clocking in and then leaving to go about their personal business or using multiple swipe cards to register absent colleagues, police said, in scenes that have become familiar after numerous similar scandals. A police video showed one man trying to tamper with a security camera and then putting a cardboard box over his head to hide his identity before swiping two cards. Police arrested around half of all employees in the town hall offices of Boscotrecase following a weeks-long investigation that they said revealed 200 cases of absenteeism involving 30 people. …four major town hall departments had been closed on Tuesday due to a lack of staff. Those arrested, accused of fraud against the state, included the head of the local traffic police and the head of the town’s accounting department. The workers, whose arrest comes amid a government crackdown against absenteeism, have been suspended from work for between six and 12 months and risk eventual dismissal.

What I want to know, of course, is whether the bureaucrats were suspended with pay or without pay.

If it’s the former (which would be my guess), how will their lives be any different? They’ll be goofing off at home while getting overpaid!

No wonder Italy is in a death spiral.

P.S. The Bureaucrat Hall of Fame is comprised of specific government employees who have perfected the art of slacking (such as the Italian doctor who legally worked only 15 days in a nine-year period). That being said, I’m tempted to give adjunct membership to the entire local government of Boscotrecase.

P.P.S. Switching topics, the unpalatable choice between Donald Trump and Hillary Clinton does have a silver lining. It’s generated this clever make-believe announcement from the British Monarch.

To the citizens of the United States of America from Her Sovereign Majesty Queen Elizabeth II:

In light of your failure to nominate competent candidates for President of the USA and thus to govern yourselves, we hereby give notice of the revocation of your independence, effective immediately.

Her Sovereign Majesty Queen Elizabeth II will resume monarchical duties over all states, commonwealths, and territories (except North Dakota, which she does not fancy). Your new Prime Minister, Theresa May, will appoint a Governor for America without the need for further elections. Congress and the Senate will be disbanded. A questionnaire may be circulated next year to determine whether any of you noticed.

To aid in the transition to a British Crown dependency, the following rules are introduced with immediate effect:

———————–
1. The letter ‘U’ will be reinstated in words such as ‘colour,’ ‘favour,’ ‘labour’ and ‘neighbour.’ Likewise, you will learn to spell ‘doughnut’ without skipping half the letters, and the suffix ‘-ize’ will be replaced by the suffix ‘-ise.’ Generally, you will be expected to raise your vocabulary to acceptable levels. (look up ‘vocabulary’).
————————
2. Using the same twenty-seven words interspersed with filler noises such as ”like’ and ‘you know’ is an unacceptable and inefficient form of communication. There is no such thing as U.S. English. We will let Microsoft know on your behalf. The Microsoft spell-checker will be adjusted to take into account the reinstated letter ‘u” and the elimination of ‘-ize.’
——————-
3. July 4th will no longer be celebrated as a holiday.
—————–
4. You will learn to resolve personal issues without using lawyers, psychics or therapists. The fact that you need so many lawyers and therapists shows that you’re not quite ready to be independent. If you can’t sort things out without suing someone or speaking to a therapist, then you’re not ready to be a sovereign nation.
———————-
5. Therefore, you will no longer be allowed to own or carry anything more dangerous than a vegetable peeler. Although a permit will be required if you wish to carry a vegetable peeler in public.
———————-
6. All intersections will be replaced with roundabouts, and you will start driving on the left side with immediate effect. At the same time, you will go metric with immediate effect and without the benefit of conversion tables. Both roundabouts and metrication will help you understand the British sense of humour.
——————–
7. The former USA will adopt UK prices on petrol (which you have been calling gasoline) of roughly $10/US gallon. Get used to it.
————–
8. You will learn to make real chips. Those things you call French fries are not real chips, and those things you insist on calling potato chips are properly called crisps. Real chips are thick cut, fried in animal fat, and dressed not with catsup but with vinegar.
——————-
9. The cold, tasteless stuff you insist on calling beer is not actually beer at all. Henceforth, only proper British Bitter will be referred to as beer, and European brews of known and accepted provenance will be referred to as Lager. South African beer is also acceptable, as they are pound for pound the greatest sporting nation on earth and it can only be due to the beer. They are also part of the British Commonwealth – see what it did for them. American brands will be referred to as Near-Frozen Gnat’s Urine, so that all can be sold without risk of further confusion.
———————
10. Hollywood will be required occasionally to cast English actors as good guys. Hollywood will also be required to cast English actors to play English characters. Watching Andie MacDowell attempt English dialect in Four Weddings and a Funeral was an experience akin to having one’s ears removed with a cheese grater.
———————
11. You will cease playing American football. There is only one kind of proper football; you call it soccer.
Those of you brave enough will, in time, be allowed to play rugby (which has some similarities to American football, but does not involve stopping for a rest every twenty seconds or wearing full kevlar body armour like a bunch of nancies).
———————
12. Further, you will stop playing baseball. It is not reasonable to host an event called the World Series for a game which is not played outside of America. Since only 2.1% of you are aware there is a world beyond your borders, your error is understandable. You will learn cricket, and we will let you face the South Africans first to take the sting out of their deliveries.
——————–
13. You must tell us who killed JFK. It’s been driving us mad.
—————–
14. An inland revenue agent (i.e. tax collector) from Her Majesty’s Government will be with you shortly to ensure the acquisition of all monies due (backdated to 1776).
—————
15. Daily Tea Time begins promptly at 4 p.m. with proper cups, with saucers, and never mugs, with high quality biscuits (cookies) and cakes; plus strawberries (with cream) when in season.

Reasonably clever. Reminds me of the somewhat un-PC humor a British friend sent me on how different countries respond to terrorism.

By the way, I’m not sure the part about needing a permit to carry a vegetable peeler is a joke. After all, we’re talking about the country where you need an ID to buy a teaspoon.

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Italy’s Fiscal and Demographic Death Spiral

European economic analysts are paying too much attention to the United Kingdom and too little attention to Italy.

Yes, the Brexit decision is important, and the United Kingdom is the world’s 5th-largest economy so it merits attention to see if there are any speed bumps as it escapes from the slowly sinking ship otherwise known as the European Union.

But one of the other passengers on that doomed ship is Italy, the world’s 8th-largest economy. And if the UK merits attention because of uncertainty on its way to a brighter future, then Italy should be getting five-alarm focus for its festering economic crisis as it descends into chaos.

Part of that crisis is quasi-permanent stagnation, as illustrated by this map showing changes in per-capita economic output since 1995.

To state that Italy is the slow student in the class is an understatement. There’s been a two-decade period with almost no improvement in economic output.

Even Greece has done better!

To make matters worse, Italy’s long-run stagnation is matched by an immediate banking crisis. Here are some excerpts from a MarketWatch report.

Banks in Italy are weighed by about €360 billion in nonperforming loans, or unpaid debts, according to Italy’s central bank. That represents 18.1% of total loans to consumers. Roughly €210 billion of those loans have been taken out by borrowers now considered to be insolvent. “Meanwhile, average return on equity has been less than 2% per year during the last five years, neither enough to clear out the NPLs at a decent pace, nor to attract more capital.

And, as illustrated by this chart from the Economist, this puts the nation in a very undesirable position.

There’s also a demographic disaster in Italy. The fertility rate is 1.43, which puts Italy in 208th place out of 224 nations.

To be sure, there’s nothing wrong with choosing to have fewer children. The “disaster” is that Italy has a huge, pay-as-you-go entitlement state that is premised on having an ever-growing number of new taxpayers to pay for the promises made to older taxpayers. And since Italy’s population pyramid is turning into a population cylinder, that’s obviously not happening.

Indeed, the EU Observer reports that parts of Italy are becoming ghost towns.

Around a third of villages in Italy are at risk of turning into “ghost” villages in the next 25 years because young people are leaving, and those who are left behind are dying of old age. …2,430 villages are at risk.

The “good news” is that there is some awareness that the nation faces a double-disaster of statism and unfriendly demographics.

Unfortunately, that awareness doesn’t extend to Italy’s ruling class. Almost nothing is being done to address the problems of a bloated (and notoriously incompetent) public sector and excessive government intervention. Fully one-half of the nation’s economic output is consumed by a bloated public sector. And a stifling tax burden helps to explain why economic output is stagnant.

And I’m not expecting good results from a new scheme to change the nation’s demographic outlook.

Italy’s health minister is proposing doubling a ‘baby bonus’ incentive for couples to have more children to combat what she calls a catastrophic decline in the country’s birth rate. …Lorenzin told the paper she wanted to double the standard baby bonus, currently 80 euros ($90) a month…and introduce higher payments for second and subsequent children to encourage bigger families.

Part of my concern is that I don’t think the government should pay people to have children, both because I don’t like redistribution and because I’m skeptical that you can successfully bribe people to have more children with $90 per month.

But when you dig into the details, the proposal is even more troubling. The government basically wants to encourage more children from the portion of the population that is most likely to rely on state handouts.

Higher-income families, those with taxable earnings of more than 25,000 euros per year, are not eligible for the scheme, excluding about a third of parents. The allowances are paid at higher rates for the poorest — those declaring less than 7,000 euros a year to the taxman. Under the new proposals, the payment for second and subsequent children would be 240 euros/month for average families and 400 euros/month for the poorest.

Call me crazy, but the last thing Italy needs is more people riding in the wagon of government dependency.

Oh, by the way, this scheme will add to the burden of government spending.

Lorenzin’s proposals would add 2.2 billion euros to public spending over six years, her department estimates.

More spending, bigger government, higher taxes, and additional red ink. Maybe that’s a recipe for prosperity on some planet in the universe, but it definitely won’t work on Earth.

P.S. No wonder there’s discussion in Sardinia on leaving Italy and joining Switzerland. After all, the luckiest Italian people in the world are the ones in Ticino, the southernmost canton of über-prosperous Switzerland (just as the unluckiest French people live in Menton and Roquebrune, which used to be part of Monaco).

P.P.S. Though you have to give the Italians credit for ingenuity. This doctor and this cop both went to extraordinary lengths to earn membership in the Bureaucrat Hall of Fame.

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Europe’s Moral Bankruptcy

I wrote last year about the moral vacuum that exists in Europe because gun control laws in nations like France make it very difficult for Jews to protect themselves from barbaric attacks.

But the principle applies more broadly. All law-abiding people should have the human right to protect themselves.

Politicians in Denmark don’t seem to understand this principle. Or maybe the do understand the principle, but they are so morally bankrupt that don’t care. Not only do they have gun control, they even have laws against pepper spray. And they are so fanatical in their desire to turn people into sheep that the government apparently will prosecute a girl who used pepper spray to save herself from rape.

Here are some excerpts from a report in the U.K.-based Daily Mail.

A Danish teenager who was sexually assaulted near a migrant asylum centre has been told she will be prosecuted after using pepper spray to fend off her attacker. …she managed to prevent the man from attacking her further by spraying the substance at him. …However, as it is illegal to use pepper spray, the teenage girl is set to face charges.

How disgusting.

And what makes the situation especially frustrating is that the criminals and terrorists in Europe obviously don’t have any problem obtaining firearms.

So the only practical effect of gun control (or bans on pepper spray) is to make life easier for the scum of society.

And the real insult to injury is that a teenage girl who should be hailed as a hero now faces the threat of punishment. Just like the unfortunate British woman who was persecuted for using a knife to deter some thugs.

And here’s some of what the BBC reported about

Italian hospitality for the visiting Iranian President Hassan Rouhani has stretched to covering up nude statues. Italy also chose not to serve wine at official meals

Pathetic. Particularly since the Italians bent over backwards for a truly heinous regime.

Kudos to President Hollande in France, by contrast. The Daily Mail notes that he held firm.

A lunch between the French and Iranian presidents in Paris was scrapped today because France refused to remove wine from the menu.

By the way, there clearly is a role for common courtesy and diplomatic protocol. It obviously would be gratuitously rude for a nation to serve pork at a dinner for officials from Israel or any Muslim nation, just as it would inappropriate and insensitive to serve beef for an event for officials from India.

Moreover, officials from one nation should not make over-the-top demands when visiting other countries. Just as it would be wrong for French officials to demand wine at state dinners in Iran, it’s also wrong for Iranian officials to demand the absence of wine at meals in France. After all, it’s not as if they would be expected to partake.

In the grand scheme of things, though, the kerfuffle about wine and statues doesn’t matter compared to the potentially life-and-death issue of whether Europeans should be allowed to defend themselves.

That’s why Europe isn’t merely in trouble because of fiscal bankruptcy, but also because of moral bankruptcy.

P.S. While having the ability to protect your life or to guard against rape isn’t a human right in most European nations, take a look at some of the things that are “rights.”

• A committee from the Council of Europe claims there is a right to other people’s money.
• Across Europe, a satellite dish is now a human right.
• In Finland, broadband access is a basic right.
• In France, it is against the law to say your husband is under-endowed or that your wife is fat.
• There’s now an entitlement for free soccer broadcasts in Europe.
• In Italy, you have the right to…um…your testicles.

All this is amusing…in a very sad way.

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The Rise and Fall and Rise and Fall of Italy

George Santayana was certainly was right when he wrote, “Those who do not learn from history are doomed to repeat it.” Consider, for instance, the foolish American politicians who want to rejuvenate Fannie Mae and Freddie Mac and other forms of housing subsidies even though we’re still dealing with the havoc of the last government-created housing bubble.

Though when Italian politicians fail to learn to from history, do it on a bigger and bolder scale.

We’ll start by going back a couple of millennia. Larry Reed of the Foundation for Economic Education tells the story of how Ancient Rome disintegrated thanks to the welfare state.

More than 2,000 years before America’s bailouts and entitlement programs, the ancient Romans experimented with similar schemes. The Roman government rescued failing institutions, canceled personal debts, and spent huge sums on welfare programs. The result wasn’t pretty. …these expensive rob-Peter-to-pay-Paul efforts were major factors in bankrupting Roman society. They inevitably led to even more destructive interventions. Rome wasn’t built in a day, as the old saying goes — and it took a while to tear it down as well. Eventually, when the republic faded into an imperial autocracy, the emperors attempted to control the entire economy.

In reading Larry’s article, I learned about many awful politicians from ancient times.

But if I had to identify the Roman version of Barack Obama, Larry makes a persuasive case that it would be Tiberius Gracchus.

By 133 BC, the up-and-coming politician Tiberius Gracchus…passed a bill granting free tracts of state-owned farmland to the poor. Additionally, the government funded the erection of their new homes and the purchase of their farming tools. …Tiberius, incidentally, also passed Rome’s first subsidized food program, which provided discounted grain to many citizens. Initially, Romans dedicated to the ideal of self-reliance were shocked at the concept of mandated welfare, but before long, tens of thousands were receiving subsidized food, and not just the needy. Any Roman citizen who stood in the grain lines was entitled to assistance.

Sure enough, more and more Romans over time learned that it was more fun to ride in the wagon rather than pull it.

…at its peak, a third of Rome took advantage of the program. It became a hereditary privilege, passed down from parent to child. Other foodstuffs, including olive oil, pork, and salt, were regularly incorporated into the dole. The program ballooned until it was the second-largest expenditure in the imperial budget, behind the military.

So what’s the moral of this story?

Larry’s article shows that my Theorem of Societal Collapse has a long history.

The Roman experience teaches important lessons. As the 20th-century economist Howard Kershner put it, “When a self-governing people confer upon their government the power to take from some and give to others, the process will not stop until the last bone of the last taxpayer is picked bare.” Putting one’s livelihood in the hands of vote-buying politicians compromises not just one’s personal independence, but the financial integrity of society as well. The welfare state, once begun, is difficult to reverse and never ends well. Rome fell to invaders in 476 AD, but who the real barbarians were is an open question. …Maybe the real barbarians were those Romans who had effectively committed a slow-motion financial suicide.

In any event, Italy slipped into the dark ages.

That’s the bad news.

The good news is that Italy also helped Europe recover from the dark ages. There was no unified nation at the time, but city states such as Genoa and Venice became major trading hubs.

Indeed, private money actually first evolved in the Italian city states.

Over several hundred years, modern Italy came into being, and that occurred during a period when government was constrained. Indeed, it’s worth noting that there wasn’t an income tax until the 1860s.

And Italy had less redistribution than the United States as late as 1930.

So there was a period where government was reasonably small and Italy enjoyed some degree of prosperity.

Unfortunately, once modern-era welfare-state programs were adopted, growth was negatively impacted. And now it’s disappeared entirely, as noted in an article by Alessio Terzi for Bruegel.

Italy…is the only EU member state, together with Greece, where real GDP is now below its 2000 level. …Moreover, Italy’s longstanding vulnerabilities such as its mammoth public debt – second only to Greece’s in GDP terms – …could easily derail the recovery.

Here’s a very depressing chart (if you’re Italian, or even if you merely care about Italy) showing that economic output today is lower than it was in 2000.

The only silver lining to this bad news is that the Italians presumably have less reason to be upset than the Greeks.

Sure, both nations have enjoyed zero growth in the 21st Century, but the Greeks went through an illusory period where they thought they had growth.

So it probably is even more painful to them now that they’ve taken a tumble.

By the way, Alessio’s article actually speculates that Italy may be poised for an economic rebound.

I hope that’s correct, and the article does mention a few reforms, but I’m not overly optimistic.

Check out the country’s ranking from Economic Freedom of the World.

As you can see, Italy ranks only 79 out of 152.

To be sure, that means there’s a lot of room to climb. But does anyone expect Italy to become Switzerland on the Mediterranean?

Heck, at least one Italian region is so dour about the nation’s outlook that it’s petitioning to be annexed by Switzerland!

Italy’s lowest grade in Economic Freedom of the World is for fiscal policy. And since government spending consumes a bit more than half the nation’s economic output, you can understand why there’s so little activity in the private sector.

Especially when you consider that excessive government spending results in punitive tax policy.

Here’s another reason to be pessimistic. Italy’s demographic profile is terrible. I’ve previously explained that even a nation with a medium-sized welfare state is in deep trouble if its population profile begins to resemble a cylinder rather than a pyramid.

Well, that’s happening to Italy, except it has a large welfare state rather than a medium-sized one.

So there’s not much reason for hope.

P.S. Allow me to rephrase something. I wrote above that “Italy’s demographic profile  is terrible.” That’s not actually accurate. There’s nothing a priori wrong with women deciding to have fewer children. And it’s unambiguously good news that people are living longer. What I should have written is that Italy’s long-run fiscal outlook is terrible. And the reason for that grim situation is the combination of demographics and redistribution programs.

P.P.S. As a general rule, demographics is destiny. At least in most advanced nations. The exceptions are jurisdictions such as Hong Kong and Singapore. By the way, both have aging populations and extremely low birthrates (Singapore in last place out of 224 nations and Hong Kong third from the bottom). But because they have very low levels of redistribution, both jurisdictions are well positioned to deal with changing demographics.

P.P.P.S. I can’t resist the temptation to comment about Ireland. If you look at the chart showing post-2000 growth in major European nations, notice that Ireland has enjoyed far more growth than any of the other nations. When the recession hit, many leftists chortled that this was a sign that low-tax policies were a failure. That was always a silly assertion since a housing bubble was Ireland’s biggest challenge. But now that time has passed and we see that Ireland has out-performed other nations, the lesson is that countries that get reasonably good scores in Economic Freedom of the World prosper more than nations that get lower scores. Yes, policy matters.

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Italy vs. America: Battle of the Bureaucrats

Since the Bureaucrat Hall of Fame is getting crowded, I’ve decided we need a system to limit new entrants.

So today we’re doing an experiment. We’ll look at two separate stories about lazy and overpaid bureaucrats, and the comments section will determine which one actually is most deserving of joining the Hall of Fame.

Let’s start in Italy, where Alberto Muraglia stakes his claim to membership. Here are some excerpts from a story in the UK-based Times.

Video footage of a policeman clocking in for work in his underpants before allegedly heading back to his bed has become the symbol of an embarrassing absenteeism scandal among council employees in San Remo, on the Italian Riviera. Alberto Muraglia, a pot-bellied, 53-year-old officer, was secretly filmed as he clocked on at council offices. He lives in the same building, a converted hotel, where he occupies a caretaker flat — allowing him to register his presence at work, and then go back to bed, it is alleged.

To be fair, our Italian contestant has an excuse for his truancy.

Though it’s about as plausible as the Groucho Marx quote, “Who are you going to believe, me or your own eyes?”

Mr Muraglia’s wife, Adriana, said the family had an alibi for every instance in which her husband was suspected of clocking in at 5.30am, opening the gates to the council building, and then returning to bed. “Some mornings, if he was a few minutes late pulling on his trousers, he would clock in in that manner and then get fully dressed immediately after and go off to work,” Mrs Muraglia told La Stampanewspaper. “Some mornings he may have forgotten, and he telephoned me to clock in on his behalf.”

In any event, Signor Muraglia is not the only bureaucrat scamming the system.

More than a hundred employees — 75 per cent of the council workforce — are under investigation for allegedly skiving off in the resort town…investigators…filmed employees swiping their time cards, and sometimes those of multiple colleagues, before turning tail and heading off to pursue other interests. One employee, filmed paddling a kayak on the Mediterranean, is alleged to have spent at least 400 hours away from his desk in the planning office, a dereliction of duty estimated to have cost San Remo council more than €5,600.

Though I have to say 400 hours away from his desk is chicken feed compared to the Italian doctor who worked only 15 days in a nine-year period.

And I like how the bureaucrats awarded themselves bonuses for their…um…hard work.

Eight of the suspected skivers shared a €10,000 productivity bonus last year.

Just like the IRS bureaucrats and VA bureaucrats who got bonuses for improper behavior.

I guess there must be an unwritten rule in government: The worse your performance, the higher your compensation.

Now let’s see how Alberto compares to our American contestant. As reported by the Contra Costa Times, former City Manager Joe Tanner is scamming taxpayers for a lavish pension, yet he’s asking for more on the basis of a shady deal he made with the City Council.

By working just two and a half more years, retired Vallejo City Manager Joseph Tanner boosted his starting annual pension from $131,500 to $216,000. He wants more, claiming he’s entitled to yearly retirement pay of $307,000. …he is now taking his six-year dispute to the state Court of Appeal. At issue is whether CalPERS must pay benefits on a contract Tanner and the Vallejo City Council concocted to boost his pension.

An extra $85,000 of pension for the rest of his life just for working 2-1/2 years?

Geesh, and I though the Philadelphia bureaucrat who is getting $50,000 of yearly loot for the rest of her life, after just three years of “work,” had a good deal. She must be feeling very envious of Mr. Tanner.

Yet Mr. Tanner isn’t satisfied.

Here’s the part that seems like it should be amusing, but it’s not actually funny when you realize that government employee pensions are driving states into fiscal chaos.

Ironically, Tanner was a critic of pension excesses. …Yet his personal spiking gambit was breathtaking. The case exemplifies how some top public officials try to manipulate their compensation to grossly inflate their retirement pay. …Tanner’s quest for another $90,000 a year, plus inflation adjustments, for the rest of his life is unreasonable.

Here’s how he schemed to pillage taxpayers.

His first contract with Vallejo called for $216,000 in base salary, plus a list of add-on items that would soon be converted to salary, bringing his compensation to $306,000. But when CalPERS advised that the amount of those add-ons would not count toward his pension, he insisted the contract be fixed. The result: His contract was amended. The add-ons were eliminated and his base salary was simply increased to $306,000, plus management incentive pay and other items that brought the total to about $349,000. If CalPERS used that number, his pension would have started at $307,000 a year. CalPERS says it was an obvious subterfuge. The amended contract was never put before the City Council at any public meeting. And there was never a truthful public explanation for it.

Of course there wasn’t a truthful explanation.

Whether bureaucrats are negotiating with other bureaucrats or whether they’re negotiating with politicians, a main goal is to hide details in order to maximize the amount of money being extracted from taxpayers.

By the way, the example of Mr. Tanner is odious, but it’s not nearly as disgusting as what happened in another California community.

Before inviting readers to vote, I want to make a serious point. Government employee pensions are a fiscal black hole because they are “defined benefits” (DB plans), which means annual payments to retirees are driven by formulas. And those formulas often include clauses that create precisely the perverse incentives exploited by Mr. Tanner.

The right approach is to reform the system so that bureaucrats instead are in a “defined contribution” system (DC plans), which basically operates like IRAs and 401(k)s. A bureaucrat’s retirement income is solely a function of how much is contributed to his or her account and how much it earns over time. By definition, there is no unfunded liability. There’s no fiscal nightmare for future taxpayers.

Now that I have that cry for fiscal prudence out of my system, I invite readers to vote. Does the shirking underwear-clad Italian bureaucrat deserve to join the Hall of Fame, or should that honor be bestowed on the scheming and hypocritical American bureaucrat?

P.S. While I think DC plans are inherently superior (and safer for taxpayers) than DB plans, I will acknowledge that some nations manage to run DB plans honestly.

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Secession in the Modern World: Should Sardinia Leave Italy and Join Switzerland?

What’s the best country in the world?

My emotional response is that the United States belongs in the top spot.

But a more dispassionate analysis suggests that Switzerland is more deserving of the honor.

It has the 4th-freest economy according to the most recent rankings from Economic Freedom of the World, eight spots above the United States.

And it is ranked #2 in the Human Freedom Index, 18 spots higher than America.

There are several specific reasons why Switzerland is a good role model.

• It still maintains real federalism, and government is constrained when it takes place at the canton and municipal level.
• It has a lower burden of government spending, in part because of a very successful limit on yearly spending increases.
• The nation’s financial privacy laws, though weakened by foreign pressure, still provide some protection for human rights.
• There is a strong tradition of gun ownership.

Perhaps most important, the Swiss people are eminently sensible, as seen by their votes in favor of a spending cap and against class-warfare taxation, minimum-wage mandates, single-payer healthcare, and the death tax.

I’m not sure I would trust my fellow Americans to show similarly sound judgement.

So it’s surely true that there are lots of reasons to admire Switzerland.

Indeed, it’s such an attractive country that many people in Sardinia want to secede from Italy and have their island become a Swiss canton.

Here are some passages from a report in the Wall Street Journal.

“In Sardinia, people want to be Swiss.” Welcome to “Canton Marittimo,” or “Canton of the Sea,” a bid by Mr. Caruso, a 51-year-old dentist from Sardinia, and his comrade Enrico Napoleone, a car dealer there, to liberate Sardinia from Italy and tether it to Switzerland. …With a population of 1.5 million, the island, which lies between Italy and Spain, is today home to more than 10 parties calling for secession from Rome, emphasizing a culture, dialect, and history distinct from Italy’s mainland. …Mr. Caruso says…“Switzerland is the ideal nation to help us secure our culture and traditions.” … “Most of the local population would go for it, starting tomorrow,” said Matteo Colaone, a spokesman for Domà Nunch, a separatist group in the Italian regions surrounding Milan.

And what do the Swiss think about this idea?

At least one lawmaker likes the idea of adding cantons, though the government’s official position is not very welcoming.

In 2010, a member of Swiss parliament named Dominique Baettig proposed amending the constitution to aid regions in neighboring countries that want to become new cantons. Switzerland’s executive branch swiftly condemned it as “an unfriendly political act.” …There is little evidence the Swiss would want to adopt a rocky island that has many more sheep than people and per-capita economic output just one fourth that of Switzerland’s.

Here’s a video report on the topic from the WSJ.

In any event, it’s easy to understand why Sardinians are anxious to leave Italy and become part of Switzerland.

Here are some excerpts from a story in the U.K.-based Guardian.

“We think of Switzerland as a good teacher who could lead us on a path of excellence.” As the 27th canton, Sardinia, so goes the argument, would bring the Swiss its miles of stunning coastline and untapped economic potential. Sardinia could retain considerable autonomy, while also reaping the benefits of direct democracy, administrative efficiency and economic wealth.

Whereas staying in Italy means endless statism.

…their frustrations with inefficient public spending, complex layers of decision-making and intimidating bureaucracy can be heard throughout the country. …being a small businessman in Italy was “a continuous battle”. “It is fighting every day with a problem that the administration, the bureaucracy, creates instead of solves,” he said.

And while the Swiss government doesn’t seem overly excited about adopting Sardinia, ordinary Swiss citizens seem to like the idea.

An online poll of 4,000 people asking, in German, “should we accept Sardinia?” produced a 93% yes vote.

I suspect that an actual referendum in Switzerland wouldn’t be that lopsided, and the final result would probably depend on whether Swiss voters thought Sardinians were simply seeking good policy or whether they were looking for big handouts (Switzerland does have some redistribution from rich cantons to those with more modest incomes).

The bottom line is that there’s scholarly evidence suggesting that supporters of decentralization, self-determination, and limited government should favor the ability of regions to either declare independence or choose to join neighboring countries (assuming there’s a mutual desire for union).

That why I think secession or radical decentralization is/was the right approach in Ukraine, Belgium, and Scotland.

And as Walter Williams points out, secession can be peaceful, such as when Norway left Sweden early last century.

So I hope Sardinia moves forward.

Yes, it would be best for them to become part of Switzerland (and there already is an Italian-speaking canton). But even if the Swiss ultimately aren’t interested, the Sardinians at least would have a chance to escape Italy’s dysfunctional economic policies if they became independent.

P.S. The seven villages of Liechtenstein have the right to secede.

P.P.S. On a lighter note, here’s what would happen if the American right and left decided to secede from each other.

P.P.S. In our final postscript, let’s look at some fresh data about Switzerland.

Check out this chart (h/t: Constantin Gurdgiev) looking at how growth rates have changed in various European nations. As you can see, the 2002-2014 period has been grim for all nations compared to the years between 1980-2001. But Switzerland has had the smallest decline.

By the way, the left is always arguing that high tax burdens are necessary to help the poor. But as you can see from this chart (h/t: Fabian Wallen), every single income group is better off in low-tax Switzerland than high-tax Sweden.

In other words, big government is bad news for everyone (other than insiders), but it’s especially bad for poor people. Bono realizes that capitalism is the right model for upward mobility. Now let’s hope Pope Francis learns the same lesson.

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A Supranational Eurozone Government: Bad for Europe, Really Bad for Germany

If you want to pinpoint the leading source of bad economic policy proposals, I would understand if someone suggested the Obama Administration.

But looking to Europe might be even more accurate.

For instance, I’d be hard pressed to identify a policy more misguided than continent-wide eurobonds, which I suggested would be akin to “co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”

And now there’s another really foolish idea percolating on the other side of the Atlantic Ocean.

The U.K.-based Financial Times has a story about calls for greater European centralization from Italy.

Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency. …Italy and France have traditionally been among the most forceful backers of deeper European integration but other countries are sceptical about supporting a greater degree of political convergence. …Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered. “To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said.

This is nonsense.

The United States has a monetary union and an economic union, yet our fiscal policy was very decentralized for much of our nation’s history.

And Switzerland has a monetary and economic union, and its fiscal policy is still very decentralized.

Heck, the evidence is very strong that decentralized fiscal systems lead to much better outcomes.

So why is Europe’s political elite so enamored with a fiscal union and so opposed to genuine federalism?

There’s an ideological reason and a practical reason for this bias.

The ideological reason is that statists strongly prefer one-size-fits-all systems because government has more power and there’s no jurisdictional competition (which they view as a “race to the bottom“).

The practical reason is that politicians from the weaker European nations see a fiscal union as a way of getting more transfers and redistribution from nations such as Germany, Finland, and the Netherlands.

In the case of Italy, both reasons probably apply. Government debt already is very high in Italy and growth is virtually nonexistent, so it’s presumably just a matter of time before the Italians will be looking for Greek-style bailouts.

But the Italian political elite also has a statist ideological perspective. And the best evidence for that is the fact that Signore Padoan used to be a senior bureaucrat at the Paris-based OECD.

The Italian finance minister…served as former chief economist of the OECD.

You won’t be surprised to learn that French politicians also have been urging a supranational government for the eurozone. And presumably for the same reasons of ideology and self-interest.

But here’s the man-bites-dog part of the story.

The German government also seems open to the idea, as reported by the U.K.-based Independent.

France and Germany have agreed a new plan for closer eurozone political union… The new Franco-German agreement would see closer cooperation between the 19 countries.

Wow, don’t the politicians in Berlin know that a fiscal union is just a scheme to extract more money from German taxpayers?!?

As I wrote three years ago, this approach “would involve putting German taxpayers at risk for the reckless fiscal policies in nations such as Greece, Italy, and Spain.“

But maybe the Germans aren’t completely insane. Writing for Bloomberg, Leonid Bershidsky explains that the current German position is to have a supranational authority with the power to reject national budgets.

The German perspective on a political and fiscal union is a little more cautious. Last year, German Finance Minister Wolfgang Schaeuble and a fellow high-ranking member of the CDU party, Karl Lamers, called for a euro zone parliament (not elected, but comprising European Parliament members from euro area countries) and a budget commissioner with the power to reject national budgets if they contravene a certain set of rules agreed by euro members.

And since the German approach is disliked by the Greeks, then it can’t be all bad.

Former Greek finance minister Yanis Varoufakis, Schaeuble’s most eloquent hater, pointed out in a recent article for Germany’s Die Zeit that, in the Schaeuble-Lamers plan, the budget commissioner is endowed only with “negative” powers, while a true federation — like Germany itself — elects a parliament and a government to formulate positive policies.

But “can’t be all bad” isn’t the same as good.

Simply stated, any sort of eurozone government almost surely will morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.

So you can see why Europe’s political elite may be even more foolish than their American counterparts.

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Has Italy Passed the Point of No Return for Statism and Big Government?

The world is a laboratory, with lots of experiments to see if a nation can prosper with big government and pervasive intervention.

The results are not encouraging. I’ve written about France being a basket case, over and over again.

And I am equally pessimistic about Greece because the moochers and looters outnumber productive people in that country.

Heck, much of Europe is a mess because of widespread statism.

But the rest of the world is filled with bad examples as well. Japan has attracted my critical attention, and I have very little reason to think that nation has a bright future.

I’ve also dinged bad policy in Mexico and South Africa, so nobody can accuse me of being parsimonious when it comes to criticizing politicians that promote big government.

But the country that may be in the deepest trouble is Italy.

To understand the depth of the problem, you should read a recent article in the U.K.-based Spectator.

Here are some excerpts, starting with an anecdote about the government-funded opera house in Rome.

Financed and managed by the state, and therefore crippled by debt, the opera house — like so much else in Italy — had been a jobs-for-life trade union fiefdom. Its honorary director, Riccardo Muti, became so fed up after dealing with six years of work-to-rule surrealism that he resigned. It’s hard to blame him. The musicians at the opera house — the ‘professori’ — work a 28-hour week (nearly half taken up with ‘study’) and get paid 16 months’ salary a year, plus absurd perks such as double pay for performing in the open air because it is humid and therefore a health risk. Even so, in the summer, Muti was compelled to conduct a performance of La Bohème with only a pianist because the rest of the orchestra had gone on strike.

The story says all the staff eventually were fired.

Is that a sign that policy makers in Italy are sobering up? Or is it too little, too late?

The author of the column, Nicholas Farrell, is not optimistic.

Italy’s irreversible demise is a foregone conclusion. The country is just too much of a basket case even to think about. …The youth unemployment rate here is 43 per cent — the highest on record. That figure doesn’t factor in the black market, which is so big that the Italian government now wants to include certain parts of it — prostitution, drug dealing and assorted smuggling — into its official GDP figures.  …Just 58 per cent of working-age Italians are employed, compared with an average 65 per cent in the developed world. …Italy’s economy has been stagnant since 2000. Indeed, over the past five years it has shrunk by 9.1 per cent. …Italy’s sovereign debt, meanwhile, continues to grow exponentially. It is now €2.2 trillion, which is the equivalent of 135 per cent of GDP — the third highest in the world after Japan and Greece. …In Italy, as in France, a dirigiste philosophy has predominated since the second world war. The government is run like a protection racket… Even newspapers are publicly subsidised, which is why there are so many of them.

But high debt in Italy isn’t because of low taxes.

Anyone who works in the real private sector — the family businesses that have made Italy’s name around the world — is in a bad place. Italy has the heaviest ‘total tax’ burden on businesses in the world at 68 per cent… To start a business in Italy is to enter a Kafkaesque bureaucratic nightmare, and to keep it going is even worse. It also means handing the state at least 50 cents for every euro paid to staff.

So where do all this tax money go?

Not surprisingly, there’s a parasitic public sector that is very well compensated. Starting with the politicians.

Italian MPs are the highest paid in the civilised world, earning almost twice the salary of a British MP. Barbers in the Italian Parliament get up to €136,120 a year gross. All state employees get a fabulous near-final–salary pension. It is not difficult to appreciate the fury of the average Italian private sector worker, whose gross annual pay is €18,000. The phrase ‘you could not make it up’ fits the gold-plated world of the Italian state employee to a tee — especially in the Mezzo-giorno, Italy’s hopeless south. Sicily, for instance, employs 28,000 forestry police — more than Canada — and has 950 ambulance drivers who have no ambulances to drive.

I gather Sicily is like the Illinois of Italy, so those horrifying numbers don’t surprise me.

And don’t forget that Italy’s representative in the Bureaucrat Hall of Fame is from Sicily as well.

So what’s the solution to this mess?

Simple, adopt a policy of small government and free markets.

An Italian government that really meant business would make urgent and drastic cuts not just to the bloated, parasitical and corrupt state sector, but also to taxes, labour costs and red tape.

And the current Prime Minister, to be fair, is proposing baby steps in the right direction. Unfortunately, he’s being far too timid.

To get an idea of the magnitude of the problem, the Wall Street Journal opined on Italian labor markets, explaining that “pro-worker” interventions by government impose very high costs.

Led by the country’s largest union, the Italian General Confederation of Labor, or CGIL, the activists want to preserve Italy’s job guarantees as they are. Call it Italy’s economic suicide movement. …there is the Cassa Integrazione Guadagni. Under this income-assistance scheme, businesses that need to downsize can put some workers on “standby,” and the government will cover a significant share of the normal salary until the company can hire back the worker. The program strains the state’s budget, discourages workers from seeking other jobs, and prevents struggling companies from downsizing to stay competitive. Need to fire a worker for poor job performance? To do so, businesses must persuade a judge that no alternative short of termination was available—a process of administrative hearings and litigation that can take months and drain company resources. The World Economic Forum in its 2014-15 assessment of labor-market efficiency ranked Italy 141 out of 144 countries for hiring and firing practices, just above Zimbabwe.

And the biggest victim of the “pro-worker” interventions are…you guessed it…workers.

Italy has the largest number of small businesses in the European Union not because companies don’t want to grow, but because they fear growth will mean having to negotiate with the militant national unions like CGIL. The unsurprising result of all these barriers to firing and efficiency is that businesses are reluctant to hire. The official unemployment rate stands at 12%, and half of Italy’s young people are unemployed.

If you want more info about Italy’s dysfunctional labor markets, I also shared some good analysis from the WSJ back in 2012.

Let’s now circle back to a question asked above. Can Italy be saved?

Like Mr. Farrell, I’m not optimistic. There’s no pro-market political party in Italy. And the so-called technocrats have demonstrated amazing levels of incompetence, so they’re obviously not the solution.

P.S. There is one tiny bit of semi-good news from Italy. Over the past 8 years, government spending has increased, on average, by just 1.6 percent per year. The bad news, though, is that the private sector has grown at an even slower rate, so the actual burden of government spending has increased.

Between 1996-2000, by contrast, government spending grew by 1.1 percent per year. But since the private sector was growing, the burden of government spending fell as a share of GDP.

In other words, when you satisfy Mitchell’s Golden Rule, good things happen.

P.P.S. Even though Italy is a complete mess (or perhaps because it is a complete mess), you won’t be surprised to learn that a New York Times columnist thinks America should adopt Italian-style government policies.

P.P.P.S. Then again, American statists have been urging European-type statism in the United States for decades. To see where that leads, check out these cartoons from Michael Ramirez, Glenn Foden, Eric Allie and Chip Bok.

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