The Italian jobs act

'Jobs act' is what Matteo Renzi, the newly elected leader of the centre-left Democratic Party in Italy has called his proposed bill for economic reform and job creation. The English title is presumably a reference to Obama's American Jobs Act of 2011. And why should Italy not take inspiration from the US? Obama's jobs act was defeated in congress but the other elements of his economic policy which were based on the same principles have worked comparatively well. The economic recovery in the US has been much stronger in the US than in Europe and in particular the job market looks a lot better. (See an up-to date summary.) In the European context Italy is doing particularly badly. Not as badly as Greece or Spain but still unemployment has reached nearly 13% and youth unemployment is above 40%.

So is this Renzi emulating Obama? A case of successful learning from very recent history? Unfortunately not. The two draft bills don't have much more in common than the title. The core provisions of Obama's bill would have cut 245 billion USD of payroll taxes to increase workers net pay. It would also have extended unemployment benefits that were running out to the tune of a total 50 billion USD and spend over 100 billion USD for infrastructure projects, the modernisation of schools and colleges as well as the hiring of additional teachers, firefighters, etc. At the time economists expected the bill to create over a million jobs within a year and add more than a percentage point of growth to the US economy. All of this as a result of a 'positive boost to aggregate demand'. In other words, this was a thouroughly Keynesian bill.

Renzi's job act is a very different animal. It's about creating a more flexible and dynamic labour market. The basic idea here is that if it becomes easier to hire and fire people then more people will be hired. In this view rigidity of the labour market is causing unemployment. If we become better at matching supply and demand for labour then unemployment will decline. But that supposes that somewhere hidden there is a significant demand for labour that merely needs to be unleashed or that lower costs will somehow lead to an increase in output. This is completely different from Obama's proposal that was based on the view that demand needed to be increased through government spending and tax cuts.

Despite its American title Renzi's bill is based on the same notions that have underpinned European economic policies over the last years. If the proposal becomes law it will work just as well as Europe's policies have worked so far.

NB: The Euro of course limits the political choices that Italy can undertake individually. But the Eurozone as a whole would be very well advised to emulate some of the more demand oriented policies that have been applied in America.

In praise of economic history

'I can’t think of a time when history has been as useful as a guide to current events (and current action, if only policymakers would listen) as it has since 2008', says Paul Krugman on his blog. 

He's right, of course. But why are policy makers not listening? That may be in part the fault of historians. For fear of oversimplifying or distorting the complexity of historical events they're often too cautious about making historical comparisons. To some extent they're right. But the problem is that if professional historians don't make historical comparisons, unprofessional historians will make them for them.

An other issue is that political decision depend only in part on knowledge and insight. Power and interests play a big part in the events that historians study and that has not changed in the present. Take the decades before the French Revolution when many people knew and said out loud that there was something wrong with the fiscal system of the Ancien Régime. But the set-up and the power relationships of the system did not allow for reform within the existing framework. 

Is history trying to tell us something, and if so, what?

Asks Chris Clark in his own piece on the lessons from 1914 and on learning from history in general. Great piece. I am tempted to steal this para as a description of what this blog does: 

'It remains important that we challenge manipulative or reductive readings of the past when these are mobilised in support of present-day political objectives. The recourse to history is most enlightening when we understand our conversations about the past are as open-ended as our reflections on the present should be. History is still "the great instructor of public life", as Cicero said. Being blind to the future, we have no other. But it is an eccentric educator.' 

Whose national interest?

The second similarity between 1914 and 2014 that Münchau sees is that the narrow minded pursuit of national interests led/leads European powers to slide into disaster. Today, he argues, the different Euro-countries look at the crisis through different lenses. The result is political stalemate because no consensus can be reached on how to solve the crisis.

This is Münchau's map of national interests: Germany sees the crisis as a problem of moral hazard. The crisis countries spent beyond their means and don't work hard enough. Italians reject German supply side economics and want 'macro economic coordination'. The French and Spanish resent outside interference in their national affairs. Fins and Dutch view the crisis countries with the same critical eye as the Germans. And the British don't really care about all of this but only use the Euro crisis as a backdrop for national politicking.

The notion of 'national interests' is always a bit questionable and is highly problematic both in 1914 and 2014. Chris Clark stresses that the motives that guided European government in 1914 do not easily fit the categories of national interest. Instead, group interests of political cliques and economic lobbies played important roles. Other historians before him have made this point even stronger. Indeed, one has to wonder in what way the German ambition of annexing steel and mining areas in northern France were part of the nation's interest. The German soldiers who died in the war and their families would probably have preferred a longer life in a smaller Germany to becoming pawns in the imperial plans of German industrialists and generals. 

Can the notion of national interest be applied with any more benefit to the Euro crisis? Some doubts may be in place. The German government is not alone in pushing a political agenda that is informed by 'supply side' economics in general and more specifically a good dose of neoliberalism. In the crisis countries many among the political elite and in the public agree to this narrative. Are Italians really all closet keynesians? Certainly not Monti and there is no political party of any consequence that bases its program on an economic analysis that is radically different from Merkel's. In Greece there is, Syriza, but despite its remarkable success it remains a minority party. The same pattern is true in other crisis countries. 

Some governments of the crisis countries ask for a slower pace of austerity compared to what the German government demands. But this is not because they disagree in principle. It's mainly because it is them, rather than Angela Merkel, who have to face the angry crowds with the pitchforks. If Merkel's constituency was not in Rügen but in Crete she, too, might prefer a slower paced austerity.

The austerity policies of Europe are not a German project but they're being carried out with broad political support across the Eurozone. Moreover, there are substantial parts of the German public that don't agree with the austerity policies and that don't benefit from them either. Among those who don't agree there is, well, Münchau himself. And while there is broad support for Merkel's policies the left wing party Die Linke (over 8% in the last elections) has mounted a principled opposition. 

Finally, Germany's economic model that relies on strong export surpluses and low labour costs is far from being in the 'national interest'. Many German workers have low salaries and their living standards are not keeping pace with the overall progress of prosperity. Many Germans and many German companies may be doing well but the nation as a whole is not necessarily. 

That European governments from Lisbon to Berlin are preferring 'supply side' economics to a Keynesian reading of the crisis is less to do with national interests and more with the domestic implications of alternative policy models. Anyone adopting a Keynesian approach has to address the problem of weak domestic demand and this leads inexorably to the issue of the distribution of wealth and incomes. And this is for many politicians, German or not, the 'third rail' of economic policy. 

Sleepwalking into disaster, again?

The first thing to say is that the 1914-2014 comparisons that are cropping up in public debate at the moment are different from the Brüning analogies of last year in important respects. That's just as well because the historical events that are being invoked were fundamentally different: Brüning's were economic policies that aggravated an economic crisis with dramatic political consequences. In contrast, the immediate causes of the First World War were diplomatic and military. The misguided political decisions of European powers in the run-up to 1914 did not lead to an economic disaster but to a war. True, this war caused economic instability well into the post-war period. But primarily the First World War was a political and military event with political and military causes.

Therefore the analogies that we are seeing today are not, as in Brüning's case about the economic issues. Rather commentators highlight what they see as similarities in the patterns of political decision making in 1914 and today. Wolfgang Münchau points to two analogies in particular:  (1) today, as in 1914, the pursuit of narrow national interests lead European nations to jeopardize stability (2) the principal decision makers now and then were not sufficiently aware of the size of the risks that they are taking by insisting on this parochial approach. Let's look first at the second part of his analogy and keep the first part for another post.

 I think this kind of comparison is overstating the naiveté of political actors now and then. It is a topos of historical writing that WWI was unlike any conflict before and that contemporaries did not expect it to be as long and destructive. But is it really true that contemporaries did not and could not know what kind of war they were risking? It is true that WWI represented a new type of industrial warfare. But there had been wars in the decades before WWI that had clearly foreshadowed the fact that industrialisation would profoundly change warfare along with virtually all other aspects of life. As Thomas Laqueur points out in his review of Chris Clark's 'The sleepwalkers':

'Why Europeans should have remained unaware that in the American Civil War hundreds of thousands of men had been mowed down as they crossed open fields against the fire of new and more accurate rifles is puzzling. But the history of the imagination is not a history of sleepwalking, whatever else it is.'

 And today? Can policy makers claim to be unaware of the economic risks they are running? Given the historical experience of the Great Depression and the disastrous political and social effects of  deflationary economic policies in the interwar period it is hard to argue that today's political leaders or members of the public are unaware of the risks that are associated with today's handling of the Euro crisis. Not everyone may be an expert in 20th century history but the analogies are widely discussed in media outlets that enjoy broad readership. Krugman, Münchau and other Cassandras don't write in obscure publications but in some of the most widely read and respected news outlets in the western world. It is true that their views are controversial and that mainstream opinions are dominated by other approaches. But no one who is in charge today can cite ignorance as a defense if things go pear shaped. Policy makers and voters have been warned.

When looking at 1914 and 2014 we need to ask why many actors took decisions that endangered European stability. But I doubt that ignorance of the possible consequences should feature very prominently among the answers.

Start digging your trench

When I started to write this blog about a year ago comparisons of the current situation with the 1920s and 30s were all the rage. Brüning seemed to be everywhere.

But that is so 2013. Now it looks like it's 1914 all over again. Chris Clark wrote about the parallels between Euro crisis and outbreak of WWI a while ago in his book 'The sleepwalkers'. Now Angela Merkel apparently read the book and slammed it--figuratively--on the table of the last European summit. Wolfgang Münchau agrees with her at least partly. Only Timothy Garton Ash does not quite buy the comparison. (Of course Gideon Rachman beat everyone to the 1914 comparison by using it already early last year in an article about the tensions between China and its neighbours.)

This is fertile ground for this blog and there will be much to say about 1914-2014 comparisons in the coming weeks. While I am organising my thoughts get in the mood by watching this.

I'll be back...

after two weeks. That's what I said in my last post. It took me a bit longer. Apologies for that.

The reason for my silence was this. Publication date should be end of March.

Regular posting will resume now.