The Economist‘s Burgernomics: Too Silly for Words

Mid-summer is generally known as the silly season. This post is devoted to the silliest piece of economics around, moreover originated, supported and spread by The Economist, that only last month pontificated on the state of macroeconomics today.

The Economist's Big Mac index provides an alternative to the actual market exchange rate, for assessing the foreign trade competitiveness of different countries. “It is based on the theory of purchasing-power parity (PPP), which says that exchange rates should equalise the price of a basket of goods in each country. In place of a range of products we use just one item, a Big Mac hamburger, which is sold worldwide. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value benchmark.” (Cheesed off, 16 July 2009, Burgernomics points to uncompetitive currencies in continental Europe).

Hold it right there

The theory tells us that there is an infinite number of PPP exchange rates, each for an alternative basket of goods. If we choose a basket of internationally tradeable commodities, actually traded by a country, trends of the implicit PPP exchange rate with another currency will be one of the many factors that will determine whether or not a country is internationally competitive and whether its exchange rate will be sustainable. Provided that the reference currency is not itself undervalued, a condition amply satisfied by the dollar today but not invariably by reference currencies. The very notions of competitiveness and sustainability are conditional on a given growth rate: a country may be competitive, and its exchange rate sustainable, at a low growth rate but not at a more ambitious one; the concept of competitiveness is undetermined until a target growth rate is specified. There are other factors affecting the exchange rate and its competitiveness and sustainability, such as Foreign Direct Investment and portfolio investment flows; the stock of public and of private external debt; the sustainability of government deficits; credit-ratings; interest rates and their comparative trends.

What is more, for a given set of all significant factors other than PPP, a country does not necessarily have to be competitive in a wide range of tradeables. It is perfectly sufficient for a country to be competitive in one single commodity, as long as its world demand is sufficiently elastic with respect to price and with respect to income – oil for instance, or microchips – for that country to be internationally competitive, even at an ambitious growth rate and a PPP rate which is overvalued in terms of a broader basket of tradeables. It is completely irrelevant whether a country is or is not competitive on any number of non-tradeables, let alone one single non-tradeable like the Big Mac, whose only attraction is its global homogeneity thanks to stipulations of the McDonald franchises. The price of perishable good, that deteriorates within minutes of its preparation, together with its chips going immediately and irredeemably soggy, is no indication of a country’s foreign trade competitiveness. A country might as well worry about its competitiveness in the export of frozen omelettes.

A hair-cut PPP Index?

It would be much better, at that point, to take into consideration another non-tradeable, such as a hair-cut. For haircuts have a much lower incidence of non-labour costs than a Big Mac, and lower variability of labour productivity in hair-cutting across countries, and therefore at least a better indication of relative wage rates – which are very important factors in affecting international competitiveness. A hair-cut PPP exchange rate has some kind of meaning, instead of being utterly meaningless and irrelevant like the Big Mac PPP. Although its relevance will depend on a country’s incidence of baldness, fashion for hair length and colour, just as the relevance of the Big Mac PPP index will depend also on the incidence of vegetarians, health-minded consumers, gourmets and Hindus (so much so that there is no Big Mac index for India). Moreover in some countries (Russia, Brazil and China) burgers are posh, in other countries they are the pits.

The same considerations, and more, vitiate the use of a one-good PPP index – whether tradeable or not – for another purpose to which PPP exchange rates are commonly put, namely income or consumption comparisons (per capita or total) across countries. With the added complication that the basket appropriate to one country may be inappropriate to another, and diverging results are likely to obtain according to the arbitrary choice of one or another basket. And a basket appropriate for the rich is bound to be inappropriate for the poor. For instance, the recognition that the poor tend to buy lower quality food, in smaller and more frequent purchases, and enjoy lower quality public services, in 2008 forced the World Bank to revise upwards its estimate of the world poor from just under 1 billion to 1,400 million – at a stroke. A classic, thorny, insoluble index number problem. Here too the use of a single good is laughable.

Lighthearted?

“When demand is scarce and jobs are being lost, no one relishes a strong currency. A country with an uncompetitive exchange rate will struggle to sell its wares abroad and will also cede its home market to foreign firms. A weak exchange rate, by contrast, encourages consumers to switch from pricey imports to cheaper home-produced goods and services. So which countries has the foreign-exchange market blessed with a cheap currency, and which has it burdened with a dear one? The Economist's Big Mac index, a lighthearted guide to valuing currencies, provides some clues.” (CLICK ON THE TABLE BELOW TO ENLARGE, OR ON THE LINK IN THE SECOND PARAGRAPH ABOVE TO ACCESS THE ORIGINAL ARTICLE AND TABLE)

It is not so much that the table above, or the conclusions drawn from it, look serious rather than lighthearted. “The dollar buys the most burger in Asia. A Big Mac costs 12.5 yuan in China, which is $1.83 at today’s exchange rate, around half its price in America. Other Asian currencies, such as the Malaysian ringgit and Thai baht, look similarly undervalued. Businesses based in continental Europe have most to be cheesed off about. The Swiss franc remains one of the world’s dearest currencies. The euro is almost 30% overvalued on the burger gauge. Denmark and Sweden look even less competitive.” According to the table, the Norwegian Krone is 72% overvalued.

It is the reasoning behind the lightheartedness that is faulty: “Care is needed when drawing quick conclusions from fast-food prices. The cost of a burger depends heavily on local inputs, such as rent and wages, which are not easily arbitraged across borders and tend to be lower in poorer countries. So PPP gauges are better guides to misalignments between countries with similar incomes.” Why, are the prices of burgers and hair-cuts easily arbitraged across borders? Bankers, businessmen and students love simplistic, unqualified propositions about economics. But the Big Mac Index is dis-educative and misleading to the point of being dangerous.

“On that basis, the markets have been kindest to British exporters. A year ago the pound was overvalued by more than a quarter on the Big Mac gauge. Now it is close to its fair value against the dollar and looks cheap against the euro. That shift has upset some other EU countries that had relied on selling to spendthrift British consumers. But after years of struggling with an overvalued currency, British firms will feel they deserve a little mercy.”

Silly economics for a silly currency in the silly season. I wish all my readers a good Ferragosto.

Exit Wounds

The amazing scale – absolute and relative – of the global response to the current financial crisis, and therefore the difference with respect to the similar crisis of 1929-32, is dramatically illustrated by a simple comparison. According to the United Nations Millennium Campaign, “since the inception of aid (overseas development assistance) almost 50 years ago, donor countries have given some $2 trillion in aid. And yet over the past year, $18 trillion has been found globally to bail out banks and other financial institutions. The amount of total aid over the past 49 years represents just eleven percent of the money found for financial institutions in one year.” (Deputy Director Sering Falu Njie, 24 June 2009).

One of the most important items on the agenda of L’Aquila G-8 meeting of 8-10 July was the discussion of the appropriate exit strategy from the extraordinary fiscal and monetary policies with which national governments, central banks and international financial institutions have responded – some more than others – to the global crisis.

At L’Aquila the German Chancellor Angela Merkel was the first to raise the issue of a collective exit strategy. Apparently Barak Obama, Nicolas Sarkozy and Gordon Brown responded negatively, wishing to continue to implement the stimuli and deeming the exit premature. No common strategy was eventually agreed, national governments retaining total discretion over their own exit policy, which is exactly what would have happened without the G-8.

In the United States the $789 billion Economic Stimulus package finally approved on 17 February ($507 billion spending and $282 billion tax relief) is being implemented rather slowly. By early July, $158 billion expenditure had been committed, only one third of that actually spent, plus temporary tax cuts totalled $43 billion; the bulk will be spent in 2010 (NYT, 9 July). “A debate had developed over whether the stimulus bill was having the desired effect or not, with some economists and Democrats arguing that a further economic boost was needed, and many Republicans saying that the rise in unemployment was proof that Mr. Obama's approach had failed. Concerns were also rising about whether the surge in government debt would lead to higher interest rates that would undo much of the effect of the package.” (ibidem).

By mid-2009, out of France’s $36 bn stimulus package 50% was already spent and a further 25% is due in the second half of 2009, with the last 25% in 2010. In Germany two stimulus packages were worth a combined €81bn. Both countries are sticking to their plans but “appear determined to resist a further large-scale discretionary boost to their economies” (Ben Hall and Chris Bryant, FT 21 July). German attitudes may change after the election, though a recent decision of the German Constitutional Court has tightened fiscal rules.

The same division on the urgency of exit characterises the position of official financial institutions. An exit strategy was urgently called for by the European Central Bank President, Jean-Claude Trichet, while the Federal Reserve does no more than the reviewing of the instruments available for possible use in an exit, and the IMF considers it premature.

The IMF

The IMF used to be criticised – rightly I believe – for its responsibilities in past crises such as the post-socialist transition recession of the early 1990s, the South East Asian crisis of 1997, the Russian crisis of 1998 (see for instance Joseph Stiglitz, Globalisation and its Discontents, 2002). But times have changed and so has the IMF, which played a leading role in the current initiative for a global fiscal stimulus, first proposed by IMF Managing Director Dominique Strauss-Kahn at the emergency summit of G-20 leaders on 15 November 2008. On that occasion the focus shifted from rescuing failing financial institutions to supporting domestic demand, which had fallen off sharply almost everywhere: a global fiscal stimulus of the order of 2% of global GNP was first mentioned.

In an interview with IMF Survey Online on 29 December 2008 Olivier Blanchard, the IMF Chief Economist and Carlo Cottarelli, Director of the IMF Fiscal Affairs Department, fleshed out the call for such a global fiscal stimulus. Blanchard listed three parallel sets of measures necessary for the recovery. First, banks’ recapitalization and isolation of bad assets, in order to resume a sustained flow of credit; the execution of this measure “is complex and will take time”. Second, “the use of monetary policy to increase demand”, except that “room for further monetary easing … is shrinking: in some countries, policy interest rates are approaching zero. Moreover, the effect of lower interest rates on demand is weakened by the disruption in credit markets. This points to a central role for the third set of measures, fiscal stimulus. In the short run, such a stimulus, if designed right, can limit the decline in demand as well as output”. Was this not rather against the grain of IMF traditional policies? “In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times, and the balance of risks today is very different.“

“If no fiscal stimulus is implemented, then demand may continue to fall. And with it, we may see some of the vicious cycles we have seen in the past: deflation and liquidity traps, expectations becoming more and more pessimistic and, as a result, a deeper and deeper recession. If, instead, a fiscal stimulus is implemented but proves unnecessary, the risk is that the economy recovers too fast. Surely, this risk is easier to control than the risk of an ever deepening recession.”

Olivier Blanchard then goes further: “I would put it even more starkly. What is needed is not only a fiscal stimulus now but a commitment by governments that they will follow whatever policies it takes to avoid a repeat of a Great Depression scenario. If they do so, the fear that people and firms have today will fade, and demand will pick up. “

The IMF would take a lead in coordinating the fiscal stimulus. “When economies are linked by a high degree of trade openness, fiscal expansion in one country translates in part into an increase in demand for the goods of other countries, and so may result in a larger trade deficit. Thus, each country is, rightly, reluctant to embark on a fiscal expansion on its own. The best solution is for all countries to act jointly. But this requires some form of commitment or coordination. This is why the IMF has been closely engaged in discussions with member countries on how to design an appropriate fiscal response. Given our global membership, we are uniquely placed to do so.” In other words, Maynard Keynes is alive and well and inspiring the IMF.

To put its money where its mouth was, the IMF raised its lending commitments to a record $157 billion. It loosened the conditionality attached to its programmes, both on fiscal policy and on inflation (for instance in Hungary in October and in Iceland in November 2008). It sought “to take account of the needs of the most vulnerable by developing or enhancing social safety nets.”(A changing IMF, Factsheet, May 2009). It is seeking to triple its lendable resources to $750 billion; to this purpose it has raised much of its $250 billion target in bilateral government loans (Japan $100 billion; Canada $10 billion, Norway $4.5 billion; EU members have committed around $100 billion, and Switzerland $10 billion). It is working at an injection of $250 billion additional liquidity into the global economy, through a general allocation of an IMF Special Drawing Rights (SDRs). The IMF also plans to go ahead with its first issuance of interest-bearing promissory notes to supplement its lendable resources; China is already committed to purchase up to $50 billion, with both Russia and Brazil committing up to $10 billion each (the notes have an initial maturity of three months, extendable for up to five years). The Fund has held discussions with the 26 members of the New Arrangements to Borrow (NAB) and its potential new members about expanding it and making it more flexible. Currently, the IMF can raise about $50 billion through the arrangement, with the U.S. share being about $10 billion. There is an envisaged increase in the NAB of up to $500 billion, of which $100 billion US contribution has already been approved (Andrew Tweedie, the Fund’s finance chief, 6 July 2009).

At the end of June the IMF urged “governments to fully implement the spending measures they have announced to combat the global economic crisis and not to relax in supporting an incipient recovery. (John Lipsky, IMF First Deputy Managing Director, in Paris on June 26). For “although experience varied across countries and programs, actual spending of announced stimulus measures was relatively low in many cases.” Lipsky paid lip service to the “need to start preparing a clear exit strategy for government intervention in both the fiscal and monetary areas” but said no more than that, not even an inventory of policy instruments like that of Bernanke (see below).

In a recent interview with Euronews.net on 24 June 2009, Olivier Blanchard reckoned that in the advanced countries the upturn might take place at the end of 2009, with a weak slow recovery “going back maybe to a stable path within three to five years, it’s going to take a long time”. “Until [the end of 2010], unemployment is going to increase and then, after this, you need growth higher than normal in order to decrease unemployment.”

Central banks “have increased their balance sheets enormously. It was largely because they bought assets that private investors didn´t want to buy. … as the recovery comes, private investors are willing to buy these assets and central banks will be able to sell these assets back to them. So, I am not really worried about the inflation”.

“…the fiscal part is more worrisome.” “What [governments] should not do is stop the fiscal stimulus now. Because if they did this – private demand at this stage is still very weak – if they stopped, basically, pushing demand, we would probably not see the recovery. So, there has to be fiscal stimulus at least this year, probably next year and maybe even the year after. “

“Surely, now, it is not time to take away the fiscal stimulus or to start increasing interest rates. The economy is very weak, private demand is very weak. If you think about consumers, they are not in the mood to spend. If you look at firms, they are not in the mood to invest. So, if you were to take away the stimulus, you´d basically stop the recovery.” “It´s absolutely essential for the moment to continue with the monetary policy and fiscal policy that we have had in the last year.“ God bless you, Olivier, even though you used to disapprove of my taste in ties.

Ben Bernanke

In an article in the Wall Street Journal (21 July 2009) the chairman of the Federal Reserve confirms the consensus within the Fed that “accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. … We are confident that we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner”. Nobody ever doubted that the Fed has the necessary tools, it is their smoothness in use that is problematic.

Above normal reserves of $800 trillion need to be eliminated or their effects neutralised; their unwinding might take too long without additional measures, such as paying an interest to banks on their reserve balances (which puts a floor - currently at 0.25% - under short-term market rates). If that did not work (because many non-bank financial intermediaries are not eligible for getting such an interest), Ben Bernanke lists four additional instruments. First, “large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions”. Second, “the Treasury could sell bills and deposit the proceeds with the Federal Reserve”. Third, the Fed has been authorised by Congress to pay interest on banks’ balances at the Fed, which would not be available for the federal funds market. Fourth, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market – a time honoured, classic operation. “Each of these policies would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.”

This is no exit plan, simply an inventory of exit vehicles, with no indication of timing, scale, sequencing of their deployment. “The Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening with the mix of tools to best foster our dual objectives of maximum employment and price stability.” In other words, we can and will do it at some point in a distant future, but let’s keep the markets guessing. Excellent.

Jean-Claude Trichet

In a key address at Munich University on 13 July, Jean-Claude Trichet stated that “preparations for exit are important. The [ECB] Governing Council will ensure that the measures taken are quickly unwound, and the liquidity provided is absorbed, once the macroeconomic environment improves. Long-term refinancing operations (like operations with shorter maturity) provide liquidity over a fixed time horizon and run off in a fully predictable way. By contrast, the unwinding of outright purchases typically requires an additional decision, namely whether to hold the securities to maturity – and if not, when to sell. The route taken by the Eurosystem limits such decisions to our covered bonds purchases and for the rest relies on built-in mechanisms for the re-absorption of liquidity.“

“A return to sound, sustainable public finances, thus strengthening overall macroeconomic stability, must be ensured. Euro area governments should prepare and communicate ambitious and realistic fiscal exit and consolidation strategies within the framework of the Stability and Growth Pact.” …

Trichet then puts it even more explicitly and strongly: “I would warn against a common and unfortunate view suggesting that it is currently too early, or even totally inopportune, to envisage appropriate exit strategies. Such a view is, in my opinion, plain wrong – for three reasons:”

“First, because decision-makers’ primary quality is that they always display “sang froid” and keep their composure, particularly in the most demanding and turbulent times. Viewing today’s actions and decisions from a longer-term perspective is part of the necessary intellectual discipline.” [Objection: this is no reason at all, it is simply monetary machismo, of a kind often indulged in by central bankers].

“Second, because nobody should confuse the existence of a credible exit strategy – which can be activated at the right moment – with the decision to actually embark on that strategy. Often such confusion explains people’s fierce opposition to the mere existence of exit strategies.” [Objection: sure, but scheduling a surgical operation does not do much to help the patient to recover without it, especially from an illness that depends so much on the patient’s morale and will to recover; one might as well provisionally book a funeral].

“And third, because the very existence and the visibility of a credible exit strategy will foster confidence today and will therefore contribute to the re-activation of the economy here and now. This is true for monetary policy: our [euro-area] 329 million fellow citizens are very profoundly attached to price stability in the medium term, and the credibility of our policy is essential for improving their confidence now.” [Objection: surely you don’t book a plane until you know when and where you are going, who with and how many, what for and on what budget and how fast you need to get there].

“This is equally true for fiscal policy: economic research has demonstrated that two-thirds to three-quarters of European households are “Ricardian”. This means that they consume less and save more if they lack confidence in the soundness of future public finances.” [Objection: even those alleged two-thirds/three-quarters “Ricardian” households will not be 100% Ricardian, matching their higher taxes exactly with higher savings. Indeed it seems more rational to respond to higher government expenditure, especially in deficit, with higher rather than lower private expenditure in view of expectations of higher employment and income continuity. I know from introspection that I am 0% Ricardian].

No Deficit, We Are German

The German “fiscal space” has been severely constrained by a decision recently taken in Berlin – unilaterally, without the statutory consultations with EMU partners and institutions – to introduce a balanced-budget law in the German constitution. As if the so-called Stability and Growth Pact were not enough of a fiscal straightjacket, from 2016 it will be illegal for the federal government to run a deficit of more than 0.35 per cent of GDP, and from 2020 the federal states will not be allowed to run any deficit at all. Once this is done, it can only be with a two-thirds majority: “future fiscal policy will be in the hands of the justices of Germany’s Constitutional Court,” while until now structural deficits were allowed by the German constitution as long as they were covered by public investments – the “golden rule” (Wolfgang Münchau, FT 21 June).

Münchau sees the danger that “Germany might end up in a procyclical downward spiral of debt reduction and low growth”… “the prescribed pursuit of a balanced budget would require ever greater budgetary cuts to compensate for a loss of tax revenues. … the new government will have to start cutting the structural deficits by 2011 at the latest. There is clear danger that the budget consolidation timetable might conflict with the need for further economic stimulus, should the economic crisis take another turn for the worse. One could also construct a virtuous cycle … If Germany were to return to a pre-crisis level of growth in 2011, and all is well after that, the consolidation phase would then start in a cyclical upturn.” … “Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case, the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case, economic and political tensions inside the eurozone are going to become unbearable.” …

“…there is no rule in economics to suggest that zero is the correct level of debt, which is what a balanced budget would effectively imply in the very long run. The optimal debt-to-GDP ratio might be lower for Germany than for some other countries, but it surely is not zero. … While the balanced budget law is economically illiterate, it is also universally popular. Average Germans do not primarily regard debt in terms of its economic meaning, but as a moral issue. … The balanced budget constitutional law is therefore not about economics. It is a moral crusade, and it is the last thing, Germany, the eurozone and the world need right now” (Münchau, cit.)

Burden sharing

A serious side effect of the G-8 inconclusive discussions on a collective exit strategy was that it buried the issues of fleshing out the details of several of the April G-20 proposals; and of the “fair sharing of the burden of the stimulus among countries” (raised by Jean-Paul Fitoussi and Joseph Stiglitz, Chairmen of “The Shadow GN” – a group of independent experts they set up at Columbia University and the Luiss University in Rome – on “The Ways Out of the Crisis and the Building of a More Cohesive World”, May 2009). “To our knowledge, – Fitoussi and Stiglitz say – a state of fair sharing has not yet been reached: the efforts made by the EU, in particular, appear to be well below what should have been done in view of the size of its GDP and high savings rate” (ibidem). Not to speak of the G-8 host country, Italy, the ultimate free rider that never really entered the coordinated reflationary effort, limiting its net participation to a token, miserly 0.2% of its GNP – according to the IMF – plus a few purely cosmetic measures in the very long run, the brainchild of creative accountant Giulio Tremonti, who therefore at L’Aquila was wisely silent on exit strategies in general and Italy’s own exit (de che? as Romans say) in particular.

A Goldilocks exit strategy?

In an article on “In search of a Goldilocks exit strategy” Jean Pisani-Ferry, Director of the Bruegel Think Tank in Brussels, recognises that “it is still too early to act”, and that “against the background of a still very weak economy it is advisable to err on the side maintaining support for a little too long” [for the non initiated, ‘Goldilocks’ is economic jargon for a state of the economy which is neither ‘too cold’ nor ‘too hot’, thus ruling out both high unemployment and high inflation]. All the same Pisani-Ferry calls for early discussions of an exit’s possible course, in order to reassure and calm markets about fears of inflation resurgence, to formulate an appropriate sequence of exit measures, to confront and solve the accompanying problems and to facilitate a coordinated approach. His optimum sequencing envisages first the cleaning up of the banking sector; second, consolidation of fiscal policy, in strict cooperation between governments and central banks; third, the “normalisation” of monetary policy; here he rightly sees monetary authorities reluctant to accept “being hostage to potential government procrastination”.

One thing that should not worry us at all is the lack of exit strategies coordination. That the stimuli should be coordinated simultaneously on a global scale was necessary to enhance their effectiveness, but the problem with an exit strategy is precisely the opposite: a simultaneous global exit raises the danger of a cumulative recessionary drive. As long as the exit is not premature and does not turn into a stampede, it is much better if every country goes its own way, staggering their respective exits. The only desirable coordination would be a coordinated staggering of exits - when the time is right - to simulate a random process, instead of an uncoordinated early exit by precisely those countries that have been running the stronger stimuli.

In turn, the coordination between monetary and fiscal policy, recommended by Pisani-Ferry, is desirable at a national level in any case and not just in the exit from macroeconomic stimuli; it should not necessarily take the form of the coordination between an internationally coordinated monetary policy and an internationally coordinated fiscal stance on a global scale. The problem is in the euro area, because the territorial scope of fiscal policy is national and that of monetary policy is European. It is very hard to coordinate the ECB monetary policy with the net collective fiscal stance of its 16 members – which is what matters – in spite of the so-called Growth and Stability Pact, for this only sets ceilings to individual fiscal stances.

Unsustainable, but why not for as long as it’s necessary?

Clearly the current high fiscal deficits, record low interest rates, large-scale monetary easing and other state interventions are not sustainable indefinitely. The general problems surrounding exit measures and their sequencing are worth discussing, as something that sooner or later – let’s hope sooner rather than later, for it will imply that the crisis is over sooner – will have to happen at some uncertain date in an indefinite future. But inflation has been falling everywhere to rates unseen for several decades; in the euro area it was down to negative average rates in June-July 2009. And even Jean-Claude Trichet says that “Looking ahead, we expect prices to remain dampened over the medium term… all indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2%.” (cited).

Therefore fears of inflation resurgence are definitely exaggerated and premature. Moreover it is not only a question of prices, but also of wages and of asset prices. “Wage deflation seems to have begun even in the industrialised countries. If it continues, it will further depress aggregate demand. Asset price inflation has been the destabilizing factor at the immediate origin of the crisis” (Fitoussi and Stiglitz, cited).

The sheer official mention of a possible early end to extraordinary measures will reduce and possibly annul the impact of those measures, such as were taken. Given the self-fulfilling nature of pessimistic expectations, loose talk may cause unemployment.

On Charity and Truth – from/to Stefano Zamagni

Stefano Zamagni, professor of economics at Bologna University, has commented via e-mail (in Italian) on my post on the recent encyclical Caritas in Veritate (Love in Truth, or Charity in Truth): The Vatican Road Is Paved With Good Intentions, Thursday 16 July 2009. He kindly expressed his interest and appreciation and gave his immediate responses. His original e-mail is reproduced at the end of this post.

Veritas in Caritate and its inverse

First, Zamagni considers my writing "about Love in Truth and its apparently equivalent inverse, Truth in Love". He argues that “the difference between the two is great and therefore there is no equivalence. Caritas in Veritate means the affirmation of primacy of the good over the truth and the just (Aristotle); Veritas in Caritate instead means following Plato, who affirmed the primacy of the true over the good and the just. A herd of philosophers has debated at length on this theme: they should not be ignored”[“the just” seems to have been misplaced the first time it occurs, but there is no ambiguity, DMN] . The Encyclical states, at the very beginning, “… the need to link charity with truth not only in the sequence, pointed out by Saint Paul, of veritas in caritate (Eph 4:15), but also in the inverse and complementary sequence of caritas in veritate” (para. 2). I only meant to say that the notions of caritas in veritate and its inverse were equally plausible. I suppose that strictly speaking both I and Zamagni are wrong here: we should have both spoken of complementarity, instead of equivalence (DMN) or opposition (SZ).

Superfluous versus overabundant

Second, Zamagni points out that “The concept of overabundance is philosophical and not economic. It has nothing to do with the notion of superfluous as we use it today. Thomas Aquinus devotes two chapters of his Summa to explain the difference”. The fact is that in the New Oxford Dictionary of English (the language of the official version of Caritas in Veritate used in my post) superfluous means “unnecessary, especially through being more than enough”, overabundant means “excessive”, while abundance is “a very large quantity of anything”, and all have similar roots meaning overflowing: respectively super-fluere and abundare. Anybody giving uncommon meanings to common words has the duty to indicate in what ways they depart from standard uses, under penalty of being misunderstood without redress.

“Civil markets”

Third, Zamagni says that I have missed the central point of the encyclical. The true, great novelty of Caritas in Veritate, he claims, is the proposition that “the civil market economy should not be confused with the capitalist economy. The civil market is the genus, the capitalist market is one of its species. The market is a way of organising economic activity; capitalism is a model of society – as Marx taught. Finally, the civil market was born at least three centuries before capitalism, as all the great historians have long recognised. Thus what Caritas in Veritate says is that, in today’s conditions, we can and we should go back to the civil market economy, whose characteristic is the inclusion of the reciprocity principle into the economic sphere, in addition to (not instead of) the other two founding principles: the principle of the exchange of value equivalents and the principle of redistribution. The difference between civil markets and capitalist markets has not been realised precisely because until a few years ago economists have continued to think that the exchange of equivalents was the same thing as reciprocity (see S. Kolm, Reciprocity, CUP, 2008)”.

I confess that I have not ever heard before the term “civil market”, which I can only take to mean a market tout court – unless it is a market that is not “incivil” in the sense of being monopolistic and generating unemployment, poverty, inequality and environmental destruction. Markets do not lend themselves to qualifiers other than those indicating their object (e.g. financial markets) or their degree of competition, such as competitive/oligopolistic/monopolistic, regulated/unregulated. In his encyclical Benedict XVI never speaks of a “civil market”, no wonder I missed it. If you Google “mercato civile” you find references either to the civilian/military dichotomy or to recent publications authored/co-authored by Stefano Zamagni; if you Google “civil market” you get masses of references almost exclusively of the first kind. This again indicates a rather idiosyncratic, maybe formerly common but now obsolete, personal usage of these terms. Words can change the world by inspiring human action, not by the manipulation of concepts and labels.

“Civil economy”

Benedict XVI does mention “civil economy” in Caritas in Veritate, in the context of the relationship between business and ethics. “In recent decades a broad intermediate area has emerged between the two types of enterprise [profit-based companies and non-profit organizations]. It is made up of traditional companies which nonetheless subscribe to social aid agreements in support of underdeveloped countries, charitable foundations associated with individual companies, groups of companies oriented towards social welfare, and the diversified world of the so-called “civil economy” and the “economy of communion”. This is not merely a matter of a “third sector”, but of a broad new composite reality embracing the private and public spheres, one which does not exclude profit, but instead considers it a means for achieving human and social ends. Whether such companies distribute dividends or not, whether their juridical structure corresponds to one or other of the established forms, becomes secondary in relation to their willingness to view profit as a means of achieving the goal of a more humane market and society. It is to be hoped that these new kinds of enterprise will succeed in finding a suitable juridical and fiscal structure in every country. Without prejudice to the importance and the economic and social benefits of the more traditional forms of business, they steer the system towards a clearer and more complete assumption of duties on the part of economic subjects. And not only that. The very plurality of institutional forms of business gives rise to a market which is not only more civilized but also more competitive.” [para. 46]. This is not a new dawn, it is something that “is to be hoped”, and really not all that much to go by.

In his lecture Dal mercato capitalistico al mercato civile (15/9/2008) Stefano Zamagni advocates “… transforming the capitalist market to a civil market. This is not a Darwinian market, like the capitalist market that tends to reward the best and marginalize the less efficient. This is not acceptable... I propose a return to the spirit of the origins when the market was born, so as to resolve the embarrassment of riches and avoid the stagnation of the circuit of wealth production and of distribution so as to include all”. In practice, this involves 1) “opposing the financialisation of the economy by means of alternative financial instruments,” raising the share of “ethical finance controlling today 20% of global transactions” [he gives no definitions and no source]. 2) Microcredit, which he says was first practiced by the Franciscans in the XV century; 3) Fair trade [commercio equo e solidale] initiatives, which Zamagni recognizes to be stagnant at the moment. In truth, again, not much to go by.

Of course – at least in principle if seldom in practice – markets can be used by economic systems other than capitalism, but neither Benedict XVI nor Stefano Zamagni characterise a new economic system, or even a significantly reformed capitalist system. I would be very interested in Stefano Zamagni fleshing out in significantly greater detail the market system he has in mind (or pointing at the relevant literature). Is it a pre-capitalistic system? Is it a globally regulated market system, especially for financial instruments? Are "civil markets" segmented; are prices controlled; do markets clear? Who picks the winners in a non-Darwinian system? Is there a role for collective and/or state ownership and entrepreneurship? Who re-distributes what to whom? What is the transition path that might lead us there from where we are now? Hopes alone do not change the world.

Value, Profit, Non-Profit

The notion of an intrinsic value of commodities, distinguished, and therefore possibly diverging, from their market prices, involves the imposition of an arbitrary and therefore indeterminate set of values. In the last twenty years the price of oil varied between $9 and $148 a barrel: at what point and in terms of what, was it at or closest to equivalent exchange value?

Marx talked of relative values for the purpose of asserting the existence of exploitation even if profit made relative prices diverge from relative labour values (the labour actually embodied in commodities, directly and indirectly) and was not talking of those values as a basis for equivalent exchange (an improper use to which his epigones put the labour theory of value). I respect Serge-Christophe Kolm’s work, particularly his Caffè Lectures on Reciprocity, but I find it of limited application here (and, frankly, in most other areas of real economic policy).

Zamagni goes on to say that “This is why the approach of Mauss and that of non-profit institutions has nothing to do with the current of thought of the civil economy – which is typical of the Italian Enlightment: the Milan School (Beccaria, Verri, Romagnosi) and the Naples School (Genovesi, Galiani, Dragonetti)”. He is also surprised at being classed as a supporter of non-profit institutions, against which he has been fighting for many years. His objection is that the non-profit approach “views capitalism as something that is there and should not be touched; state failures and market failures are there and non-profit institutions have the role of patching the system and calming street protests. Whereas the idea of the civil economy is that of changing the capitalist logic from inside in order to go beyond it, which is probably what young Marx had in mind before getting bogged down with the so-called Transformation Problem”. “This is the true ‘revolutionary’ road in the present circumstances, … while left wing politicians (including the extreme left) continue to invoke and hope for a real revolution which they know will never be realised, and right wing politicians continue to support the purely cosmetic non-profit approach and corporate philanthropy.”

I am sure I am not the only person who associates Stefano Zamagni’s work with the non-profit approach, not least in view of his interview on Italian radio on 7 July, but I stand corrected. Yet I cannot regard his as a revolutionary road, for the little he has given us of his destination is only a marginal reform of the capitalist system.

Is the Church concerned with its own laicity?

Finally, Zamagni notes that “The Church does not want to, and should not, put forward concrete action proposals” like the ones suggested in the last paragraph of my post, for “that would be a patent violation of the principle of laicity [laicità], as understood by Rawls and Habermas.” I do not expect my suggestions should be ever entertained by the Church, which is fair enough, but frankly I do not see how the actions I recommend would contravene the principle of laicity, when the diametrically opposite actions actually taken by the Church are not thought to contravene it. Moreover, the Church does not seem to me to be concerned with maintaining its own laicity in the first place.

Traduttore traditore, possibly. So, for the benefit of my Italian readers, and for the record, I reproduce here the original text of Stefano Zamagni’s e-mail, for which I thank him hoping that he might be induced to comment further.

Stefano Zamagni’s original e-mail

Caro Mario, grazie molte per la tua nota che ho letto con piacere e con interesse. Ti scrivo alcune reazioni a caldo.

Primo. "about Love in Truth and its apparently equivalent inverse, Truth in Love" (p.6). la differenza è grande e dunque non c'è equivalenza. Caritas in Veritate (CV) significa affermare il primato del bene sul vero e sul giusto (Aristotele); Veritas in Caritate significa invece seguire Platone che affermava il primato del vero sul bene e sul giusto. Una schiera di filosofi ha poi discettato a lungo sul tema: concediamo loro almeno l'onore delle armi!

Secondo. Il concetto di sovrabbondanza è filosofico e non economico. (p.7). Non c'entra nulla con la nozione di superfluo, così come la usiamo noi. oggi. Tommaso d'Aquino dedica due capitoli della sua Summa per spiegarne la differenza.

Terzo. Il punto centrale della CV non è quello che tu hai notato. Si tratta di un punto che costituisce la vera grande novità di questa enciclica, soprattutto rispetto alla Centesimus Annus. Infatti, viene qui chiarita quella confusione di pensiero che ha generato lotte (anche cruente) e dissapori tra studiosi per quasi due secoli: l'economia di mercato civile non va confusa con l'economia capitalistica. Il mercato civile è il genus; il mercato capitalistico è una sua species. Il mercato è un modo di organizzare l'attività economica; il capitalismo è un modello di società - come Marx ha insegnato. Infine, il mercato civile è nato almeno tre secoli prima del capitalismo, come tutti i grandi storici hanno da tempo riconosciuto. Allora ciò che la CV dice è che, nelle condizioni odierne, si può e si dovrebbe tornare all'economia di mercato civile, la cui cifra è l'inclusione dentro la sfera economica del principio di reciprocità, in aggiunta (ma non in sostituzione) agli altri due principi fondativi: il principio dello scambio di equivalenti di valore e il principio di redistribuzione. E' perche' fino a pochi anni fa gli economisti hanno continuato a pensare che lo scambio di equivalenti fosse la stessa cosa della reciprocita' che non si e' colta la differenza fra mercati civili e mercati capitalistici. (Se ne ha voglia, cfr. S. Kolm, Reciprocity, CambridgeUniv. Press, 2008).

Ecco perche' l'approccio di Mauss e quello del non profit - da te citati - nulla hanno a che vedere con il filone di pensiero dell'economia civile - che e' tipico dell'Illuminismo italiano: scuola di Milano (Beccaria, Verri, Romagnosi) e scuola di Napoli (Genovesi, Galiani, Dragonetti). Chi mi conosce sa che da anni mi batto contro il non profit ( e ora anche in sede istituzionale ): mi ha dunque sorpreso che tu scriva il contrario di cio' che e'. (Se fossi interessati e ne avessi tempo non ho esitazione ad inviarti i miei scritti dell'ultimo decennio sull'argomento). Perche' non mi piace il non profit? Perche' la sua logica e': c'e' il capitalismo e non si tocca; ci sono tuttavia fallimenti sia del mercato sia dello Stato; allora si facciano intervenire le organizzazioni del non profit per porre un qualche rimedio, per attaccare pezze e per tenere "calma la piazza". L'idea dell'economia civile invece e' quella di mutare dall'interno la logica del mercato capitalistico per andare verso il suo superamento. A mio giudizio, questo era l'intendimento implicito anche del Marx degli scritti giovanili, prima che il nostro si impaludasse nel "problema della trasformazione".

Forse l'ho tirata troppo in lungo, anche se avrei tante altre osservazioni da avanzarti. Termino dicendo che mi vado sempre piu' convincendo che questa e' la vera via "rivoluzionaria" nelle condizioni storiche del momento. Con l'azione politica, si tratterebbe solo di accelerare la transizione - che e' concretamente possibile. Invece, e' la societa' civile (alcuni suoi spezzoni) a tirare con fatica la carretta, mentre i politici di sinistra (anche estrema) continuano a invocare o a sperare la rivoluzione vera e propria perche' sanno che mai potra' realizzarsi, e i politici di destra continuano a sostenere il non profit e la filantropia d'impresa (corporate philantropy) in chiave cosmetica.

Un'ultima annotazione. La Chiesa non vuole e non deve avanzare proposte concrete di azione come quelle da te suggerite nell'ultimo paragrafo della tua nota. Sarebbe una patente violazione del principio di laicita', cosi' come inteso da J. Rawls e J. Habermas.

Grazie ancora Mario per il tuo spunto. Sarebbe bello poterne discutere liberamente e senza filtri ideologici. Ma ormai l'Accademia non e' piu' il luogo in cui si coltiva il pensiero critico.

Ti invio un saluto caro e buon lavoro,Stefano Zamagni

P.S. - Ti allego un mio scritto recente sulla crisi in atto. [The lesson and warning of a crisis foretold: a political economy approach].

“Up to a point, Your Majesty”

“No One Saw it Coming” …

When Queen Elizabeth II visited the London School of Economics in November 2008, “she asked Professor Luis Garicano, of the economics' management department, about the origins of the credit crisis, saying: "Why did nobody notice it?". Prof Garicano told the Queen: "At every stage, someone was relying on somebody else and everyone thought they were doing the right thing." The Queen described it as "awful". Prof Garicano said afterwards: "The Queen asked me: 'If these things were so large, how come everyone missed them?'". Now the Queen has been sent a letter by professor Tim Besley of LSE (a member of the Bank of England Monetary Policy Committee) and other eminent economists, explaining how "financial wizards" failed to "foresee the timing, extent and severity" of the economic crisis. The letter ends: "In summary, your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole." (The Observer, 26 July 2009).

“The idea that ‘no one saw this coming’... has been a common view from the very beginning of the credit crisis, shared from the upper echelons of the global financial and policy hierarchy and in academia to the general public”: Dirk J. Bezemer, of Groningen University (“No One Saw This Coming": Understanding Financial Crisis Through Accounting Models, 16 June 2009). Bezemer provides abundant examples: “Few, if any people anticipated the sort of meltdown that we are seeing in the credit markets at present” (former USA Treasury Minister Robert Rubin, at a session at the Brookings Institution in Washington, 14 March 2008). On 9 December 2008 Glenn Stevens, Governor of the Reserve Bank of Australia commented on the “international financial turmoil through which we have lived over the past almost year and a half, and the intensity of the events since mid September this year”. He went on to assert: “I do not know anyone who predicted this course of events”. On 9 April 2009 Nout Wellink – chairman of the Basel Committee that formulates banking stability rules and Dutch representative at the European Central Bank - told his audience that “[n]o one foresaw the volume of the current avalanche” (Bezemer, cited).

Predictably economists get a rough treatment, in connection with the global financial crisis, also in a major review of “The state of Economics”, published by The Economist of 18 July 2009. “There are three main critiques: that macro and financial economists helped cause the crisis, that they failed to spot it, and that they have no idea how to fix it.”

… But Some Knew Better Than Others

Tim Besley and his colleague signatories of the letter to the Queen can speak only for themselves. Undoubtedly lots of economists in high places made utter fools of themselves for views that were so spectacularly falsified by the crisis. In February 2005 Alan Greenpan asserted to the US House Financial Services Committee that "I don't expect that we will run into anything resembling a collapsing [housing] bubble, though it is conceivable that we will get some reduction in overall prices as we've had in the past, but that is not a particular problem."(quoted by Bezemer). In its Report on “Financial Globalization: A Reappraisal” (August 2006) the IMF confirmed its established view that “there is little systematic evidence to support widely cited claims that financial globalization by itself leads to deeper and more costly crises” (p.1). Anatole Kaletsky (FT 13 November 2008) wrote of “those who failed to foresee the gravity of this crisis - a group that includes Mr King, Mr Brown, Alistair Darling, Alan Greenspan and almost every leading economist and financier in the world.”

Bezemer (who provides the above quotes and more) shows that, on the contrary, “it is not difficult to find predictions of a credit or debt crisis in the months and years leading up to it, and of the grave impact on the economy this would have - not only by pundits and bloggers [absit inIuria verbis!], but by serious analysts from the world of academia, policy institutes, think tanks and finance.” He list a dozen, for starters.

Anticipations of the Housing Crisis and Recession

Dean Baker, US co-director, Center for Economic and Policy Research. “ …plunging housing investment will likely push the economy into recession.” (2006).

Wynne Godley, US Distinguished Scholar, Levy Economics Institute of Bard College [1970–1994 Director of the Department of Applied Economics, University of Cambridge;
1956–1970 The Economic Section of the H.M. Treasury (Deputy Director from 1967): and professional oboist ]. “The small slowdown in the rate at which US ousehold debt levels are rising resulting form the house price decline, will immediately lead to a …sustained growth recession … before 2010”. (2006). “Unemployment [will] start to rise significantly and does not come down again.” (2007).

Fred Harrison, UK Economic commentator. “The next property market tipping point is due at end of 2007 or early 2008 …The only way prices can be brought back to affordable levels is a slump or recession” (2005).

Michael Hudson, US professor, University of Missouri “Debt deflation will shrink the “real” economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worse.” (2006).

Eric Janszen, US investor and iTulip commentator. “The US will enter a recession within years” (2006). “US stock markets are likely to begin in 2008 to experience a “Debt Deflation Bear Market” (2007).

Stephen Keen, Australia associate professor, University of Western Sydney. “Long before we manage to reverse the current rise in debt, the economy will be in a recession. On current data, we may already be in one.” (2006).

Jakob Brøchner Madsen & Jens Kjaer Sørensen, Denmark professor & graduate student, Copenhagen University. “We are seeing large bubbles and if they bust, there is no backup. The outlook is very bad” (2005)” The bursting of this housing bubble will have a severe impact on the world economy and may even result in a recession” (2006).

Kurt Richebächer, US private consultant and investment newsletter writer “The new housing bubble – together with the bond and stock bubbles – will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession” (2001). “A recession and bear market in asset prices are inevitable for the U.S. economy… All remaining questions pertain solely to speed, depth and duration of the economy’s downturn.”(2006).

Nouriel Roubini, US professor, New York University “Real home prices are likely to fall at least 30% over the next 3 years“(2005). “By itself this house price slump is enough to trigger a US recession.” (2006).

Peter Schiff , US stock broker, investment adviser and commentator “[t]he United States economy is like the Titanic ...I see a real financial crisis coming for the United States.” (2006). “There will be an economic collapse” (2007).

Robert Shiller , US professor, Yale University “There is significant risk of a very bad period, with rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected.” (2006)

Note: for sources and more detail, please refer to the Appendix, Bezemer 2009 (cited).

No “Stopped Clock Syndrome”

Moreover Bezemer shows that his findings do not suffer from the “‘stopped clock syndrome’. A stopped clock is correct twice a day, and the mere existence of predictions is not informative on the theoretical validity of such predictions since, in financial market parlance, ‘every bear has his day’.”

He finds that accurate predictions are systematically associated with a particular type of economic model; “that ‘accounting’ (or flow-of-funds) models of the economy are the shared mindset of those analysts who worried about a credit-cum-debt crisis followed by recession, before the policy and academic establishment did. They are ‘accounting’ models in the sense that they represent households’, firms’ and governments’ balance sheets and their interrelations. If society’s wealth and debt levels reflected in balance sheets are among the determinants of its growth sustainability and its financial stability, such models are likely to timely signal threats of instability. Models that do not – such as the general equilibrium models widely used in academic and Central Bank analysis – are prone to ‘Type II errors’ of false negatives – rejecting the possibility of crisis when in reality it is just months ahead.”

Forthcoming posts will include comments on The Economist’s review of The state of Economics, and a discussion of Exit Strategies.

We should be so lucky to have a double dip

The global crisis of 2008-2009 was abrupt, rooted in the financial markets of advanced countries where it went through synchronised stages that sometimes can be pinpointed to the day, then spreading to the real economy in different ways, timing and speeds in different countries. It is a seismic crisis as deep – so far – as that of 1929-32. In the end it may turn out to be shorter, and therefore less deep than that, thanks to the more appropriate, large scale and synchronised – also so far – policy responses by world governments and international financial institutions.

The suddenness, financial origins and stages of the crisis are best synthesised and illustrated by the evolution of Interbank Market Spreads, i.e. the difference between 12-month Euribor/Libor and Overnight Index Swap rates, in basis points (from “The ECB Enhanced Credit Support”, a keynote Address by the European Central Bank President, Jean-Claude Trichet, given on 13 July 2009 at the University of Munich; Figure 1 below).

Figure 1
All was well in the euro, sterling and US dollar markets until August 2007, the “Beginning of the Turmoil”, when the US crisis of subprime mortgages erupted. The Turmoil worsened gradually until September 2008 (on 15 September, Lehman Brothers went bankrupt) when it began to intensify reaching a peak in November 2008; the spreads have declined gradually since then but are still as high in July 2009 as they were around July 2008.

It is best to let Jean-Claude Trichet speak: “…we have to acknowledge that there was a dramatic shift in focus in large parts of the financial sector – away from facilitating trade and real investment towards unfettered speculation and financial gambling. Hans-Werner Sinn has called these deviations “ Kasino-Kapitalismus”. Of course, we all know that financial liberalisation and financial innovation have made important contributions to the overall productivity of our economies. The securitisation of loans, for example, had tremendous potential for the diversification and efficient management of economic risk. But securitisation was implemented in a precarious way. Banks and non-banks were able not only to sell loans, but also to place them fully off-balance sheet as soon as they had been granted. This resulted in weak underwriting standards and a lack of incentives for lenders to conduct prudent screening of loans. “ …

“The credit boom leading up to the crisis was exacerbated by three multipliers:


- first, incentives: ill-designed compensation schemes for loan managers and traders that reinforced the shortening of their time horizons;
- second, complexity: increasingly complicated and opaque financial instruments that made it difficult for holders of securities to assess the quality of the underlying investments; and
- third, global macroeconomic imbalances: a chronic shortage of savings in some industrialised economies was made possible by an excess of savings in other parts of the world."


"In mid-2007 the turmoil erupted. This was sudden, but not entirely unexpected. Indeed, as long ago as January 2007, I myself expressed the views of my fellow central bankers, when I indicated that markets would need to prepare for a general reassessment and repricing of risk, which was clearly underestimated at that time. [1] Some months later, this repricing occurred very suddenly, triggering turbulences in the interbank market. The consequences of this very sharp repricing threw the credit boom into reverse. The asset cycle turned, and many of the missing links in the financial chain were exposed.

The collapse in mid-September of last year of a major financial institution [Lehman Brothers] transformed the financial turmoil into a global financial crisis. Immediately, financial intermediaries restored liquidity buffers, scaled down their balance sheets and tightened lending conditions. They dramatically reduced exposure to the risks that they had imprudently accumulated during the period of financial euphoria. Collectively, they engaged in a large-scale “deleveraging” process. Banks’ intermediation was sharply reduced, and loans to companies were curtailed.

A long-term trend that had brought credit risk spreads on loans extended by international financial intermediaries to historical lows was suddenly reversed. A credit squeeze ensued which took a severe toll on the real economy.”

Barry Eichengreen of Berkeley and Kevin O’Rourke of Dublin have tracked down the course of the current crisis against that of the 1929-32 global crisis, in terms of industrial output, Stock Exchange values and international trade volume (Vox.eu 6 April, updated 4 June 2009). They have taken as the respective starting points of the two crisis the earlier peaks in world industrial production, which occurred respectively in June 1929 and April 2008. Month after month, our current recession replicates the trends of 1929-32 or is worse. Signs of improvement appeared in the 9 June update, but do not alter the basic picture: the latest levels to which our recession has plunged in 2008-2009 are still below the corresponding levels reached at the equivalent time in 1929-30. “Today's crisis is at least as bad as the Great Depression” (cit). See Figures 2-4.


Figure 2. World Industrial Output, Now vs Then (update in green)

Source: Eichengreen and O’Rourke (2009) and IMF.

Figure 3. World Stock Markets, Now vs Then (update in green)


Source: Global Financial Database. From: Eichengreen and O’Rourke (2009)

Figure 4. The Volume of World Trade, Now vs Then (update in green)

Source: League of Nations Monthly Bulletin of Statistics. From : Eichengreen and O’Rourke (2009).

This “trade destruction” appears to have been much worse than in the corresponding months of 1929-32; it is one of the most worrying aspect of our recession. As recently as May 2008 the IMF External Relations Department could still issue a paper “Globalization: A Brief Overview”(“By IMF Staff”), saying that “Globalisation is irreversible: In the long run, globalization is likely to be an unrelenting phenomenon” (italics in the original). Six month later an important episode of de-globalisation was already under way.

“To sum up, – Eichengreen and O’Rourke conclude – globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event. That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline.”

The hope is that the massive macroeconomic intervention jointly set in motion in particular by the G-20 of April 2009 but also before and after, eventually will reverse the course of our recession. Monetary policy has responded faster and more strongly in the present crisis: in 7 major countries interest rates have been cut more rapidly, from a lower level, down to unprecedented low levels. In 19 major countries money supplies in the run up to the beginning of the current crisis had been growing faster than before 1929, but the expansion has continued faster in the current crisis, moreover without any prospect of the money supply contraction of 1929-32. Government budgets have been running consistently higher deficits than in 1929-32, on a world basis, especially in the advanced countries, but also in emerging countries.

At the latest count the overall global stimuli – fiscal and monetary, national and international – appear to have reached a previously unimaginable scale of the order of $15 trillion. We have grown indifferent to inconceivably large sums, and the arithmetic of government finance has fundamentally altered (“Is Trillion the New Billion?”, asked Robert Hahn and Peter Fassel, Economist Voice, http://www.bepress.com/ev, January 2009. Italian readers are easier to stun if they think of a trillion dollars as 1.4 million billions of old Italian liras). But most of those trillions are only on paper or are not yet getting spent. It is arguable whether the small improvements noted by Eichengreen and O’Rourke amount to “green shoots of recovery” (they deny it). Yet there have been premature calls for an exit strategy (for instance by the German Chancellor Angela Merkel and the ECB President Jean-Claude Trichet). Worse, a collective exit strategy was considered – though rejected for the time being – by the latest G-8. We should be so lucky to have a double dip, a W-shaped pattern of GNP instead of an L-shaped one or worse.

The Vatican Road Is Paved With Good Intentions

"Jesus was the first socialist, the first to seek a better life for mankind" – Mikhail Sergievich Gorbachev is reported to have said. He was neither the first nor the last to claim this: in 2007 Venezuelan President Hugo Chàvez said that Jesus was “the greatest socialist in history”. It is true that some passages in the Gospel are suggestive: “The first shall be last ... ”, “the meek shall inherit the earth ... ”, the Good Samaritan and “love thy neighbour”, Lazarus and the rich man, chasing off the merchants from the Temple, “You cannot serve God and money”, the camel through the eye of the needle … But these are calls for greater equality, reciprocity, social justice, to be achieved through individual honesty and generosity, not through political or collective action, let alone a revolution (contradicted by “Give onto Caesar…”).

Benedict XVI’s long-anticipated social encyclical, “Caritas in Veritate” [Love in Truth], released on Tuesday 7 July 2009 on the eve of the G8 meeting at L’Aquila, is supposed to be the Catholic Church’s enlightened response to the current challenges of globalization and the financial crisis, of widespread poverty and rising unemployment, and the growth of inequality. It has been greeted as a radical, progressive manifesto (for instance by the Governor of the Bank of Italy Mario Draghi, in “Senza etica non c’è sviluppo”, L’Osservatore Romano, 9 July 2009). Admittedly Love in Truth, compared with the G8 wishy-washy “President’s Summary”, does sound quite radical. But in truth and charity Benedict XVI’s text is a remarkably bland, vague and ineffectual treatment of the issues it is supposed to address, just like all the previous acclaimed papal encyclicals from 1891 to date. Indeed in some respects – for instance on intellectual property protection, on immigration, on its neglect of monopoly – in spite of new noises about full employment, non-profit organisations and the economics of gift, it represents a marked regress with respect to earlier statements of the Catholic Church’s “social doctrine”, especially those of John Paul II.

Leo XIII: Rerum Novarum (1891)

Leo XIII discusses the implications of an economic system based on “a new property form”, capital, and a new form of labour, “wage labour”, echoing Marx in defining labour as a commodity freely exchanged in the market, insecurely and without reference to any vital minimum, involving a society "divided into two classes, separated by a deep chasm” (n.132). The system had been developing for some time but towards the end of the XIX century was reaching a critical point: “… society …was torn by a conflict all the more harsh and inhumane because it knew no rule or regulation. It was the conflict between capital and labour, or — as the Encyclical puts it — the worker question” (as John Paul II commented in his celebratory Centesimus Annus in 1991).

Leo XIII condemned class war, but was aware that class peace could be built only on justice (n. 130); he stressed the dignity of work and of the worker. Among the rights worthy of protection, next to ownership he listed the right to associate in Trades Unions, to limit working hours, protect the working conditions of children (he did not seem to mind at all that children should actually be working instead of going to school) and women, and the right to a “fair wage”, understood as the right to the necessary means of subsistence. A fair wage is a woolly concept, like that of a fair price. “A fair price – I was taught in the 1960s by a scathing Nicky Kaldor – is that which gives a fair rate of return on labour costs reckoned at a fair wage”: the indeterminacy of two out of these three variables and their possible/likely inconsistency given the state of technology clearly did not occur to Leo XIII and his economic advisors. But apart from that Leo XIII was adamant, though he may have not understood fully how far-fetched, radical and probably impossible his proposition was : “A workman's wages should be sufficient to enable him to support himself, his wife and his children. If through necessity or fear of a worse evil the workman accepts harder conditions because an employer or contractor will afford no better, he is made the victim of force and injustice"(n.131). He did not stop to consider whether unemployment was fairer or less fair than an unfair wage, which he should have.

Leo XIII was equally critical of liberalism and socialism. "To remedy these wrongs [the unjust distribution of wealth and the poverty of the workers], the Socialists encourage the poor man's envy of the rich and strive to do away with private property, contending that individual possessions should become the common property of all...; but their contentions are so clearly powerless to end the controversy that, were they carried into effect, the working man himself would be among the first to suffer. They are moreover emphatically unjust, for they would rob the lawful possessor, distort the functions of the State, and create utter confusion in the community" (n.99). Leo XIII deserves full credit for this prophetic criticism of what came to be known as “realised socialism” (Rudolph Bahro’s expression); John Paul II paid him such credit in his Centesimus Annus.

From Pius XI to Paul VI

The “social doctrine” of the Catholic Church was further developed by Pius XI in Quadragesimo Anno (1931). Not surprisingly Pius XII left no mark whatever on such doctrine. John XXIII in Mater et Magistra (1961) and in Pacem in Terris (1963) stated unambiguously that the social question had become world-wide.

Paul VI, in Populorum Progressio (1967, which Benedict XVI rightly or wrongly considers “the Rerum Novarum of the present age”), tersely denounced “the scandal of glaring inequalities not merely in the enjoyment of possessions but even more in the exercise of power” (n.9), called for integral development, “the good of every man and of the whole man” (n.14), and stigmatized “a system … which considers profit as the key motive for economic progress, competition as the supreme law of economics, and private ownership of the means of production as an absolute right that has no limits and carries no corresponding social obligation. This unchecked liberalism leads to dictatorship rightly denounced by Pius XI as producing “the international imperialism of money””.

It is interesting to note that Paul VI recognized the possibly adverse impact of population growth on development. “It is true that too frequently an accelerated demographic increase adds its own difficulties to the problems of development: the size of the population increases more rapidly than available resources, and things are found to have reached apparently an impasse. From that moment the temptation is great to check the demographic increase by means of radical measures” – though of course he rejected such measures in the name of the freedom of married couples, the moral law, the right to procreation and the law of God.

“Rich nations must give to developing countries”. “… the superfluous [sic] wealth of rich countries should be placed at the service of poor nations” – not a radical proposal: Paul VI does not explain why only superfluous wealth should be given . “At Bombay [4 December 1964] we called for the establishment of a great World Fund, to be made up of part of the money spent on arms, to relieve the most destitute of this world”. He was aware that developing countries relying on primary products’ exports were at a disadvantage in trade with highly industrialized nations; on that ground he questioned liberalism but as a remedy he only called on the goodwill of industrialized countries. “The world is sick. Its illness consists less in the unproductive monopolization of resources by a small number of men than in the lack of brotherhood among individual and people”. “Excessive economic, social and cultural inequalities among peoples arouse tensions and conflicts, and are a danger to peace”. “We appeal to all Our sons… Changes are necessary, basic reform are indispensable: the laymen should strive resolutely to permeate them with the spirit of the Gospel”.

Looking back, it is surprising that this collection of bland and trite platitudes, without any real initiative to promote any change for the better, should ever have been regarded by anybody – believer or not – as something worthy of attention and comment. And how could John Paul II suggest that “The Encyclical [Rerum Novarum] and the related social teaching of the Church had far-reaching influence in the years bridging the nineteenth and twentieth centuries. This influence is evident in the numerous reforms which were introduced in the areas of social security, pensions, health insurance and compensation in the case of accidents, within the framework of greater respect for the rights of workers”. As if such reforms had nothing to do with Trades Union militancy, War and Post-War developments, the response to the Great Crisis, emulation of the social policies of “realized socialism”. But John Paul’s pontificate really did make a difference.

John Paul II

John Paul II made several important pronouncements on the Church’s “social doctrine”. His Centesimus Annus endorsed fully Leo XIII’s Rerum Novarum and developed it to discuss the 1989 fall of the socialist system of central-eastern Europe and its transition to capitalism; to criticize liberalism and western consumerism, to introduce environmental questions, to raise much more forcefully than ever before (in Church doctrine) issues of poverty and inequality. Two other encyclicals of his had prepared the ground: Laborem Exercens on human work (14 September 1981) and Sollicitudo Rei Socialis on the current development problems of individuals and peoples (30 December 1987).

But a much lesser known “Post-Synodal Apostolic Exhortation” Ecclesia in America, delivered in Mexico City on 22 January 1999, expounds and develops his approach to globalization. And two official documents produced during his pontificate and submitted respectively to the United Nations and the World Trade Organisation, on the excessive protection of intellectual property rights, moved the Vatican from general moral exhortations to concrete, progressive policy proposals, from an audience of the faithful to the appropriate global institutions.

Centesimus Annus (1991)

John Paul II attributed the 1989 collapse of communism in central eastern Europe to “the violation of the right of work” [presumably meaning the human rights of workers], the inefficiency of the economic system, and the spiritual vacuum provoked by atheism. He claimed that an important, decisive contribution had been ”the Church’s commitment to the defence and promotion of human rights”, and the meeting of the Church and the workers’ movement. But in a memorable piece in The Guardian (8 April 2005) Jonathan Steele convincingly argued that “It was Gorbachev, not the Pope, who brought the system down”. And that “The impetus for Gorbachev’s reforms was not external pressure from the west, dissent in eastern Europe or the Pope’s calls to respect human rights, but economic stagnation in the Soviet Union and internal discontent within the Soviet elite”.

John Paul II states that “private property also has a social function which is based on the law of the common purpose of goods". “God gave the earth to the whole human race for the sustenance of all its members, without excluding or favouring anyone. This is the foundation of the universal destination of the earth's goods.” This is a meaningless proposition, for there is no sense in which the earth’s goods have a common purpose or destination, in our world where the Gini coefficient for global income distribution is 65%, and is much higher for wealth distribution (see my earlier post on To Have and Have Not). And the idea that individual labour is the origin of individual property is fatuous, because it ignores primitive accumulation. Where John Paul takes an enlightened stance, however, is on the importance of knowledge and the excessive protection of intellectual property right (see below, on Vatican submissions to the World Intellectual Property Organisation and the WTO on the subject).

National and global markets “seem” (in John Paul’s words) to be efficient in the allocation of resources and the satisfaction of needs, but the defeat of so-called “real socialism” should not “leave capitalism as the only model of economic organisation”. “It is necessary to break down the barriers and monopolies which leave so many countries on the margins of development, and to provide all individuals and nations with the basic conditions which will enable them to share in development.” “There are collective and qualitative needs that cannot be satisfied by market mechanisms”. Consumerism is chastised in all its forms, including drugs and pornography. Enterprises should not be directed to profit only but to (unspecified) “other human and social factors”, and should be treated as “communities of men”. The service of high foreign debt should not lead entire populations to hunger and despair.

Ecclesia in America (Mexico City, 1999)

Chapter 2 of this large document, under the unlikely heading “Encountering Jesus Christ today in America”, contains a full discussion of globalization and its ethical implications. Globalization “brings some positive consequences, such as efficiency and increased production and … with the development of economic links between the different countries, can help to bring greater unity among peoples and make possible a better service to the human family. However, if globalization is ruled merely by the laws of the market applied to suit the powerful, the consequences cannot but be negative. There are, for example, the absolutizing [sic] of the economy, unemployment, the reduction and deterioration of public services, the destruction of the environment and natural resources, the growing distance between rich and poor, unfair competition which puts the poor nations in a situation of ever increasing inferiority. While acknowledging the positive values which come with globalization, the Church considers with concern the negative aspects which follow in its wake” (n.20).

Chapter 5 of Ecclesia in America, on “The path to solidarity”, develops these themes further. There is a call for “the globalization of solidarity”; a sharp criticism of “neoliberalism”; “based on a purely economic conception of man, this system considers profit and the law of the market as its only parameters, to the detriment of the dignity of and the respect due to individuals and peoples. At times this system has become the ideological justification for certain attitudes and behavior in the social and political spheres leading to the neglect of the weaker members of society. Indeed, the poor are becoming ever more numerous, victims of specific policies and structures which are often unjust” (n.56). Reduction and cancellation of foreign debt, environmental protection and reclamation, corruption, drug trade, the arms race, immigration, receive specific attention.

On immigration, “the Church in America must be a vigilant advocate, defending against any unjust restriction the natural right of individual persons to move freely within their own nation and from one nation to another. Attention must be called to the rights of migrants and their families and to respect for their human dignity, even in the case of non-legal immigration” (n. 65).

Yet John Paul opposed liberation theology – “because he saw priests defy their bishops and challenge the church’s hierarchical structure” (Jonathan Steele, cited).

The Holy See Submissions to the WIPO and the WTO (2001)

On 16 April 2001 the Permanent Observer Mission of the Holy See in Geneva submitted to the United Nations WIPO a document entitled “Intellectual property and genetic resources, traditional knowledge and folklore”. It firmly opposed the patenting of “genetic material existing in nature, provided that it is possible to replicate it using a biochemical process – a sort of reverse engineering of the complex results of natural evolution”. It defended the rights of use and usufruct of such materials by “native communities that have some knowledge and make use of some of the biological properties covered by the patent”. Present legislation tends to abandon “the social function of intellectual property”, and “patents constitute a brake on free competition”. The Holy See advocates: the informed, free agreement of persons, peoples and states involved as a prerequisite of patenting biological resources; equitable economic participation of native populations in the benefits from commercial exploitation of biological resources: the extension of such protection to human genetic resources; “assurance that patents for biological discoveries do not constitute an undue obstacle to subsequent research and scientific teaching.” Chapeau.

On 20 June 2001 His Excellency Mons. Diarmuid Martin submitted “Intellectual property and access to basic medicines” to the WTO Plenary Council on trade-related aspects of intellectual property rights, on behalf of the Holy See. “Within an open free trade system, intellectual property rights constitute an exceptional monopoly regime”. The submission calls for price discrimination on drugs in favour of poor countries, and a regime of compulsory licensing “to be used as remedies in situations of national emergency or other circumstances of extreme urgency”. “A broad-based commitment of solidarity is the best way to prevent poor countries from falling into the temptation of weakening the Intellectual Property rights framework” (italics in the original text).

Not only that, but: “The Holy See, consistent with the traditions of Catholic social thought, underlines that there is a "social mortgage" on all private property, namely, that the reason for the very existence of the institution of private property is to ensure that the basic needs of every man and woman are met and sustained. This "social mortgage" on private property must also be applied today to "intellectual property" and to "knowledge" (John Paul II, Message to the "Jubilee 2000 Debt Campaign" Group, September 23, 1999). The law of profit alone cannot be applied to that which is essential for the fight against hunger, disease and poverty. Hence, whenever there is a conflict between property rights, on the one hand, and fundamental human rights and concerns of the common good, on the other, property rights should be moderated by an appropriate authority, in order to achieve a just balance of rights.” This is a most powerful, pointed, specific and effective proposal. This kind of “social doctrine” – obviously developed by John Paul II, is a truly revolutionary change. “Santo subito”, as his followers decreed after his death.

Benedict XVI: Caritas in Veritate (2009)

Against this background of major contributions to the Church’s “social doctrine” – and in particular the pronouncements of John Paul II who can be considered its true founder – what is the value added of Benedict XVI latest encyclical?

Before getting to substantive points, the non-believer is put off by more cryptic and mysterious statements than usually are found in encyclicals: about Love in Truth and its apparently equivalent inverse, Truth in Love; the asserted but unexplained importance of the Gospel for development, as well as several references to the mystery of the Trinity. Nothing the matter with that, from a pope of course, but it does not help communications with the world at large.

The necessity of the full development of individuals and peoples is borrowed from Paul VI and John Paul II. The limitations of the profit motive are not new in the Church’s social doctrine. The narrative of the current global financial crisis is obviously broader, richer and more accurate than anything anticipated in previously encyclicals, but that is simply the benefit of hindsight and up to date information, not of particularly profound insights.

Here are a few instances of awareness of recent changes. The limits placed by globalization on the feasible policies that national governments can undertake are stressed. The “…downsizing of social security systems [is] the price to be paid for seeking greater competitive advantage in the global market, with consequent grave danger for the rights of workers, for fundamental human rights and for the solidarity associated with the traditional forms of the social State.” “Governments, for reasons of economic utility, often limit the freedom or the negotiating capacity of labour unions. Hence traditional networks of solidarity have more and more obstacles to overcome.” “…uncertainty over working conditions caused by mobility and deregulation, when it becomes endemic, tends to create new forms of psychological instability, giving rise to difficulty in forging coherent life-plans, including that of marriage”. “What is missing … is a network of economic institutions capable of guaranteeing regular access to sufficient food and water for nutritional needs”. “…the human consequences of current tendencies towards a short-term economy — sometimes very short-term — need to be carefully evaluated.” The encyclical acknowledges “the damage that can be caused to one's home country by the transfer abroad of capital purely for personal advantage”. It condemns the “speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the long-term sustainability of the enterprise”, though often it may be difficult for a speculative use to be distinguished from other uses. “Both the regulation of the financial sector, so as to safeguard weaker parties and discourage scandalous speculation, and experimentation with new forms of finance, designed to support development projects, are positive experiences that should be further explored and encouraged, highlighting the responsibility of the investor.”

Otherwise, the characterization of globalization, its benefits, costs and excesses, the principle of subsidiarity in its governance; the concern about poverty, inequality and environmental issues, do not add much to the picture already drawn by John Paul II in his encyclicals. Added emphasis on the need of “equivalent value” in international trade (echoing unfashionable, outdated post-Marxian trade theory based on irrelevant labour values, as Arghiri Emmanuel’s Echange Inégal, 1962, 1969) is just as empty as Leo XIII’s reliance on the “just wage”.

There are a few minor novelties in Love in Truth. One is the reliance on non-profit organizations as a form of enterprise that can operate in the market and provide social services efficiently, mobilizing additional entrepreneurial energies in society. This is a hopeful possibility, known to be a pet concern of one of Benedict XVI’s economic advisors, Stefano Zamagni, yet untried in its full potential and of doubtful viability in a deep crisis.

A stronger novelty is the advocacy of “principle of gratuitousness”, the economics of gift, for the pleasure of giving rather than for the benefit of remission of sins. Reciprocal gift is well known (since Marcel Mauss, Le Don, 1922) as the foundation of some of the social texture of any society, but it is a limited foundation whose limits are confirmed by Benedict XVI: “Gift by its nature goes beyond merit, its rule is that of superabundance” – ultimately the same thing as Paul VI advocating the gift of “superfluous” wealth.

The commitment to “prioritize the goal of access to steady employment for everyone” is another strong novelty. It might have been wiser to talk of government policies aiming at high and stable employment, rather than full employment for all, as of right. The right to employment is also enshrined in article 4 of the Italian Constitution, and equally wishfully futile. Nobody can have a right to anything without somebody else having a corresponding obligation, and short of there being an Employer of Last Resort (a possible, though remotely likely institution, missing from both the Italian Constitution and Love in Truth) the promise of a right to employment is a straight con. Not so much Stalin's enquiry when warned by an adviser against coming into conflict with the Catholic Church, “How many divisions does the pope have?”. Rather, when Benedict XVI calls for access to steady employment for everyone, the operative question is “How many trillion dollars does the pope have?”. Not enough to make a dent on world unemployment.

These well-meaning but merely wishful additions to the Church’s social doctrine come at a price. For instance, the dilution of the Church’s position on immigration previously reached by John Paul II. The contributions that migrants make to both their country of origin via remittances, and to the host country, are acknowledged, and so are their “inalienable rights that must be respected by everyone and in every circumstance”. But Benedict XVI is awed by “the sheer numbers of people involved, the social, economic, political, cultural and religious problems [immigration] raises, and the dramatic challenges it poses to nations and the international community.” The phenomenon “requires bold, forward-looking policies of international cooperation if it is to be handled effectively. Such policies should start from close collaboration between the migrants' countries of origin and their countries of destination; [such collaboration] should be accompanied by adequate international norms able to coordinate different legislative systems with a view to safeguarding the needs and rights of individual migrants and their families, and at the same time, those of the host countries. No country can be expected to address today's problems of migration by itself. We are all witnesses of the burden of suffering, the dislocation and the aspirations that accompany the flow of migrants.” Maybe this is a change in the right direction, but a far cry from John Paul II’s “natural right of individual persons to move freely within their own nation and from one nation to another… the rights of migrants and their families …even in case of non-legal immigration”.

On excessive protection of intellectual property, the powerful proposals submitted by the Holy See to the WIPO and the WTO in 2001 are totally forgotten, replaced by a feeble single sentence “On the part of rich countries there is excessive zeal for protecting knowledge through an unduly rigid assertion of the right to intellectual property, especially in the field of health care.” The likely negative impact of demographic growth on sustainable development, which had been recognized by Paul VI (see above), is denied by Benedict XVI: “To consider population increase as the primary cause of underdevelopment is mistaken, even from an economic point of view”. There is a total neglect of monopoly and its adverse impact on unemployment and distribution (neither “monopoly” nor “competition” figure in Love in Truth). Altogether, not a small price by any means for the few novelties reported above.

Finally, there is no progress with respect to the view that has always characterized Vatican thinking, that economic problems can be solved if only individuals behaved ethically, a precondition no different from the socialist reliance on the development of “socialist man”, and equally pretentious, hopeless and futile. Benedict XVI has a peculiar notion of “the common good”: “It is the good of “all of us”, made up of individuals, families and intermediate groups who together constitute society” – thus implicitly rejecting the possibility of bettering the position of some individuals families and groups at the cost of worsening that of others. Mario Draghi writes that “Without ethics there is no development” (the title of his article quoted above). Not so. What is needed is not ethics but rules, legal rules embodying those ethical principles but relying on a clear system of penalties and rewards in this life rather than the next.

Caritas begins at home

Suppose that Benedict XVI (and his predecessors who have developed the Catholic Church’s “social doctrine”) had really wanted to impact the full, sustainable development of individuals and peoples, reduce poverty, improve equality, avoid exploitation and unemployment. They have powerful instruments at their disposal, not just moral exhortations but a complex system of permissions and prohibitions, backed by powerful penalties and rewards. There are a few things popes could have done, and could still do, at a stroke. Encourage contraception, to reduce both population growth and the resulting unsustainable pressure on non reproducible resources (that Paul VI well understood, and Benedict XVI denies) and at the same time reduce the number of abortions. Encourage or at least condone the use of condoms in particular, to avoid the spread of HIV and other sexually transmitted diseases. Let people die in peace if and when they want to. Make false reporting, insider trading and tax evasion a mortal sin explicitly, and excommunicate pyramid bankers. Promulgate a schedule of hundreds, thousands, millions, trillions days of indulgence to reduce sinners’ permanence in Purgatory for each economic good deed, and grant plenary indulgence for remission of debt or the hiring of the unemployed. All these measures would affect only Roman Catholics, but there are enough believers and practicing sinners among them to make a significant difference.

As it is, the Vatican Road is paved with good intentions. It does not lead to Hell, but leads nowhere - other than the status quo.