Austerity Can Kill You

In 1962 the RCP (Royal College of Physicians) published a Report on Smoking and health  in the UK. Using research by Sir Richard Doll and Sir Austin Bradford Hill, the Report established conclusively the link between smoking - including passive smoking - and lung cancer, other lung diseases, heart disease and gastrointestinal illnesses. It caused a sensation, and received an ambivalent, often hostile response from the media, governments and society. In 1962 tobacco "smoking was omnipresent, accepted, established." "[In the UK] around 70% of men and 40% of women smoked". It was "a world suffocated by the swirling clouds of tobacco" - "in pubs, cinemas, trains, buses, on the streets, and even in hospitals and schools." [from the RCP-Royal College of Physicians report on Fifty years since Smoking and Health – progress, lessons and priorities for a smoke-free UK, 2012]. 

Gradually government action reduced this phenomenon.  By 2012 "... smoking is no longer the norm. Our schools, hospitals, pubs, cinemas and public transport are subject to smoke-free legislation. [In the UK] Only 21% of the population smokes. Government, media and society have largely accepted the need to protect people, particularly children, from much of the harm associated with tobacco smoke." Still, in the UK it took fifty years to achieve such a large reduction in smoking incidence. Smokers are still 21% of the population too many, they represent glaring evidence of either irrationality or addiction or both, and the persistence of vested interests by tobacco and cigarettes producers.

Austerity - aiming at a balanced government budget, reducing expenditure and raising taxation even in the middle of an economic recession - also has been the norm for a very long time, and still is enshrined in the statutory policies of EU and EMU, of IMF and ECB. Yet we have known at least since 1936 (with the publication of Keynes' General Theory), indeed since 1933-35 (the dates of Michal Kalecki's anticipations of Keynesian propositions, see Robinson 1976 and Nuti 2004) that austerity can cause unnecessary, involuntary unemployment of labour and irreversible losses of income and consumption.

In our time and age austerity is more incomprehensible than smoking, were it not for the irrational fear of inflation in the middle of a recession, the generalised addiction to hyper-liberal ideologies and the vested interests of those who think they benefit from labour unemployment keeping workers "in their place". What is worse, austerity today is much more widespread than smoking, it is on the rise and is officially supported by our national and international authorities more than it ever was, while at least smoking is steadily declining not least because of progressive health policies worldwide.

Feasible full employment

In 1943 Michael Kalecki could write that “A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plant to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports”. As long, of course, as such government spending programme is “financed by borrowing and not by taxation”. Kalecki even dealt with the case of highly indebted countries, which also could afford and attract loans to finance government expenditure as long as interest was paid out of a capital levy.

Opposition to such a policy of full (meaning high and stable) employment would be political: "(i) opposition in principle to government spending based on a budget deficit; (ii) opposition to this spending being directed either towards public investment – which may foreshadow the intrusion of the state into the new spheres of economic activity – or towards subsidizing mass consumption; iii) opposition to maintaining full employment and not merely preventing deep and prolongued slumps”. Such objections subside in the slump, and are revived in the boom, thus generating what Kalecki called a "political cycle" and a generally lower average degree of employment over such cycle than otherwise feasible. 

But the feasibility of Kaleckian-Keynesian full employment policies soon ceased to enjoy the support of a "solid majority of economists". The effectiveness of expansionary fiscal policy was challenged on an escalation of arguments.

From deficit spending to expansionary fiscal consolidation

First, it was argued that government expenditure would “crowd out” private investment. This idea neglects the possibility of private investment on the contrary “crowding in” additional expenditure due to the activation of its accelerator effect of higher primary demand. On the contrary, Dennis Robertson (in a talk given at Princeton in 1953) argued that at least some of the additional savings out of the income generated by government spending would not represent a leakage but would be channeled into additional investment, and called this “the Kalecki effect”.

Second, Ricardian equivalence was invoked, tentatively put forward by David Ricardo in the early 19th century and re-discovered by Robert J. Barro in 1974. When government expenditure is raised, funded by borrowing, economic agents discount the future payments of higher taxes that they anticipate having to pay to service the higher debt. The effect is the same as it would be if expenditure was funded directly by an immediate higher tax: lower private consumption offsetting higher government expenditure. (The reader is invited to perform a mental experiment: is this how he/she responds to a fiscal stimulus by the government? I certainly don't).

Third, in the early ‘seventies the theory of so-called rational expectations was introduced by Robert Lucas and others, which was a tendentious misnomer. They should have been called expectations successful by definition. The efficient utilization of all information available, by all economic agents, makes markets efficient. Nobody is ever surprised. Multipliers could then be lower than unity.

Fourth, in the 1990s and 2000s a series of empirical studies propounded the idea of “Expansionary Fiscal Contraction”. They argued that closing the budget deficit via higher taxes and/or lower expenditure can be and by and large is expansionary: see Giavazzi and Pagano (1990, 1996); Alesina and Perotti (1997); Alesina and Ardagna (2010). Blanchard (1990, then Professor at MIT, before joining the IMF as Chief Economist in 2008) explained how this was due to the promotion of private sector-led growth, for the reasons already mentioned above: Ricardian equivalence, increasing confidence, a favourable impact on expectations, declining borrowing costs, a weaker currency. This would hold also for "extreme" fiscal contraction or consolidation.

Growth in a Time of Debt

But the culmination of the expansionary fiscal consolidation thesis, supported by the so-called "austerians"' - "advocates of fiscal austerity, of immediate sharp cuts in government spending" (Krugman's definition) - is a paper by Harvard economists Carmen Reinhart and Kenneth Rogoff, "Growth in a Time of Debt" (2010). On the basis of a new dataset of forty-four countries spanning about two hundred years, incorporating “over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances”, Reinhart and Rogoff find that “the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more.” 

The notion that government debt exceeding 90 percent of GDP has a significant negative effect on economic growth became a decisive supportive argument for austerity by national and international leaders, from ex-vice-presidential candidate Paul Ryan, chairman of the USA Congress budget committee, to EC Commissioner Olli Rehn, and authoritative commentators. Thus Keynes's proposition that “the boom, not the slump, is the right time for austerity” was falsified, austerity becoming a good policy for all seasons in highly indebted countries.

The tide is turning

The proposition of "Expansionary Fiscal Consolidation" was immediately subjected to many criticisms and was gradually discredited both on theoretical and on empirical grounds.

Already in November 2008 the IMF Managing Director Dominique Strauss-Kahn took the initiative for a sizeable global fiscal stimulus of the order of 2% of Global GDP. In an interview with IMF Survey Online on 29 December 2008 Olivier Blanchard – by then IMF Chief Economist, and Carlo Cottarelli, Chief of the IMF Fiscal Affairs Department, called for bank recapitalization (time consuming) and monetary expansion (ineffective at low interest rates) and made a strong case for fiscal stimulus: "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." The IMF raised its lending, increased its own resources and relaxed somewhat its conditionality, but its commitment was intermittent and short lived. The ECB, under the leadership of Jean-Claude Trichet, soon was advocating an early exit strategy from both monetary expansion and fiscal stimulus.

In October 2010, Chapter 3 of the IMF World Economic Outlook examined “the effects of fiscal consolidation — tax hikes and government spending cuts—on economic activity.” It found that fiscal consolidation typically reduces output and raises unemployment in the short term, especially if it occurs simultaneously across many countries, and if monetary policy is not in a position to offset them. Only in the longer term, can interest rate cuts, a fall in the value of the currency, and a rise in net exports usually “soften” but do not offset the contractionary impact.

Baker (2010) criticises Alesina and others (1995, 2006) for their use of cyclically adjusted deficits, while policy driven deficit adjustments behave in a keynesian fashion. He also criticises Broadbent and Daly (2010) on the ground that known cases of expansionary consolidation occurred for very narrow output gaps relatively to the large ones that occur in the current crisis.

The September 2011 IMF Fiscal Monitor warned that “too rapid consolidation during 2012 could exacerbate downside risks”: “Further tightening during a downturn could exacerbate rather than alleviate market tensions through its negative impact on growth”.

In 2012 Carlo Cottarelli stressed the “schizophrenic” attitude of investors with regard to fiscal consolidation manoeuvres: their initial enthusiasm is followed by the fear of consequent recession, so that governments are “damned if they do, damned if they don’t”.

The IMF World Economic Outlook (October 2012) contains a large Box by its Chief Economist Olivier Blanchard and Daniel Leigh arguing that fiscal multipliers have been under-estimated by IMF forecasts and policy documents, by the OECD and the European Commission. Recent IMF research suggests that fiscal multipliers are in the range 0.9 to 1.7, rather than the customary assumption of their being around 0.5. In other words, the cost of fiscal consolidation has been grossly under-estimated. In January 2013 Blanchard and Leigh presented a longer paper expanding their argument at the American Economic Association Annual Conference. However, according to the auhors “More research is needed.”

But more research was already available to the IMF: Guajardo, Leigh and Pescatori (2011) investigated "the short-term effects of fiscal consolidation on economic activity in OECD economies." "We examine the historical record, including Budget Speeches and IMF documents, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.”

And Batini-Callegari-Melina (2012)
-  discredit the need for cutting public/social expenditure, for especially in a downturn expenditure multipliers can be up to ten times larger than tax multipliers;
- find absolute values for multipliers of the order of 2.5 instead of 0.9-1.7 as in the IMF World Economic Outlook (2012);
- find aggressive consolidation much more expensive than gradual in terms of GDP.

In May 2013 Jeffrey Frankel criticized various papers by Alesina and other co-authors (Giavazzi, Ardagna and Favero), all claiming that fiscal consolidation is not contractionary in a recession. Frankel’s objections are based on a recent paper by Alesina's original coauthor, Perotti, criticizing the dating methodology used, and pointing out that some of the fiscal consolidations used by Alesina et al. were announced by governments but never implemented. Thus Frankel concludes that Alesina "has not been receiving his fair share of abuse” (Eurointelligence.com, 22/5/2013).

At the same time Alesina and Giavazzi softened very considerably their original position. In May 2013 they actually recommended the Italian government to overstep the 3% deficit threshold for two years – for “that three per cent should not be a taboo” – offering the EC in exchange  immediate tax reductions on labour incomes and planned gradual and permanent expenditure cuts in the following three years. The European Commission would not close the excess deficit procedure for Italy at end-May but should be willing to approve such plan and verify its implementation. At the same time, credit to households and enterprises should resume through bank re-capitalisation conditionally funded by the EMS.

The non-existent 90% threshold

The Reinhert-Rogoff notion of a critical 90% threshold of the debt/GDP ratio was immediately criticized by Irons and Bivens (2010) who argued that causation run backwards, in that slower growth leads to higher debt-to-GDP ratios rather than the other way round. Moreover “there is no compelling reason to believe … that gross debt of about 90% will necessarily lead to slower economic growth… In fact, the greatest threat to economic growth is policy inaction fueled by deficit fears.”

The final blow to the Reinhart-Rogoff 90% debt/GDP dogma came from Herndon, Ash and Pollin (2013), who replicated the analysis by Reinhart and Rogoff 2010 using the original data. Apart from a coding error, which made only a small contribution to their conclusions, Reinhart-Rogoff selectively excluded available data for several Allied nations—Canada, New Zealand, and Australia—that emerged from World War II with high debt but nonetheless exhibited solid growth. And summary statistics were all weighted equally regardless of the duration of high debt and growth performance. Herndon et al. (2013) conclude that “… when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not 0.1 percent as published in Reinhart and Rogoff”. It turns out that “average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”

Reinhart and Rogoff (2013) admitted some of their errors and omissions but argued that these do not alter their ultimate austerity-justifying conclusion: excessive debt depresses growth. But two subsequent studies have claimed that, on the contrary, slow growth appears to cause higher debt (as Irons and Bivens 2010 had already argued). Dube (2013) finds that growth tends to be slower in the five years before countries have high debt levels. In the five years after they have high debt levels, there is no noticeable difference in growth at all, certainly not at the 90 percent debt-to-GDP level regarded by Reinhart and Rogoff as the threshold of non-sustainability. Kimball and Wang (2013) present similar findings. This point is accepted by Reinhart-Rogoff (2013): "The frontier question for research is the issue of causality."

But suicidal policies persist

Such an amazing, cumulative and final discrediting of the alleged expansionary (severe at that) fiscal contraction approach, and the associated 90% threshold to debt sustainability, does not appear to have had much impact on actual policies, especially on German-led European policies, with EU and especially EMU countries tied to the "suicide pact" (Joseph Stiglitz) of so-called Growth and Stability.

The latest EU Fiscal Compact or TSCG – Treaty on Stability, Coordination and Governance – demanded a balanced budget provision to be inserted in member states’ national constitutions, subject to a maximum structural deficit of 0.5% of GDP. There are penalties and automatic adjustments in case of inobservance, subject to the verification and rulings of the European Court of Justice. Financial assistance programmes under the ESM – the European Stability Mechanism that come into operation in March 2012 – from March 2013 are conditional on prior TSGC ratification.

From 2015 countries exceeding the statutory debt/GDP ceiling of 60%, required by both the Maastricht Treaty and the Stability and Growth Pact, are expected to reduce the excess debt by 1/20 of the current gap every year until the ceiling is reached – which for a country like Italy at over 130% involves a budgetary surplus of over 3.5% a year for 20 years.

The IMF (2013) Report criticized the Troika’s [EC, ECB, IMF] handling of the Greek crisis over the last four years, but concluded that all was for the best and their policies would not be any different today in the same circumstances. In July 2013 a conference of German economists advocated that a debt/GDP ratio of 90% - Reinhart and Rogoff’s fated but dubious threshold – should trigger off automatic debt re-structuring and bail-in.

Austerity is like compulsory smoking

In conclusion, the Keynesian-Kaleckian view of capitalist dynamics is alive and well. The IMF itself has been reviving it and providing theoretical and empirical backing for it, by stressing the high cost of fiscal consolidation, but at the same time continuing to officially recommend and impose such fiscal consolidation. While providing the strongest case for a fiscal stimulus, IMF research is being used even by their more enlightened officials to recommend gradual rather than abrupt fiscal consolidation, instead of the fiscal stimulus that would be appropriately needed. Obstacles to full employment policies are still of a political nature today (resistance to a capital tax to service exceptionally high sovereign debt, in addition to the drive to maintain workers’ discipline through unemployment). The time for a Kaleckian (and Keynesian) over-due revival is now, but until it takes place we are all condemned to suffer from the impoverishment and the unemployment caused by the deepest, man-made, economic crisis in human history.

                            REFERENCES 

Alesina, A. and R. Perotti (1995). “Fiscal Expansion and Adjustments in OECD Economies”, Economic Policy, 207-247.

Alesina, A., S. Ardagna, and F. Trebbi (2006), “Who Adjusts and When? The Political Economy of Reform”, IMF Staff Papers, V. 53 Special Issue, Washington.

Alesina Alberto and Francesco Giavazzi, (2013), “Crescita, una proposta alternativa: Quel tre per cento non sia un tabù”, Corriere della Sera, 17 May.

Baker Dean (2010), “The Myth of Expansionary Fiscal Austerity”, CEPR, October.

Barro Robert J. (1974), “Are government bonds net wealth?”, Journal of Political Economy 82(6), pp. 1095-1117.

Batini Nicoletta, Giovanni Callegari and Giovanni Melina (2012), “Successful Austerity in the United States, Europe and Japan”, IMF Working Paper 12/190, July, Washington.
Blanchard Olivier J. (1990), “Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries: A Comment”, NBER Macroeconomics Annual Vol. 5, (1990), pp. 111-116, MIT Press, Cambridge, Mass.
Broadbent, B. and K. Daly (2010), “Limiting the Fall-Out from Fiscal Adjustments”, Goldman Sachs Global Economics Paper 195.

Cottarelli Carlo (2012), “Fiscal Adjustment: Too Much of a Good Thing?”, Posted on January 29 by iMFdirect.

Dube Arindrajit (2013), “A Note on Debt, Growth and Causality”, Draft forthcoming, May 30.

Giavazzi Francesco and Marco Pagano (1990), “Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries”, NBER Macroeconomics Annual Vol. 5, (1990), MIT Press. Cambridge Mass.

Giavazzi Francesco and Marco Pagano (1996) "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," NBER Working Papers 5332, National Bureau of Economic Research, Inc.

Guajardo Jaime, Daniel Leigh and Andrea Pescatori (2011), "Expansionary Austerity: New International Evidence", IMF WP/11/158, Washington. don Thomas, Michael Ash and Robert Pollin (2013), “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” Political Economy Research Institute, Working paper n. 322, April 15, Amherst.

Irons John and Josh Bivens (2010), “Government Debt and Economic Growth: Overreaching Claims of Debt “Threshold” Suffer from Theoretical and Empirical Flaws”, Economic Policy Institute, 26 July, Briefing Paper #271.

International Monetary Fund (2010), “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation.” World Economic Outlook, Chapter 3, Washington.

International Monetary Fund (2013), “Greece: Ex Post Evaluation of Exceptional Access Under the 2010 Stand-By Arrangement,” June, Washington.

Kalecki Michal, (1933) Proba teorii koniunktury [An Essay on the Theory of Business Cycle], Instytut Koniunktury I Cen, Warsaw. As “Outline of a theory of the of Business Cycle”, in Kalecki, 1971.

Kalecki Michal (1934), “On foreign trade and ‘Domestic Exports’”, translated from Polish in Kalecki (1971).

Kalecki Michal (1935), “A macrodynamic theory of business cycles”, Econometrica 3, July, pp. 327-44.

Kalecki Michal (1943), “Political aspects of full employment”, The Political Quarterly, p. 332-331.

Kalecki Michal (1971), Selected essays on the dynamics of the capitalist economy 1933-1970, CUP, Cambridge.

Keynes J. Maynard (1936), The General Theory of Employment, Interest and Money, London, Macmillan.
Kimball Miles and Yichuan Wang (2013), “After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth”, QUARTZ, 29 May.

Olivier Blanchard and Daniel Leigh, “Growth Forecast Errors and Fiscal Multipliers,” IMF Working Paper, January 2013.

Lucas Robert (1976), "Econometric policy evaluation: A critique", Carnegie-Rochester Conference Series on Public Policy 1 (1), pp. 19–46.

Nuti Domenico M. (2004), “Kalecki and Keynes Re-visited”, in Zdzislaw L. Sadowski and Adam Szeworski (Eds), Kalecki’s Economics Today, Routledge, London and New York.

Reinhart, Carmen M. and Kenneth S. Rogoff (2010), "Growth in a Time of Debt", NBER Working Paper No. 15639, January.

Reinhart, Carmen M. and Kenneth S. Rogoff (2013), “Responding to Our Critics”, The New York Times, 25 April.

Robinson Joan V. (1976), “Michael Kalecki: a neglected prophet”, New York Review of Books, 23, 4 March, pp. 28-30.

A CORRECTION:

In my answer to Branko (see Comments to this post) I wrote:

"If the size of the fiscal multiplier (which is the weighted average of the multipliers applicable to various expenditure cuts and tax rises involved) is greater than the current debt/GDP ratio, as the latest IMF researchers suggest, then fiscal consolidation raises such a ratio."

I should have written:

"If the size of the fiscal multiplier (which is the weighted average of the multipliers applicable to various expenditure cuts and tax rises involved) is greater than the inverse of the current debt/GDP ratio, as the latest IMF researchers suggest, then fiscal consolidation raises such a ratio."  

Berlusconi Is Ineligible

In an article in Sole-24 Ore of Sunday 26 May 2013 (Ineleggibilità e Democrazia dei Partiti: Le ragioni legali che i saggi non svelano) Giuliano Amato adds his voice to those such as Valerio Onida, Luciano Violante, and now no less than the new leader of the PD, Gugliemo Epifani, who oppose the notion of Silvio Berlusconi's non-elegibility to Parliament, alleged by many on the ground of his conflict of interest as beneficiary of economically significant TV concessions by the State. 

The eminent jurist and statesman rejects the argument used by others that, since the relevant legislation has not been invoked for twenty years, it cannot begin to be applied now. It would be like arguing, he writes, that, if a serial killer has not been condemned for his first six murders, he should be acquitted once he is caught for his seventh murder. The trouble, Amato argues, is that the Electoral law of 1957, which is still in force, is not as clear-cut as the law on murder.  That law declares ineligible, among others, "those who on their own account [in proprio] or as legal representatives of companies or enterprises are involved with the State by concessions or administrative authorisations of considerable economic significance [in qualità di rappresentanti legali di società o di imprese risultino vincolati con lo Stato per concessioni o autorizzazioni amministrative di notevole entità economica]...".  Berlusconi, argues Amato - as has Valerio Onida, a former President of the Constitutional Court and one of Napolitano's "wise Men" - is neither the legal representative of such a company, nor a direct concessionary, even though he is the uncontested main shareholder, the "boss, l`ideatore e il regista".  According to the Italian Constitution, norms that limit any rights cannot be interpreted extensively, for in that case the hostility towards laws ad personam would be replaced by a peculiar predilection for interpretations ad personam.  Therefore, Amato concludes, Parliament was right in applying , on purely legal and not on political grounds, a literal interpretation of the law. If main shareholders of concessionary companies were intended to be ineligible an amendment to that effect should have been approved beforehand; many such amendments were presented over the years but, for better or worse, were never approved. 

Amato explains that in his approach he is giving voice to his own "jurist's soul".  By the same token, let me voice my own "economist's soul" on this matter. 

A shareholder holding a 100% share in a company that is granted an economically significant State concession is literally undistinguishable to all intents and purposes from a person holding such a concession on his own account.  The application of inelegibility to a 100% shareholder in such a company would not violate either the spirit or the letter of the law.

At the other end of the range of conflicts of interest specified by the law, a legal representative of a company that enjoys the same state concession will have a significantly reduced interest in that concession, with respect to a 100% shareholder, and therefore a reduced conflict of interest.  In fact such a legal representative would benefit from the concession only if, and to the extent that, his compensation is enhanced by the company profitability contributed by the concession. This could happen, for instance, through bonuses related to company performance, or through the allocation of company shares and/or options on favourable terms.  Let us say that the legal representative has a conflict of interest with the State equivalent to that of a shareholder holding x% of company shares, where that x% can and normally does represent a minor shareholding fraction in the company in question.

The position of a major shareholder in a company that is granted a significant State concession is clearly intermediate between that of a concessionary on his own account (or of a 100% shareholder in a concessionary company) and that of a legal representative whose benefit is a small fraction of the concession profitability.  Therefore the ineligibility of a major shareholder in a concessionary company is not in any sense an "extensive interpretation" of a rule to a different category of subjects for which that rule was originally intended, violating the Constitution, but simply an "inclusive interpretation" that applies the same rule not only to the extreme cases contemplated by the law but also to cases intermediate between the extremes. As if the law punishing serial murder and maiming by shooting was also applied to serial murder by strangulation.

Some might regard my argument as casuistic, indeed jesuitical. Anybody who might think so should consider that the same contention could be raised against a literal interpretation of the rule that glosses over the macroscopic conflict of interest that Silvio Berlusconi has enjoyed for the last twenty years.

Il Vecchio Glorioso Comunista

The re-election of Giorgio Napolitano on 20 April for a second seven-year term is an extraordinary event. Unprecedented in the Republic of Italy, not least because of a silent Constitution that neither prohibits nor specifically authorizes re-election (see Part II, Titolo II, art. 83-91). Most uncommon for a man of 88, one year older than the Queen of England and only junior - among Heads of State worldwide - to Robert Mugabe and Shimon Peres, and over six years older than the Italian male life expectancy at birth. Especially after so many previous, consistent and stern denials of such a prospect, labeled  by himself as "ridiculous". And accepting the post on the condition - not to be found in the Constitution, and requested only after re-election - that Parliament grants him effective Carte Blanche in the formation of the next Government. 

Admittedly any President can be better than no President, and financial markets (both the stock exchange and the market for government bonds) rejoiced at the news and the very prospect of a new government rather than none.  Whether initial market optimism was justified or groundless still remains to be seen.  For many Napolitano has been and is a Man of Providence, selfless and generous in the service of the country, an impartial custodian of the Constitution. But many others see him and his re-election at best as a mixed blessing, at worst as an unmitigated disaster.

On the one hand, Napolitano has the merits of being committed both to national unity and to Italy's European integration.  On the other hand, his understanding of such commitments is questionable.  For him, national unity is the avoidance of conflicts at any cost, and in particular the appeasement of Silvio Berlusconi, with the speedy presidential countersigning of ad personam laws favourable to him and his companies though subsequently declared unconstitutional, the postponement of a confidence vote in December 2010 that allowed Berlusconi time to illegally purchase additional parliamentary support, and the President's undue exhortations to magistrates to postpone Berlusconi's appearances in court and his sentencing in four open cases in the run up to the last elections.  While Napolitano's interpretation of Italy's interests in Europe is the total acquiescence to the obligations of EU and EMU, including the so-called Growth and Stability Pact that Romano Prodi at least had the courage to call "stupid", and the associated European austerity measures.

(In passing we might also mention Napolitano's political, outrageous use of pardon in the case of CIA agent Joseph Romano, convicted for Abu Omar's "military rendition" and torture, while pardon had been specifically restricted by the Constitutional Court to cases of compassion; his demand that phone tappings of four conversations of his with former Minister Mancino should be destroyed - as they were on the day of his re-election - regardless of their possible relevance to the investigation of State negotiations with the Mafia; and his continuous strong support for Italian military involvement in "peace-keeping" missions  in Iraq, Afghanistan, Libya and Lebanon).

What is worse, in the name of such questionable interpretations of well-meaning commitments Giorgio Napolitano has been perfectly willing to sacrifice democracy and the very same Constitution which he has sworn to observe and to which he has always vigorously paid lip-service.  An authoritarian streak, typical of a glorious old Communist in the tradition of Togliatti and Amendola, used to sacrifice everything, including his own party, in the name of a cause, has led him to transform Italy into a semi-presidential republic.  (For a lucid assessment of Napolitano's first seven years, see Thomas Mackinson, Il Fatto Quotidiano, 18 aprile 2013.

Back in November 2011, when Berlusconi resigned the Premiership, Giorgio Napolitano could have dissolved Parliament and called new elections: Berlusconi would have been steamrolled and buried forever.  Instead of which Napolitano appointed Mario Monti as life senator and pieced together a so-called "technocratic" government under Monti's leadership, backed by a Grand Coalition of PdL, UDC and PD, that squeezed economic life out of the country and led GDP further down a recessionary path. Napolitano's pretext for a technocratic government (of which as recently as 2010 he had denied the very concept) was the fear that Italian debt might become unsustainable. The fear, that is, that the spread between interest on Italian debt renewal and that on German Bunds - that under Berlusconi had escalated to over 500 points (i.e. 5%) on ten year bonds - might rise further during the electoral campaign and after the election if Parliament had been dissolved. 

Monti's austerity policies, predictably, instead of reducing the Debt/GDP ratio raised it to 127% by the time of the recent elections, poised to rise over 130%; though initially they had a small net favourable effect on the spread due to financial markets taking note of a renewed Italian commitment to repay debt.  But the spread fell significantly only in the summer of 2012, not thanks to Monti but as a result of Mario Draghi's resolve to do "all that it takes" to save the euro, and of his Outright Monetary Purchases approaching an ECB role as Lender of Last Resort.  If Napolitano had called an election in November 2011, it would have been won hands down by the PD, and markets would have rejoiced just as they did immediately after the elections of 24-25 February 2013 when they believed early exit polls wrongly giving victory to the PD. But that was a cruel delusion, the Italian electorate split three ways into three parts defying governability.

The PD coalition, whose campaign ruled out an alliance with PdL, gained by a whisker an artificial majority in the lower Chamber (thanks to the majority premium of an indecent electoral law passed by Berlusconi) but only a useless relative majority in the Senate, and was unable to form a government even with the support of Monti's coalition that had barely cleared the 10% threshold for entering the lower Chamber. The PdL coalition gained almost a third of the vote in both Chambers, was open to an alliance with PD but ruled out a technical government.  Beppe Grillo's 5Star Movement (the largest single party if we exclude Italian voters abroad) obtained almost another third but ruled out participation in any government, not least with Bersani's PD.

Pierluigi Bersani, the un-charismatic leader of the PD, tainted by 15 months complicity with Monti's recessionary policies (like the PdL, which at least had provoked Monti's fall before the end of the legislature), handicapped by a lack-lustre electoral campaign without either a programme or alternative policies, had always excluded most vigorously the continuation of a Grand Coalition that included Berlusconi.  Napolitano gave him an "exploratory" mandate, conditional on his obtaining a clear majority on paper before allowing him to seek a confidence vote in both Chambers, and quickly withdrew it with dubious constitutionality, in spite of the precedents of unconditional mandates.   The M5S followed a deplorable , indeed unforgivable, and self-defeating un-cooperative strategy, refusing to support a government led by Bersani, who in truth had offered only a vague programme of 8 points imitating some M5S policies, without offering them ministerial posts or negotiations about the choice of the Premier. 

Napolitano should have allowed Bersani to seek a confidence vote, which he had a fighting chance to obtain; even if he had lost, at least his government would have taken the place of Monti's government, that Napolitano undemocratically left in charge in spite of Monti's spectacular electoral defeat. Napolitano should then have explored an alternative, or resigned at once long before his tenure's expiry in mid-May, so as to speed up his replacement by a new President who could then proceed to dissolve Parliament and call new elections or seek to construct a new government on the strength of such a threat.

Instead of which Giorgio Napolitano temporised, wasted time and pre-judged the subsequent course of events, by appointing an improvised "Commission of Ten Wise Men", with the ambiguous role as "facilitators", totally outside Constitutional procedures, with the task of producing a draft programme for the new government. The so-called Wise Men were indeed all men in their middle to old age, exclusively from the parties that would be included in the a potential Grand Coalition.  A most peculiar procedure, in the absence of a candidate Premier, however pre-judging the subsequent appointment of a Premier who would then be effectively bound to endorse a Grand Coalition to accompany that particular programme.

What is worse, many of the ten appointees, tipped as potential Ministers in the future government, as it actually happened to four of them  - another extra-constitutional feature - were rather controversial, notable not so much for their wisdom as much as their representation of party kakistocracy (i.e. power of the worst, to coin an expression). See Marco Travaglio at Servizio Pubblico of 4 April. 

 

 - Filippo Bubbico (PD) former President of the Basilicata region, had been indicted four times and was still subject to one indictment for abuse of office, the author of a hare-brained, expensive and failed scheme to promote employment in his region by subsidising silk worms cultivation (sic).  

- Giancarlo Giorgetti, a Lega MP close to Bossi who then switched to Maroni's support, well connected in banking circles (Fioroni and Fazio), notorious for having taken a €100,000 bribe delivered directly by Fioroni at Montecitorio, though he returned it the same day recommending a donation to a sport association instead; his wife indicted for fraud against the state. 

- Enrico Giovannini, President of the Statistical Office, undoubtedly a competent statistician but never speaking on policy issues; he had been asked by Monti to conduct an investigation on the costs of politics and the salary differentials between Italian MPs (the highest paid in Europe) and MPs in the rest of Europe,  but after six months research in the end had declined alleging the difficulties of the task.

- Mario Mauro, a close associate of the unspeakable ex-President of Lombardy Roberto Formigoni, had switched to Monti at the last minute.  

- Enzo Moavero Milanesi, a EU official,  Minister for European Affairs in Monti's government.

 - Valerio  Onida, ex-President of the Constitutional Court, was on record both for backing Napolitano in his quarrel against the Palermo magistrates investigating the negotiations between mafia and the State, about phone tappings involving former Minister Mancino; and as arguing that the 1957 Law named after Sturzo, often invoked to allege Berlusconi's ineligibility to Parliament, did not apply on the Jesuitical argument that Berlusconi was neither the direct holder of a state concession of TV channels nor the manager of the company that was granted the concessions - glossing over the fact that Berlusconi was indeed a major shareholder in that company, in a clear conflict of interest with the State. 

- Giovanni Petruzzelli, an associate of Senate ex-President Schifani, was President of the Anti-Trust Authority without being able to claim a specific competence, consultant and co-author of Totò Cuffaro, former President of Sicily currently serving a 7 year sentence for aiding the Mafia.  

- Gaetano Quagliariello, distinguished for his multiple moves from Radicals to the UDC, to PDL (as deputy head of the group), to Monti's group and back to the PDL, was the author and proposer of many of the initiatives introduced - and endorsed by Napolitano - to favour Berlusconi and his companies.  

- Salvatore Rossi, a Bank of Italy high official close to the centre-left.

- Last but not least, Luciano Violante (PD), a sycophant  ex-magistrate who in 1998 had proposed an amnesty for Berlusconi and in 2003 (immortalised by youtube on the web, http://www.youtube.com/watch?NR=1&v=RHPRel7mpUM&amp) actually reminded an ungrateful Berlusconi in Parliament that the PD had guaranteed in 1994 not to interfere with his TV channels, and had set aside the pursuit of legislation on conflict of interest; he actually boasted that Mediaset turnover had increased 25-fold under their government.

In conclusion, not a bunch of Wise Men but - with a couple of exceptions - a gallery of partisan and biassed villains, at least in the eyes of many respectable observers.

When, after over 50 days of total inaction, parlamentarians and regional electors began the process of electing a new President, Pierluigi Bersani - no doubt under the influence of Napolitano - made a spectacular U-Turn from his "No alliance with Berlusconi in government" that had been the main line of his electoral campaign and his early exploration of forming a government, to opening to the Grand Coalition with Berlusconi through the proposal of a candidate agreeable to the PdL, Franco Marini, a respected Catholic trade unionist and former President of the Senate. Such an abrupt switch, to a diametrically opposite policy, predictably was not acceptable to a sufficient number of PD electors to miss the two third majority (required in the first three ballots) so that the candidate was sunk even with the support of most of the PdL.

At this point Bersani made a third spectacular U-Turn and proposed Romano Prodi, corresponding to what Berlusconi called a "declaration of war".  Bersani behaved as a kingmaker, rather than as a democratic leader, in proposing both Marini and Prodi, for neither was subjected to a vote together with other contestants or on his own; Prodi was approved by a dubious and opaque "acclamation" at a meeting of PD electors, instead of being subjected to a ballot, whether open or secret.  So Prodi, the PD founding father and truly independent candidate, also failed to be elected even by the simple majority required at that stage, missing as many as 101 votes that could have been commanded by the PD. 

All the time the M5S had put forward the candidature of Stefano Rodotà, a distinguished professor of Civil Law, who had served for two legislatures as an MP elected as an independent in the Communist Party, former president of PDS - an earlier incarnation of the PD - an ex-President of the Privacy Authority and a civil rights champion: an offer Bersani could not refuse, but did refuse to his eternal shame. Just like the M5S refused to vote for Prodi, also to Beppe Grillo's eternal shame.

This is when Napolitano was asked - again, after repeated earlier refusals  - to stand for re-election. On Bersani's part this was a third U-Turn, from Prodi's independent candidature to Napolitano's strong advocacy of the stitch-up between PD and PdL - or inciucio, in Neapolitan dialect. This is a derogatory term that Napolitano now asks to be banned in his version of political correctness and newspeak; equally banned are expressions playing down the importance of the new government as a "the President's government" or "limited purpose" or "low intensity", or "service government". The designation of the new Premier,  Enrico Letta, until the previous week Bersani's deputy and equally opposed to a Grand Coalition with PdL, made Berlusconi blissfully happy, laughing all the way to the bank (and to the Tribunal), not least because Enrico Letta is the nephew of Gianni Letta, a major advisor and a Minister of his (which makes the present "governo di servizio" a "governo di servi, zio..." in a cartoon in Il Fatto Quotidiano).

The government sworn in on 27 April could have been worse. Angelino Alfano as a deputy Premier and Minister of the Interior was a big price to pay, but at least the old party caryatids on both sides (including Berlusconi) were out - for the time being.  Ministerial average age of 54 years is 11 years lower than in Monti's government; there are only 21 Ministers of which one third are women, including the first black Minister ever in Italian government. Their vote of confidence - aided by a shooting incident in front of the government palace, Palazzo Chigi, immediately used unjustly to demonize M5S - was taken for granted, but its durability is not: the proof of the new pudding will be in the governing.

A Grand Coalition is being presented as a novelty but is nothing more nor less than the replication of the Monti government, with some involvement of politicians that Monti had sought and failed to obtain. It is hard to imagine that Letta might do much more than Monti, apart for the partial reversal of some of his austerity measures: already the two sides are quarrelling about the suspension versus the reimbursement of IMU, and it is not at all clear what government expenditures will have to be cut to make room for lower taxes. 

The centre left PD-SEL alliance is definitively broken; the PD itself has been cracked by Bersani's repeated U-Turns and the final betrayal of PD electoral commitments. Bersani has been scrapped at last; Matteo Renzi has been side-lined and - having always supported an alliance with Berlusconi - will not be able to re-unite the party. The millions who voted for the PD on the basis of its commitment not to ally with the PdL have been betrayed, yet paradoxically those MPs who would not give their confidence vote to Enrico Letta are the ones who have been threatened with expulsion, instead of the other way round. In the end, only one out of 293 PD members of parliament abstained: a "Bulgarian-style" party discipline that would have deserved a better cause. 

Neither Napolitano nor Letta, but Berlusconi is the only true and absolute winner of Italy's latest elections.  All he needs now is to be appointed as life senator by a benevolent Napolitano, and to walk into the posts of either Premier or President at the next round, especially if a French-style direct election of the President was introduced beforehand. Gaetano Quagliariello's appointment as Minister for Institutional Reform, and Berlusconi's bid to a candidature as President of the Committee for Reforms, if successful, might pave the way to such a formalisation of the extra-constitutional presidentialism ushered by Napolitano.  Nothing much can be done about everything else, as a fait accompli, but at least this final corruption of the Italian Constitution can and should be resisted, in order not to have Berlusconi for ever.

Iron Lady: Rust In Peace

Margaret Hilda Thatcher (1925-2013) once famously said, in an interview to Woman’s Own of 31 October 1987, that "There is no such a thing as society. There are individual men and women, and there are families”. Naturally she was often reviled for such a proposition, including by me as I repeatedly quoted her and criticised her vigorously for it in lectures and seminars.

Taken literally such a proposition is patently false. Clearly the collection of individuals and their families are interconnected in a vast and thick mesh of relationships – through economic, political and social institutions – known as “the fabric of society”. The total is infinitely larger than the sum of its individual parts.

But what Thatcher actually meant is that society is all of us, and is not an external entity distinct from the collection of all individuals and their families, so much so that she went on to say: "And no government can do anything except through people, and people must look after themselves first.” A perfectly simple and innocent call for self-help, and for restraint in the reliance on government transfers from a budget to which in the end we all have to contribute. Sure, she was neglecting the fact that welfare transfers are not necessarily always a disincentive to create income and wealth, that they also represent a stimulation of demand and therefore may generate employment and income, and that a more equal and cohesive society may be worth attaining - at least up to a point - even if re-distribution had a net cost in terms of efficiency. But even these omissions and reservations are legitimate though possibly misguided opinions, for which Thatcher did not deserve to be reviled. Therefore belated but sincere apologies are due and are here unreservedly made.

Nevertheless, there are still many exceedingly serious reasons to revile her. The general principle, that one "not speak ill of the dead", does not apply to influential public figures (as we are reminded by Glenn Greenvald, Guardian 8 April): noblesse oblige. I lived in England throughout most of her political career, from 1962-1982, and intermittently until after her downfall in 1990, and disliked her passionately. Mrs Thatcher - for I could never bring myself to call her a Lady - to me was forever Thatcher-the-milk-snatcher (as in 1971, while Minister for Education in the Heath government, she abolished free milk for school children aged 7-11 years). Never mind the destruction of the British coalmining industry: coalmining is an attractive occupation and culture only in the morbid, romantic literary sickness à la D.H. Lawrence, and miners should have been retired gradually by Labour governments over the previous thirty years, instead of being kept employed artificially as a reserve army of Labour voters. But there was no reason to confront them as Thatcher did and unleash riot police on horseback assaulting them: she could have easily bribed them instead with the proceeds of North Sea Gas.

Nor was there any need to start a class war using a regressive and odious poll tax, or to deny Irish hunger strikers in the Maze prison their political status thus leading to their death. She lowered taxes and cut welfare expenditure and industrial subsidies, promoting de-industrialization and unemployment (that rose to a record of nearly 13 per cent under her watch); she privatized council houses without building new ones, and sold off all kinds of public assets, including public infrastructure (steel, airways, etc.) and utilities such as water, telecoms, gas and electricity, transferring massive public wealth to the private sector. She de-regulated economic activities, especially finance, and shrunk the size of the state. In doing this she somewhat revived competition - which she could have done if she had wanted to even without privatization - but did not promote economic growth in the UK, as she is widely credited to have done.

Thatcher never understood any macroeconomics - or she would not have written (in her Path To Power, 1995): "There is no better course for understanding free-market economics than life in a corner shop." With infinitely greater confidence than that applicable to her assertion about society, we could say that "There is no such a thing as a market system". For in order to substantiate the naïf, oversimplified market vision of her mentors (Milton Friedmann and Friederich von Hayek, Alan Walters and Keith Joseph and the whole of the Mount Pelerin Society) as a system of self regulating equilibria we would need a system of complete markets, i.e. of exclusive, spot and inter-temporal, instantaneous and non-sequential markets, for all dated and contingent goods and services. Instead of which we only have a relatively small number of spot markets, a handful of forward markets except for labour and mostly for homogeneous primary commodities as well as money, all sequential and rarely contingent on the states of the world. In the market system as we know it economic agents act on the basis of expectations as well as prices in a typical, incontrovertibly Keynesian world of inadequate and unstable effective demand and involuntary unemployment.  

Policies based on such hyper-liberal (then labelled monetarist) approach, which she shared with Ronald Reagan who gained power in 1980, had massive adverse consequences over time and space. They contaminated and corrupted the New Labour approach of Tony Blair and Gordon Brown, they deeply affected the transition path of the Soviet Bloc from central planning to market economies and caused its immense unnecessary costs, and they paved the way for the global Great Recession of 2008 which is still causing our misery to date. 

Internationally, she strengthened her failing domestic support by declaring war on Argentina over Britain colonial possession of the Malvinas, instead of conducting political negotiations; her tears over the accompanying loss of lives, revealed by recently published War Cabinet papers, are only evidence of hypocrisy. She played a key role in bringing about the first Gulf War, and advocated the 2003 attack on Iraq. She denounced Nelson Mandela and the ANC as "terrorist", while she befriended dictators like Augusto Pinochet, Saddam Hussein and General Sukharto ("One of our very best and most valuable friends"). She opposed German re-unification and the euro but fortunately she was defeated by Germany and France trading one for the other.

For somebody so opposed to the state taking care of its citizens "from cradle to grave", it is ironical that she should be given a lavish “ceremonial funeral with military honours” yesterday in St. Paul’s Cathedral at an estimated cost of £10-12mn. It is only fair that Ken Loach should have suggested that her funeral should have been "privatized": "Put it out to competitive tender and accept the cheapest bid. It's what she would have wanted".

Grillo's Zombies

"You are a Dead Man talking!" - said Beppe Grillo to Pierluigi Bersani who had asked for M5S support for a legislative platform that included some of Grillo's pet initiatives. Admittedly Bersani is a lugubrious, funereal figure, totally un-charismatic, indeed "de-tumescing", to use a term coined by a former Cambridge colleague to damn Tony Giddens, then a candidate to College high office . After all, Bersani now demands respect, after calling Grillo "a Web fascist", which is worse and unwarranted. The 5 Star Movement is marked for its non-fascist, non racialist, non right-on rightist stance. And Bersani has been utterly inconsistent: he criticised Mario Monti, but aided and abetted his disastrous recessionary policies for fourteen months. A Bersani-led Democratic Party was only stopped from forming a new government with him by Monti's electoral debacle.

The problem is that Beppe Grillo is treating his brand new, clean and youthful 54 Senators and 109 "Onorevoli deputati" (or rather "citizens", as he wants them to be called, rejecting traditional titles), precisely like Zombies. "We will not give a vote of confidence to any government, let alone a PD-PDL government: we will vote on a law by law basis, according to our programme". Which is plainly silly: the M5S 163 parlamentarians will not get an opportunity to vote law by law unless there is a government in power that commands a confidence vote in both houses. The 163 citizen are turned by Grillo into Dead Men Who Do NOT talk.

 

Frozen, hibernated, silenced, ready to be resurrected only to leave their respective Houses when Parliament is soon going to be dissolved. A rather inglorious end to such an extraordinary, auspicious, revolutionary success. And when new elections are called, the protest voters that concentrated on Beppe Grillo on 24-25 February, now frustrated by the complete waste of their votes, will turn back to traditional parties, most probably PDL that will also drain some of Monti's support - unless the magistrates send Berlusconi to jail.  

Grillo's suggestion, of forming a government on his own, with the confidence vote support of PD and PDL, is as much of a non-starter as Bersani's offer to Grillo of a PD government with M5S support on specific policies plucked from their programme. What is needed is effective power sharing, with a precise division of Ministries, not the unaccountable, unspecified support for policies presumed to be jointly desired (how many? to what extent? accompanied by what else?). Grillo seems to favour a PD-PDL "Governissimo" which would not last long and cause the PD to lose half of their electorate (as happened to the Left in Greece and in Spain). D'Alema would pay this high price, for it is the only government which would give him office. Napolitano and Veltroni would, out of concern for Italy's stability and place in Europe, but Bersani and his cronies are unlikely to bite. 

Nevertheless, there are three tenuous prospects for a way out of this unprecedented constitutional crisis.

First, last Friday Dario Fo - Grillo's stated candidate as Napolitano's successor, though unavailable - said that there is a possibility of a deal with the PD under the leadership of someone other than Bersani (Matteo Renzi? Fabrizio Barca? Dario Fo did not say). Earlier on the same day Massimo D'Alema had already said, on television, that if Grillo sets this condition it should be immediately accepted.

 

Second, the 163 parlamentarians treated like Zombies by Grillo are nothing of the kind. Leading personalities are emerging within their group, and they are a diverse and articulate lot. They do not have to revolt, they can simply ignore the attempts to make them do as they are told. Give them a taste of Roman parliamentary life, and they will prefer to stay on rather than to return to the provinces.

Finally, it might actually dawn on Beppe Grillo that rejecting the opportunity to change, at last, some of the fundamental ills of Italian political life might actually jeopardise his current command of the protest vote. He simply will not get a second chance.