Rethinking Keynes today in the light of the interesting scenarios of those Western economies that need to give greater impetus to a growth that is still weak and especially insufficient to reduce unemployment is a difficult and difficult task. And this not only because it is difficult, if not impracticable, to think that the solution should be found in recourse to deficit spending, but also because any strategy aimed at creating new jobs must take into account the adoption of labor-saving innovations .
If one can agree on the Keynesian method, ie on the need for public actions, the same cannot be agreed on conventional therapies that rely on increasing public spending.
Western economies, the EU in particular, have seen their debt rise since the 2008 financial crisis, leading to diametrically opposed choices that led to the launch of the infamous Fiscal Compact. An austerity program that is undoubtedly too rigid and merciless in the face of the needs of the weaker systems, but which nonetheless marks the need for a (gradual) return from debt and the adoption of budgetary discipline by the most indebted countries.
Inevitably, public intervention has been taking on different forms from the traditional ones (increase in deficit spending) to embark on the path of incisive reforms aimed at reducing unproductive spending and crowding out private investments: the well-known spending review, perhaps too tepidly launched .
Add to this that the scenario of low interest rates and inflation close to zero opens up new and interesting opportunities for the public hand. If to this mix is added, as the Italian case shows, the reduction of the spread and a prospect of even negative interest rates on short-term debt, public intervention can and must concentrate on stimulating the increase in consumption and not so much on the whole aggregate demand, so as to accompany the recovery with policies suited to the expansionary monetary policy of the ECB.
This means using the tax lever to reduce the tax burden on less well-off categories because they are characterized by a high propensity to consume. At the same time, the spending review must focus on the gradual elimination of waste, certainly not social spending, with the addition that it too must be reserved for the needy (not for everyone).
Financing the reduction of the fiscal burden in deficit is not a bad idea as many nostalgic critics of the first Keynes maintain, both because it does not cost (one-year interest is negative) and because it radiates rapid effects on consumption. When taxes are reduced starting from levels judged excessive, not only is consumption boosted but the way is paved for the recovery of private investment without disturbing public intervention.
Finally, a side note. The data on the weight of the tax burden shows a slightly downward trend which is manifesting itself in 2015 and which could continue in 2016 with an expected decrease of 1,8% of GDP, freeing up resources for consumption and investments.
I've gone on a bit, but I would like to end by recalling that short-term economic policy does not allow for “jumps”. It should be planned on the effects it can have in the medium term. Otherwise “in the long run, not only we, but also our children would have died”.
ANSWER FROM ROBERTO PASCA DI MAGLIANO TO MICHELE BAGELLA
OBSERVATIONS BY GIORGIO LA MALFA ON THE INTERVENTION BY ROBERTO PASCA DI MAGLIANO
ANSWER FROM ROBERTO PASCA DI MAGLIANO TO GIORGIO LA MALFA
Read also Ernesto Auci's comment on Giorgio La Malfa's book "John Maynard Keynes" (Feltrinelli), followed by La Malfa's answer and Auci's rejoinder.
MICHELE BAGELLA'S OBSERVATIONS ON THE INTERVENTION BY ROBERTO PASCA DI MAGLIANO
I agree with your Keynesian synthesis.
I'll add a few points:
1) The refinement of the Keynesian view on economic policy must be done in the light of what Keynes taught us on the side of expectations in the financial sector and which have been developed by general theory onwards from Hicks ( A suggestion to simplify the theory of money, Tobin ( PortfolioTheory), and Stigliz (Asymmetry Information). Certainly Friedman took the concept to an extreme with rational expectations, not considering how much forecast imperfections can affect financial market trends. Otherwise, if the forecasts would be perfect, there would be no bubbles.
2) The effects of forecast imperfections on the financial markets must be accompanied by the effects of forecast imperfections on the real economy. This is a very complicated field, but there are two starting points that must always be kept in mind when speaking of economic policy: a) European constraints and b) the globalization of markets
3) In your summary you mentioned the European constraints. I add the globalization of the markets as a further constraint to the economic policy. Inflation as an income redistribution tool has short-term effects. In the medium term, efforts to increase employment will not pay off! In order to increase employment in the new context, a policy of reforms that looks at the competitiveness of factors, capital and labour, is needed. There are no shortcuts, unless you want to blow up the "system". Argentina has tried but with extremely negative results for employment but positive for the political class that promoted them. The Argentine model can only fascinate those who promote it.
4) Belonging to the Eurozone has given indebted Italy the possibility of recovering over time the disasters caused by governments in the past favorable to excessive public spending. The thesis of the "external constraint" of Guido Carli and Azelio Ciampi, continues to be especially today as valid as ever. Can it be abandoned? Certainly not respecting the European Treaties. So "to the failures of the markets" we will add the "failures of the Treaties"! I think the "Draghi-like Keynesianism” that is, the search for spaces for intervention compatible with the Treaties is the way forward as a method. Of course, then come the concrete measures you mentioned: fewer taxes and more incentives sector by sector, which is the "difficult" aspect of Italy's current economic policy.
I've gone on a bit, but I would like to end by recalling that short-term economic policy does not allow for “jumps”. It should be planned on the effects it can have in the medium term. Otherwise “in the long run, not only we, but also our children would have died”.
ANSWER FROM ROBERTO PASCA DI MAGLIANO TO MICHELE BAGELLA
I thank Michele for his supplementary, fair and organic observations. I'm glad you share my thesis on the fact that Keynesian thought should be recovered as a method (need for public intervention to reduce unemployment) and not as a therapy (increased spending, unacceptable in a highly indebted country).
In periods of low or no interest (the last placement of one-year Treasuries discounts a negative rate), new opportunities open up for an expansive fiscal policy aimed at reducing taxes to boost consumption and investment. In other words, the possibility opens up of financing the reduction of deficit taxes (this is what can be done in Italy).
It is good to remember that short-term economic policy has limited effects, implicitly recognizing that policy actions must be repeated over time.
I would add that the new scenario of low rates and almost zero inflation paves the way for the implementation of fiscal measures, which are more effective, faster and cheaper to stimulate growth than traditional economic policies based on increased public spending.
OBSERVATIONS BY GIORGIO LA MALFA ON THE INTERVENTION BY ROBERTO PASCA DI MAGLIANO
the 2016 tax reduction you mentioned is measured in relation to what it could have been if the government had raised the VAT. In reality, compared to 2015, the reduction will only reduce taxes on the house minus the tax increases on gaming and on capital returns from abroad: in terms of decimal points.
ANSWER FROM ROBERTO PASCA DI MAGLIANO TO GIORGIO LA MALFA
I would observe that the trend of the weight of the tax on the GDP shows both a slight tendency to decrease, accentuated in the programmatic forecasts (all to be verified)
