Does John Cochrane get Italy wrong?
John Cochrane took part in a debate on Italy and the euro, hosted by Il Sole 24 Ore, Italy’s premier financial daily. The debate was promoted by Luigi Zingales. Most of my friends thought it was not a great idea, for it put on par contributions from well-established economists with others that are quite at the fringes of the scientific debate: the first tended to be less critical of the euro project, the latter tended to have a more jaundiced view of the European single currency.
My gut feeling is that Euro-exit is a bad idea, but debating it frankly is a good idea: for nothing helps bad arguments more than the impression that they can’t be talked about, most likely because of some dark forces which are suppressing the debate.
Cochran contributed a splendid piece to the debate. The article was criticised by Alberto Bagnai, perhaps the most vocal critic of the euro in Italy. Cochrane responded here and was showered by quite a few critical comments.
In his rebuttal, contending that Italy’s problem is not the currency Italians use but high public spending and lack of economic dynamism, John writes:
Call me when you can hire and fire people, government spending is under 50% of GDP, marginal tax rates are less than half, rent control is gone, it takes less than a decade to get a building permit, or when the World Bank ease of doing business ranking doesn’t look like this.
Well, rent control has been gone for quite a while, and so commentators on Cochrane’s blog couldn’t resist the temptation to teach the famous economist a lesson on Italy. They provided Cochrane’s readers with a glimpse of Italy as a free market nirvana – perhaps inadvertently.
Let me just go through a couple of the points they make. I don’t believe they are false: but they are, so to say, half-truths.
Correct, Italy doesn’t have rent control any longer. Does it mean that property rights are seriously enforced? Not quite. Evicting illegal occupants and squatters is actually more difficult than ever, with obvious effects on the supply of rental units. My colleague Giacomo Mannheimer blogged on Italy’s lack of respect for property rights here and also authored a short report on the subject (In Italian, sorry).
Did Italy liberalise its labour markets? Well, we had a number of attempts that were certainly an improvement as compared with the former arrangements.
In the late 90s/early 2000s, unemployment in Italy was at a historical low, perhaps precisely because of these liberalisation attempts.
At last, the so-called “Jobs Act” has abolished the infamous “article 18” of the Workers’ Statute, which made it virtually impossible to fire people for businesses with more than 15 employees.
Yet we still don’t have much “freedom to fire” today.
For one thing, any attempt to actually fire a particular individual by a firm needs to pass the scrutiny of the labour courts, which regularly side with the workers.
There is still a strong disincentive to even attempt to fire someone, as the legal costs will be significant and good chances are that you ultimately won’t get rid of him. It is actually easier to fire a bunch of people collectively, after negotiations with trade unions, in cases of severe distress of a given company (but without telling them who shall go), than picking one single worker and firing her.
It is true that we had something like German “mini jobs”: but they have been abandoned, because of trade unions’ pressure.
Together with the enduring hegemony of the trade unions, the country’s biggest problem lies in national collective bargaining. Though at firm-level you may negotiate a number of variations on the national agreement, these latter do not include wage cuts. Read this old-ish piece by Thomas Manfredi and Paolo Manasse, which very clearly points out the problem in the conclusion:
In Italy, the share of contracts covered by some form of collective bargaining is among the highest among Western countries- around 85%. This happens despite the fact that union membership is on the low side, around 30%, in international comparisons. The reason is that collective contracts typically apply to non-unionised workers as well as unionised ones, and they are also enforced outside the sector where they are negotiated. Furthermore, while the average length of collective contracts in Italy is 3 years, in line with the OECD average, the de-facto duration is much longer, due to recurring delays in contracts’ renewals. As of today, only between 30 to 40% of Italian firms use in-company bargaining (Treu 2009), while this percentage is close to zero for companies located in the South.
In the discussion on Cochrane’s blog, Uber gets mentioned a few times. It is true that banning Uber is a trend all over Europe, and not just in Italy.
And still the point can be made that the drive for over-regulation is pervasive, in the Italian bureaucratic class as well as among decision makers. A couple of stupid examples may make you smile. Advertising for baby formula is prohibited by the law (see here). The Parliament is considering a law to regulate the possibility of calling/hiring a chef to cook a dinner at your house (see this).
It is true that national regulation of commercial activity has been pretty much liberalized: but local government continues to meddle.
Then of course there are the quite bigger issues of public spending (basically 50% of GDP), high taxation, high public debt (132,6% of GDP) that Cochrane alluded too and that constitute the bulk of good reasons for so-called “structural reform”.
Summarizing. It is certainly not true that Italy didn’t reform in the last twenty years (in the 90s, actually, Italy privatised a lot). But very often these reforms did not result in a much needed liberalisation of the Italian economy, which is not a free market nirvana yet. It’s hard to argue with Cochrane on that point.