Italy’s government normally spends about 50% of GDP, even more than Sweden, making it one of the most lavish welfare states in the world. So what does Italy get for all of that spending? Here’s the NYT:
The underlying logic of Italy’s welfare system, which offers little support for those without tax contributions, remains intact. So Mr. Esposito and his family are relying on weekly food parcels from a community center. “Without their help,” he said, “we just wouldn’t have anything to eat.”
Even workers who are in the system can fall through the cracks. Lucia Vitale works at the Naples airport for about half the year, catering to the hundreds of thousands of tourists who arrive from March onward. For the other half of the year, she and seasonal workers like her can claim unemployment benefits. But those benefits have now run out. And they can’t get help from the government because, Ms. Vitale said, “we don’t fit into the right categories.”
The government has granted a one-time payment of 600 euros, around $650, to the self-employed and to seasonal workers in the tourist sector. But Ms. Vitale technically works in the transport sector, so she can’t apply for the support. For now, she too is getting by with handouts from volunteer organizations.
The situation for many is bleak. “Everyone here is having problems now,” Mr. Gallinari, the florist, said. “There are lots of people who are going hungry. You can see that their behavior is beginning to change.” Reports of social unrest across the region — shopkeepers forced to give away food, even some thefts — have ruffled a usually close-knit community. “The other night I caught some kids trying to break into my garage,” Mr. Gallinari said. “This is new for us.”
Even so, such incidents are rare. More striking — and representative of neighborhood life in Naples — has been a groundswell of community initiatives, to fill the void of absent state support. Some have set up a mutual aid help line so that volunteers can deliver food and assistance. And certain shops have begun encouraging customers to cover a shopping bill for someone unable to pay, in the Neapolitan tradition of the “caffè sospeso,” or suspended coffee.
Notice that even a welfare state like Italy is unable to provide a basic safety net in an emergency. Why is that? Why not increase spending to 60% or 70% of GDP for a couple of years, until the emergency is over?
Italy could have done exactly that if they had not run up unsustainable budget deficits when they were not facing a crisis situation. In fact, they did the opposite, borrowing so much that investors now view Italian bonds as having a greater default risk than German government bonds, despite both being priced in euros. Because Italy did not save for a rainy day, they now lack the ability to provide emergency relief in a crisis. Fortunately, Italy has volunteer groups to help out.
In recent years, pundits have often claimed that budget deficits don’t matter, as interest rates on government debt have fallen close to zero (or even negative in many European countries.) I’ve been arguing that it is risky to boost the debt to GDP ratio to a very high level, at a time when most other pundits thought my ideas were old fashioned and out of date. I argued that although interest rates are currently quite low, if they rose to high levels in the future then the interest burden on a large public debt could become unsustainable. That seems far-fetched today, but then the 15% interest rates of 1981 seemed equally far-fetched in the 1950s.
This is one reason why it’s not wise for countries to “max all of their credit cards”—borrow as much as lenders are willing to lend. History provides many examples of economic conditions changing in quite unexpected ways. The “black swan” event in this case turned out to be a global pandemic, not higher interest rates. But that’s the point—black swans are hard to predict.
Countries with their own currency (such as the US and Japan) have a greater ability to borrow money than those that lack their own currency (such as Italy and Greece.) But having your own currency doesn’t entirely eliminate the long run budget constraint. Rather the “default” that is most likely would involve high inflation, not outright refusal to pay the nominal obligation of the debt.
PS. Switzerland has also been hit very hard by the coronavirus epidemic, but I don’t see press reports of hungry people in Switzerland. Their government spends about 34% of GDP, one of the lowest ratios in Europe.
READER COMMENTS
Steve
Apr 10 2020 at 5:20pm
I will never understand the governmental-level or individual-level reluctance (or outright refusal) to plan for a rainy day.
“Bad times will never come!” *Bad times do – in fact – come* “Who could have seen this? We need massive fiscal stimulus!”
Garrett
Apr 10 2020 at 8:21pm
Because it’s seen as callous to say people should’ve made better decisions when they’re down
Steve
Apr 11 2020 at 12:12pm
Yeah I understand that, but nobody has the cajones during boom times (when people are not “down”) to preach any kind of prudence.
Phil H
Apr 12 2020 at 3:28am
Rather than pathologizing or moralizing about it, it might be better to see lack of contingency planning as a natural problem.
For individuals, the problem is that we don’t know what’s coming, and denying yourself now for an unknown future can make little sense.
For governments, the problem is somewhat different: the money governments collect does not belong to them. It belongs to the citizens of the country, and refusing to spend it on those citizens can be politically difficult to sell.
If you see the problems as problems of knowledge and agency, rather than signs that these individuals/governments are bad/stupid, then potential solutions are there.
Sven
Apr 11 2020 at 4:22am
Scott, Italy tried to get out of their unfavorable debt situation since the early 1990s by having a primary budget surplus almost every single year since then. That approach worked very well (debt shrunk fast) until the introduction of the euro in the early 2000s.
Since then, all it go them was slow growth and rising debt to gdp ratio. In fact, NGDP in Italy last year (before Corona) was almost the same level as in the early 2000s years.
The reason why italy has such a big budget spending to GDP ratio is their unfavorable demographics which squeezes the public retirement system. They did cut back on almost everything else, especially public investment. As long as italy is at least able to refinance itself with low interest rate, cutting back now on retirement system spending would most probably do more harm than good with regards to economic development.
For me, italy is a showcase that a country can have huge demand side problems for a very long period of time if neither monetary policy (via demand stimulus) nor partner countries (via fiscal transfer) are willing to help, and that this will create serious debt problems over time. It does not reveal any lessons about government size.
If you compare it to Japan: Yes, Japan has unfavorable demographics as well and you might argue that their budget spending to GDP ratio is much lower. But I think that this insight does not reveal any lessons about goverment size or debt in a demand deficient economy, because the japanese retirement system relies more on private savings than european systems. And all it got them was a huge “glut” of savings which the economy has trouble “putting to use” because of the demand shortfall (caused by inappropriate monetary policy). And this ultimately lead to the government “using” these savings by creating huge budget deficits.
So in short: It is the deficient demand problem which causes the debt, not deliberate decisions about government budget sizes.
I am no advocate of big government, but it may make sense to not get things backwards here.
Scott Sumner
Apr 11 2020 at 2:52pm
Sven, I don’t entirely agree with the premise of your comment. Italy did not try hard to get out of its debt problem; Germany is the country that tried to do so, and succeeded. When a country is spending 50% of GDP and pushing its debt ratio steadily higher, it cannot be said to be trying very hard to reduce its debt. You can certainly have an adequate welfare state at 45% of GDP. And I don’t regard “primary surpluses” as a useful indicator. Italy needed to run surpluses in absolute terms, not primary surpluses.
Is it hard to get reforms through Italy’s political system? Absolutely. And that’s probably the heart of the problem. But “demand” is not Italy’s core problem, as Germany is also in the eurosystem. Demand explains cyclical fluctuations in Italy, but that’s all. It doesn’t explain 20 years of stagnation—that’s supply-side.
Sven
Apr 11 2020 at 6:23pm
Scott, as a german, I can only laugh at the perception that germany “tried harder”.
Germany ran considerable budget deficits between 2000 and 2010, increasing the public debt. After that period, germany had a lot of luck by being able to keep its aggregate demand up through exporting, because its export products were of particular interest to global markets during this time (especially china). At the same time, interest rates were declining dramatically, because aggregate demand in the overall euro zone was depressed (not in germany, as you can from its NGDP number!). And there you have it: No financing costs + good GDP growth leading to fast declining debt to gdp ratio. No hard work, just luck of being in the right position at the right time.
Italy in contrast had no other choice but to keep spending under control even harder, because aggregate demand declined and interest rates went up (the spread at least).
And regarding the structural reform stuff: I suggest taking a look at this paper: https://www.ineteconomics.org/uploads/papers/WP_94-Storm-Italy.pdf
Not sure if I would agree with the conclusions and proposed solutions, but at least the summary of reform effort comparison is very interesting and revealing.
Scott Sumner
Apr 12 2020 at 2:01pm
Sven, You said:
“Italy in contrast had no other choice but to keep spending under control even harder”
How is spending 50% of GDP “under control”. The island of Sicily employs more forest rangers than all of Canada, despite having few trees. There is massive waste in Italy’s government, and almost no political will to cut spending.
Italy did face more adverse external circumstances than Germany, but it has also run a far more statist economy than Germany. On almost any ranking of “economic freedom”, Italy is near the bottom among developed nations. Germany’s Hartz reforms contributed to Germany lowering its natural rate of unemployment, although booming experts to China also played a role.
Again, is spending 45% of GDP too much to ask? Italians need to realize that “la dolce vita” is gone until they get the economy in shape. As individuals, they are extremely talented people; it’s politics that are holding them back.
Mike Davis
Apr 11 2020 at 10:05am
Sven, Does Italy had a “huge demand side problem” for a very long period of time or does it have a productivity/supply side problem? That’s a real question, not a snarky comment. I don’t know enough about Italy to have a valid opinion. I do know that many European countries, especially in the South, suffer from wasteful, inefficient rules and regs. (And if stories about organized crime are to be believed, the mafioso may also be a drain on productivity.)
Sven
Apr 11 2020 at 11:14am
Mike, good point. But my best guess is: It has both problems.
And as we know, long demand side problems often cause bad supply side problem.
I don’t think it was the mafia which dragged down NGDP growth to 0% for 20 years. Rather, the mafia had it very easy given the desperate state of the economy.
bill
Apr 13 2020 at 2:59pm
Italy’s debt to NGDP ratio is about double Germany’s (about 125% to 60%?).
Germans can borrow for 10 years at -0.60% vs Italy paying 1.75%. To my mind, that 1.75% rate is like a blended borrowing of -0.60% and 4.10% (ie, if Italy had a debt ratio equal to the German one, they would pay much less. Maybe -.60% as well. Bond buyers could think of that 1.75% as half at -0.60% and half at 4.1%) So, it’s too simple to think that the marginal borrowing for Italy is 1.75%. It’s much higher. Higher even than 4.1% because the new borrowing is pushing the debt to NGDP levels even higher. I see lots of problems with my analysis here, but I also see a kernel of truth.
Scott Sumner
Apr 14 2020 at 1:35am
Good point.
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