It is my Friday Lay Day blog and it is going to be relatively quick. There was an article in the Wall Street Journal (December 23, 2015) – Economists Say ‘Bah! Humbug!’ to Christmas Presents – that says a lot about how my profession struggles to appreciate reality in all its dimensions. Every year, it…
Its Friday and I am writing a short blog only. A lot of people I meet find it hard to understand what a cost is in economics. They are too accounting oriented, in the sense that think a dollar sign on a piece of paper (such as a fiscal statement) represents a cost. In some contexts, it is sensible to think about dollars but when considering what a government should do, the only thing that really matters is the real resource cost. That may be calibrated in dollar terms but is not a monetary amount. In walking around three large Italian cities in the last week (Florence, Rome and Milan) I saw a lot of idle resources. The real costs of this idleness are massive – lost production, lost real income, lost lives. I saw many people not working and many others trying to scratch out an income selling trinkets on street corners. I also saw rubbish and urban decay everywhere such that the urban amenity was severely diminished. I didn’t see a shortage of productive jobs that could be done to improve the civic (public) parts of Italian life. But no-one was doing them. Why? The potential jobs were latent only because there was no-one willing to pay the idle workers to perform these productive tasks. That happens when there is a shortage of spending and has nothing to do with structural parameters.
Ask yourself this question: Have the real resources available to Greece declined by 25 per cent between 2008 and 2014? In Italy, is there now a shortage of available labour? A moments reflection (a walk down the street) will tell you that there is no shortage of labour in Italy and plenty of jobs that the idle labour could perform – jobs that are right before one’s eyes as you walk around the streets that if performed would make lives better.
Between the second-quarter 2007 and the first-quarter 2014, unemployment in Italy increased by 118.7 per cent or 1,742 thousand people.
That rise took total unemployment from 6 per cent of the labour force to 12.6 per cent. The situation is much worse in some of the more disadvantaged areas in the south and among certain demographic groups.
As you can see from the graph below, the situation was being recovered to some extent before the European Commission started to demand austerity measures from the Italian government.
After that time (early 2011), unemployment accelerated sharply. Between the June-quarter 2011 and the March-quarter 2014, unemployment rose by 1,204 thousand or 60.6 per cent.
What were those 1.74 million or 6.6 per cent of the available labour force doing before the crisis hit? They were productively engaged meeting the demands for goods and services from the non-government and government sectors.
If sales had not have fallen off a cliff, what would they be doing? Answer: Working!
The mainstream claim that the solutions to the Eurozone crisis are structural. Major structural changes including wage cuts, retrenchment of job protection rules, cutting of pensions and income support measures, and cuts to business regulations that stop corporate fraud etc are necessary.
But even with all those rules, regulations etc, there were 1.7 million workers more working in 2007 than there are now in Italy.
The only thing that happened is that the non-government sector spending collapsed and then the government imposed austerity which made matters worse.
Structural factors can impact on growth in output and employment, but they are slow-moving influences. They do not suddenly happen, unless we are talking about a tsunami or an earthquake which destroys productive capital.
But natural disasters are not what the mainstream neo-liberals are referring to when they claim the unemployment was caused by structural impediments.
The reality is simple. Had the Italian government responded to the decline in private spending and increased its deficit accordingly, the rise in unemployment would have been minimal.
The rise is all down to a failure to provide the nominal spending necessary to keep production, and hence, employment going.
The Italian government could reverse this situation almost immediately by embarking on a major public sector job creation program, backed by the ECB. It could be done within the terms of the Lisbon Treaty, using the same processes that the ECB used in 2010 under its Securities Market Program.
The European Commission would also have to declare the situation in Italy to be exception and allow the Stability and Growth Pact and related conditions to be relaxed.
The Eurozone has all the ad hoc flexibility it needs to create those jobs. The fiscal deficit in Italy would rise significantly but then so would Italian well-being and prosperity.
All that stops them is ideology! There are no real resource constraints (costs) preventing them from making things better in Italy.
Its overcast today – so we need some sun
I was playing this record this morning to keep me company while working. Its one of those great tracks from Burning Spear’s 1977 album – Dry and Heavy.
This is the 12″ version of the track – The Sun – originally from the Dry and Heavy album and written and sang by Winston Rodney (aka Burning Spear).
The musicians on the track include Robbie Shakespeare (bass), Leroy Wallace (drums), Bernard Harvey (keyboards), Earl Smith (guitar), Donald Kinsey (guitar), Bertram Mclean (guitar), Noel Sims (percussion), Uziah Thompson (percussion), Bobby Ellis (trumpet), Richard Hall (tenor), Herman Marquis (alto) and Vincent Gordon (trombone) – all great players.
So sit back and forget about austerity for a little moment.
The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:
That is enough for today!
(c) Copyright 2014 William Mitchell. All Rights Reserved.