Transcript presentation

Macroeconomics and Inequality
Francesco Saraceno
The Euro after the crisis:
lessons from the past and challenges for the future
Cambridge
December 15, 2010
Outline
 The Trend towards Increasing Inequality
 A worldwide phenomenon
 The role of policy
 The Macroeconomic Effects of Increased
Inequality
 Macroeconomic Performance in the EU and in
the US
 Eurosclerosis?
 Arguments in favour of structural reforms
 Public Sector Performance
 A European Paradox
Outline
 The Trend towards Increasing Inequality
 A worldwide phenomenon
 The role of policy
 The Macroeconomic Effects of Increased
Inequality
 Macroeconomic Performance in the EU and in
the US
 Eurosclerosis?
 Arguments in favour of structural reforms
 Public Sector Performance
 A European Paradox
The Trend towards Increasing Inequality
 Common trend (and overall undisputed)
 “Superstar Economy” (Gordon and Dew Becker)
The Trend towards Increasing Inequality II
 The Gini index is subject to many criticisms, so we can just focus on
the trend
The Causes of Inequality: The Role of Policy
 Progressivity of the tax system has strongly decreased
The Causes of Inequality: The Role of Policy II
The Causes of Inequality: The Role of Policy III
 Shift of taxation from high to low incomes, and from capital to
labour.
 Result: Generalized decrease of the wage share
Outline
 The Trend towards Increasing Inequality
 A worldwide phenomenon
 The role of policy
 The Macroeconomic Effects of Increased
Inequality
 Macroeconomic Performance in the EU and in
the US
 Eurosclerosis?
 Arguments in favour of structural reforms
 Public Sector Performance
 A European Paradox
Macroeconomic Effects of Increased Inequality
 The poor have a higher propensity to consume




Liquidity constraints
Subsistence consumption
Satiation
Etc.
 Transfer of wealth to the rich reduces propensity to
consume as well as the consumption structure
 Unless we live in a world in which S = I ex ante, this may
lead to the consequence that demand and growth stagnate
 Question: if the increase of inequality is widespread, and if
it tends to depress growth, why do growth performances
differ, notably across the ocean?
Outline
 The Trend towards Increasing Inequality
 A worldwide phenomenon
 The role of policy
 The Macroeconomic Effects of Increased
Inequality
 Macroeconomic Performance in the EU and in
the US
 Eurosclerosis?
 Arguments in favour of structural reforms
 Public Sector Performance
 A European Paradox
"My Crisis, your Problem"
Change between
2010q2 & 2008q1
FRA
DEU
ITA
JPN
USA
GBR
SPAIN
GDP per capita (%)
-3.5
-2.3
-7.1
-4.5
-3.2
-5.8
-6.0
GDP (%)
-2.2
-2.7
-5.6
-4.3
-1.1
-4.5
-4.6
Unemployment (points)
+2.1
-0.6
+2.2
+1.4
+4.9
+2.6
+10.8
In spite of the sluggish recovery the US did comparatively well in terms of GDP
 Caveat: Most of the effects of the recession are felt on employment
Global Recovery Will Remain Moderate
OECD area, unless otherwise stated
Nothing New Under the Sky
Why the EMU did Worse than the US?
 At the early stages of the crisis it was expected
that Europe would be less hit than the US
 Excessive activism of macroeconomic policies (in particular
monetary policy) of the Unites States
 Excessive deregulation of financial markets
 Europe’s growth model
 Strong regulation
 Prudent macroeconomic policies
 What went wrong?
Outline
 The Trend towards Increasing Inequality
 A worldwide phenomenon
 The role of policy
 The Macroeconomic Effects of Increased
Inequality
 Macroeconomic Performance in the EU and in
the US
 Eurosclerosis?
 Arguments in favour of structural reforms
 Public Sector Performance
 A European Paradox
Lessons for Europe
 Why are the US growing more than Europe?
 Common Wisdom: In two words: Washington Consensus




More flexible economy
Less regulation, less rigidities.
Less distortions in the incentive mechanism
This explains the difference e.g. in the impact of the ICT
revolution
 Implication: Europe has to go for structural reforms
 This is the philosophy behind the European institutions
 Stability Pact
 ECB Statute
Problems with Structural Reforms
The importance of structural reforms is beyond
doubt, but it may be overstated
A number of reforms have already been
implemented.
 Goods market: Privatization, deregulation
 Labour market: Multiplication of contract types,
temporary jobs, reform of unemployment benefit
systems, wage moderation
Problems with Structural Reforms II
EPL index*. Selected years
1985
1995
2005
2008
Denmark
2.4
1.5
1.5
1.5
Finland
2.33
2.16
2.02
1.96
France
2.79
2.98
3.05
3.05
Germany
3.17
3.09
2.12
2.12
Greece
Italy
Spain
Sweden
UK
US
EMU11**
3.56
3.57
3.82
3.49
0.6
0.21
-
3.5
3.57
3.01
2.47
0.6
0.21
2.75
2.73
1.82
2.98
2.24
0.75
0.21
2.23
2.73
1.89
2.98
1.87
0.75
0.21
2.2
Source: Creel and Saraceno (2010)
 While we have dual system, with protected insiders and
outsiders, the marginal worker is not a source of rigidity
Shocks plus Institutions, Once More
 So, if it is not (only) market flexibility, what else can it
be?
 Difference often neglected: Policies are also very
different
 Active in the US
 Very inertial in Europe
 This corresponds to two different theoretical
backgrounds
Policy Divergence or Market Flexibility?
 Macroeconomic policy has been proactive in the US, and very inertial in
the EMU
Monetary Policy
Fiscal Policy
Institutions, not Only Policy
 US, UK, Spain, increasing indebtedness
 Consumption out of income substituted by consumption out
of debt
Institutions, not Only Policy II
Conclusion: A European Paradox
 The US institutional setup is consistent:
 Extreme market flexibility and weak collective
insurance
 Fluctuations are smoothed by proactive
macroeconomic policies
 The EMU on paper is also consistent
 Strong welfare state and automatic stabilization
 Constraints to discretionary macroeconomic policies
 What about the EMU in reality?
 Huston, we have a problem…
The Future?
 One First (impossible) best, political integration…
 … four feasible reforms
 A “solidarity stabilization fund”
 Golden Rule of Public Finance (to allow financing public investment by
borrowing)
 “Political” determination of the inflation objective (Bank of England?)
 More pragmatic approach to competition policy, in order to allow the
conduct of a true industrial policy…
 …and a question mark:
 Exchange rate policy?
Where does this come from?
Fitoussi, J. P. and F. Saraceno (2010), "Europe: How Deep Is a Crisis? Policy
Responses and Structural Factors Behind Diverging Performances",
Journal of Globalization and Development, 1(1), Article 17.
Fitoussi, J. P. and F. Saraceno (2010), " Inequality and Macroeconomic
Performance “Document de Travail de l’OFCE, 2010-13
Creel, J. and F. Saraceno (2010). "Automatic Stabilisation, Discretionary
Policy and the Stability Pact", paper presented at the Bank of Italy
Conference on Fiscal Policy and the Crisis, March 24, 2010
Fitoussi, J.-P. and F. Saraceno (2008), "Fiscal Discipline as a Social Norm:
The European Stability Pact", Journal of Public Economic Theory, 10(6),
pp. 1143-68.
Fitoussi, J.-P. and F. Saraceno (2004). " The Brussels-FrankfurtWashington Consensus. Old and New Tradeoffs in Economics " Document
de Travail de l’OFCE, 2004-02