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Italy’s debt crisis – what can we learn from it?

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Map of Europe
Map of Europe

Very bad news for Italy, but a learning opportunity for us.

Excerpt:

Fears are spreading that Italy may soon have to follow Greece, Ireland, and Portugal and seek a financial bailout from the European Union and the International Monetary Fund. Doubts over the sustainability of Italy’s explosive cocktail of high debt and low growth have led to violent routs that saw Italian stocks plunge and bond yields soar in recent days.

Italy is the seventh-largest economy in the world and the third-largest economy in the euro zone (the group of countries which use the euro as their common currency). It is also the third-most indebted country in the world after the United States and Japan. In its European context, Italy’s mountain of debt is more than that of all the other so-called PIGS (Portugal, Ireland, Greece, and Spain) group of financially troubled countries combined.

Given the massive size of the Italian economy, many analysts believe that Italy (like Spain) is too big to be rescued and that a full-blown debt crisis in the country could lead to the collapse of Europe’s single currency.

Confidence in Italy began to erode after Moody’s Investors Service and Standard & Poor’s announced in recent weeks that they are reviewing the country’s sovereign credit rating. The review for a possible downgrade of Italy’s rating comes amid stalled economic growth that will complicate any efforts to reduce the country’s debt load, and political infighting in Rome over budget cuts required to prevent government borrowing costs from spiraling to unaffordable levels.

There is no quick fix for the two most immediate problems ailing Italy: the country’s towering national debt and extremely poor prospects for economic growth.

At 120 percent of GDP, Italy’s debt is the EU’s second-largest by that measure after Greece, which has a debt-to-GDP ratio of 150 percent. Italy’s €1.8 trillion ($2.5 trillion) debt, which is equal to the country’s national income, poses an unsustainable economic burden that will push Italy into the abyss if the government’s debt servicing costs keep rising.

What can we learn from Italy that we should avoid?

First, they are planning to balance the budget by 2014:

The plan calls for freezing public sector pay, reducing funding to local government and health services, increasing the retirement age, and cracking down on tax evasion. Italians will also have to pay €25 for some non-emergency hospital visits and €10 above existing fees to see specialists. The aim is to cut the budget deficit from 3.9 percent this year to 2.2 percent in 2013 and to balance the budget by 2014.

We are running massive 1.6 trillion dollar deficits under Obama, and he refuses to balance the budget. Even if he took every penny earned by those households earning $200,000 or more per year, that would not generate enough money to cover his massive 1.6 trillion dollar spending sprees. The problem is not revenue, it’s spending.

And what else can we learn from Italy?

Here’s more from the PJM article:

Everyone seems to agree that Italy’s growth problems are structural and systemic. As noted recently by the Economist magazine: “Between 2000 and 2010 Italy’s average growth, measured by GDP at constant prices, was just 0.25% a year. Of all the countries in the world, only Haiti and Zimbabwe did worse.”

Says the Economist: “Many things contribute to these gloomy figures. Italy has become a place that is ill at ease in the world, scared of globalization and immigration. It has chosen a set of policies that discriminate heavily in favor of the old and against the young. Combined with an aversion to meritocracy, this is driving large numbers of talented young Italians abroad. In addition, Italy has failed to renew its institutions and suffers from debilitating conflicts of interest in the judiciary, politics, the media, and business. These are problems that concern the nation as a whole, not one province or another.”

Does that sound familiar? That’s right! The Democrats are scared of globalization. They oppose free trade deals that reduce the prices of consumer goods. The Democrats favor distributing wealth from young to old. They oppose reforming entitlements like Social Security and Medicare for young people. The Democrats are opposed to meritocracy. They are the party of unions, tenure and wealth redistribution. It’s this economics illiteracy that is slowing down economic growth here at home. We need to vote the people who make economic decisions by feelings out. And we need to put the people who make economic decisions based on job creation in.

 

News

Would the Republican “cut, cap and balance” plan solve the debt crisis?

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Let’s take a look at the Republican “Cut, Cap and Balance” plan, as reported by CBS News.

Excerpt:

The House next week will take a vote to raise the debt ceiling and pass a balanced budget amendment, House Republican leaders said today.

The plan is unlikely to go anywhere, since a balanced budget amendment would likely fail in the Democrat-led Senate, but GOP leaders nevertheless called it a serious plan to raise the debt ceiling. They said President Obama and Democrats have failed to come up with an equally serious plan.

“We asked the president to lead,” House Speaker John Boehner said in a press conference today. “We asked him to put forward a plan — not a speech, a real plan — and he hasn’t. We will.”

The “cut, cap and balance” proposal would make raising the debt ceiling contingent on Congress sending a balanced budget amendment to the states. It would also cap government spending at 18 percent of Gross Domestic Product over the next 10 years.

The plan would raise the debt ceiling by $2.4 trillion, since that is the increase requested by the president. However, the plan would actually make even more in spending cuts — as much as $111 billion in 2012 alone.

[…]Boehner said the House would vote on the “cut, cap and balance” plan and then decide how to proceed from there.”I don’t want to preclude any chance of coming to an agreement, but [Democrats have] been unwilling to put a real plan on the table,” Boehner said. “Without serious spending cuts or real reform to entitlement programs, this problem is not going to be solved.”

That’s what the Republicans would do if they were in control. The balanced budget amendment would cap spending at 18% of GDP, so that we would never have a debt crisis ever again. That’s the right solution, except that the Democrats cannot give up the idea of buying votes with the money they steal from job creators. They just can control their addiction to spending.

Now, let’s take a look at who caused the debt crisis, with this House Budget Committee article by fiscal hawk Paul Ryan. (H/T Washington Post)

Excerpt:

While President Obama has recently professed a newfound — and vague — desire to cut government spending, it’s useful to recall what the President has actually done since taking office in 2009. The President signed into law a massive spending spree that plunged us deeper into debt, and failed to deliver on its promise to create jobs.

  • 24% Increase in Base Spending. Non-defense discretionary spending grew by 24% for the first two years of the Obama Administration, adding $734 billion in spending over the next 10 years.
  • Record Government Spending. The Federal government will spend $3.6 trillion this year, 24% of gross domestic product (GDP) and the highest burden on the economy since World War II. Spending has historically averaged a little over 20% of GDP.
  • President’s Budget Makes Matter Worse. According to CBO, the President’s budget never spends less than 23% of GDP and by the end of the decade rises to 24% of GDP. His budget’s failure to address the drivers of our debt threatens the health and retirement security of America’s seniors, and the economic security of all Americans. The President’s budget seeks to spend $46 trillion in government spending over the next decade, and has subsequently fought against House Republican efforts to restrain his spending appetite down to $43.5 trillion.

During the four years when Nancy Pelosi was the Speaker of the House, and Harry Reid was in control of the Senate, the Democrats packed 5.34 trillion dollars onto the national debt.

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What economic policies do left-wing and right-wing economists agree on?

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This article is from Harvard economist Greg Mankiw. (H/T Michael)

Excerpt:

Here is the list, together with the percentage of economists who agree:

  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
  2. Tariffs and import quotas usually reduce general economic welfare. (93%)
  3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
  4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
  5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
  6. The United States should eliminate agricultural subsidies. (85%)
  7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
  8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
  9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
  10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
  11. A large federal budget deficit has an adverse effect on the economy. (83%)
  12. A minimum wage increases unemployment among young and unskilled workers. (79%)
  13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
  14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

I wonder which political party believes in most or all of these positions?

Hmmmmn.