A neglected piece of news from Italy

by on March 1, 2013 at 7:18 am in Current Affairs, Economics, Political Science | Permalink

One reason Berlusconi did so well is because of his opposition to a very unpopular property tax from the previous government:

The [Berlusconi] letter was sent to voters in swing regions of Italy.

It vows to scrap the unpopular property tax brought in under ex-Prime Minister Mario Monti and pay voters back.

There is more here.  Why does this matter?  Note that Italy has much more wealth than income, as indeed do all countries I know of.  Rogoff and Rinehart have focused our attention on the debt-gdp ratio, but as a pure accounting matter the debt-wealth ratio is more important.  And debt-wealth ratios rarely if ever look terrifying.  If you wish to get practical about it, imagine Italian homeowners — who have very low levels of debt on their homes — turning over twenty percent of the equity value in their living quarters to German and French banks.  (“Unterschreiben Sie hier, bitte…”)  The crisis is solved and, with apologies to Robert Barro, I am not even sure how much the negative wealth effect would crush consumer spending.  Life would go on and day-to-day taxes on income and consumption do not need to rise.

Yet of course this rarely if ever happens.  Indeed the Italians just took a big step away from such a “solution.”  The real lesson is that debt crises are crises of political will, not problems in the numbers per se.  And I take that to be bad news for the United States.  It also means that neither the debt pessimists nor the debt optimists convince me much with their cited numbers.  Look to the politics and adjust your mood accordingly.

1 prior_approval March 1, 2013 at 7:37 am

‘One reason Berlusconi did so well is because of his opposition to a very unpopular property tax from the previous government:’

Talk about missing the lede – Berlusconi didn’t want to pay, and as has been true his entire political career, he managed to find enough voters to agree with him, using his wide ranging media assets. And this isn’t even the first time he has done this –

‘Berlusconi came to power in 2008 after a last-minute campaign promise to remove the property tax, which he abolished in his first Cabinet meeting. On Friday, he promised to do the same if his coalition wins.’

http://bigstory.ap.org/article/berlusconi-vows-cancel-property-tax-day-1 (That link is from Jan. 25, 2013, by the way)

2 Alexei Sadeski March 1, 2013 at 10:35 am

Billionaires like Berlusconi value power and influence more than money.

3 prior_approval March 1, 2013 at 10:45 am

Billionaires like Berlusconi seem to value bunga-bunga more than anything else. And apparently, a sufficient number of Italians find this a job qualification for elected office.

4 Alexei Sadeski March 1, 2013 at 11:43 am

I’ll take Berlusconi over any of the typical earnest American politicians.

5 karl March 1, 2013 at 12:02 pm

Easy to say when you don’t really have to.

6 prior_approval March 1, 2013 at 1:14 pm

karl’s replay is pretty much the same answer as I have heard from every Italian I have spoken to about Berlusconi – admittedly, most of them Italians living in Germany, but a few conversations were during a trip to Italy last summer.

To show just one of the major differences between the current crop of leading American politicians (Bloomberg can be compared to Berlusconi, for example), let me relink to the wikipedia page devoted to nothing but Berlusconi’s past, present, and ongoing involvement with the Italian judicial system – http://en.wikipedia.org/wiki/Trials_and_allegations_involving_Silvio_Berlusconi

It is truly interesting reading, and Berlusconi has woven politics and self-interest in a way uniquely his own – partially his ownership of all the major broadcast networks but one (or all, when in power, depending on how you look at it). Partially the number of proven charges he has weaseled out of, in part by the successful changing of the law to benefit himself, and partially because he manages to pull it all off, over and over again.

7 Alexei Sadeski March 1, 2013 at 6:51 pm

Remarkable that you chose to compare Berlusconi to Bloomberg; Bloomberg is by far my most loathed of all American politicians – whilst Berlusconi is by far my favorite of all European politicians.

Bloomberg combines the most obnoxiously overreaching aspects of the leftist nanny state with the righteous, moralistic indignation of the far right. One of the worst political actors of our generation, and naturally one of the sharpest politicians.

8 Alexei Sadeski March 1, 2013 at 6:52 pm

Oh, and prior_approval, I am quite well aware of Berlusconi’s varied criminal history. I am, after all, a huge fan!

9 ThomasH March 1, 2013 at 7:42 am

I don’t think “political will” is quite the right term for it. The “political will” problem is when “everybody knows” that pain must be administered and all shy from administering it. The US problem is that there is not such consensus. One side thinks that the deficit should shrink in the long run by a combination of controlling medical costs, reduced military spending, and tax reform that shifts tax burdens away from low income groups and toward higher income (ideally higher consumption) groups. The other side thinks the deficit should be shrunk immediately with unspecified reductions in non-military spending. Numbers are useful in examining these differences.

Italy’s problem is that the adjustments it needs to make can only be done in the context of vigorous EU-wide growth, which the ECB does not have the “political will” [ironic :)] to deliver.

10 Hojat March 1, 2013 at 7:49 am

The debt issue is oversimplified in your writing. From a normal Italian point of view, this is not his debt, this is the government debt. They do not want to pay back the debt created by the government.

And changing assets to liquidity, at the nation level is not that easy.

11 Nathan Goldblum March 1, 2013 at 10:50 am

It’s not government debt – it’s state debt. And the state, my friend, is you and me.

12 Maurice de Sully March 1, 2013 at 3:35 pm

In “Italy”- much like “Spain”- such is not necessarily so.

When the state is just a money sponge, there is no reason to remain attached to it. European nationalism, in its current form, is a fairly recent innovation. No reason to assume it will persist in its present form.

13 Andrew' March 1, 2013 at 8:21 am

I paid cash for my house when all the other jerks were swinging for the fences…and you want me to give up what I chose to lock in? That’s a tad flip.

14 Effem March 1, 2013 at 12:09 pm

So a pensioner should pay instead? Not sure I follow the logic.

15 antipopulist March 1, 2013 at 12:19 pm


16 Effem March 1, 2013 at 1:11 pm

The logic being?

17 JWatts March 1, 2013 at 4:24 pm

What is the logic behind your argument?

18 Bernard Guerrero March 1, 2013 at 2:13 pm

Euthanasia of the rentier class…

19 collin March 1, 2013 at 8:24 am

Maybe we should send Robert Wagner to Italy to sell reverse mortgages.

20 Slocum March 1, 2013 at 8:33 am

A government engages in periodic wealth confiscations whenever it runs into debt trouble, wiping away the latest crisis just like that…solve for the equilibrium?

21 dan1111 March 1, 2013 at 11:27 am


22 DocMerlin March 1, 2013 at 8:09 pm

Periodic genocides.

23 Giuseppe March 1, 2013 at 8:35 am

How do I turn over twenty percent of the equity value in my home? I could take out a new mortgage but in practice that is just a mechanism to transfer the equity (wealth) via payments (revenue/GDP). I would still take the hit to my annual income and standard of living. My guess is the Germans want the wealth in a convertible form so a piece of paper saying they own 20% of my house with no right to sell or use won’t cut it.

24 Andrew' March 1, 2013 at 9:16 am

This is a general problem because a 20% drop would constitute a fire sale and probably precipitate a much higher drop. Isn’t that basically what just happened? So, you couldn’t sell, so you’d have to pay out of income, so you are back where you started from. But they lent you the money in the first place, and they are supposed to know more about aggregate capacities, so what percentage of liability should they bear?

25 Yancey Ward March 1, 2013 at 10:30 am

Exactly. Or the Italians could pay rent on their real estate to the German and the French banks. Or the Germans and the French banks could just take 20% of Italians’ retirement savings.

26 karl March 1, 2013 at 12:05 pm

Think of it as a lien, payable as an estate tax after death.

27 Brian Donohue March 1, 2013 at 9:09 am

Can we reframe this whole conversation in terms of leverage?

We all know, for example, the $16.4 trillion US federal debt. The proper way to sleep at night in view of this millstone is not via some long-winded macroeconomic BS, but in view of the wealth of citizens, which I think runs to about $80 trillion in gross assets and $10 trillion in gross (non-government) liabilities.

At the same time, however, you would want to properly account for “already earned” Social Security and Medicare benefits. Not sure what this number is, cuz nobody I’ve seen has done it right, but it’s another 14 figures. In Europe, with more comprehensive government-provided benefits, it’s a bigger problem.

Put it all together, and the West is leveraging its wealth to a…healthy degree.

Now, if you live in a rich country, and you want to perpetrate an intergenerational rip-off, I advise you talk non-stop about these numbers. Like I say, it’s the only way I can even get my brain around the $16.4 trillion and sleep at night.

Families, classes, and whole countries have episodes of spending down wealth. The worst part is the insidiousness of it, played out over generations. I don’t like this model.

A real economist might be more interested in, for example, where this pile of wealth came from in the first place.

If I learned one thing in economics, it’s the ubiquity of trade-offs. No free lunch. Modern macroeconomics, AFAICT, is built on a childish rejection of that view.

Italy is not insolvent, but they are on track to slowly, bitterly, sell their patrimony. Sad.

28 Yancey Ward March 1, 2013 at 10:32 am


29 Pavel Kohout March 1, 2013 at 9:13 am

Nonsense. The real problem is that Italy is one of the most generous welfare states in Europe. Cut Italy’s welfare to the level of Spain or UK, and, presto, there’s a budget surplus. Problem solved.

30 derek March 1, 2013 at 10:22 am

I haven’t looked for a little while, but iirc the government cost per gdp is about 8-10 % higher than Germany. The political will lacking is that which would control spending. And Germany is not a low bar.

That is also the problem with the UK and the US as well. The US has done extraordinarily well with gov’t being in the mid 30% range historically. It is higher now and we see the stagnation, as well as the impoverishment of the middle. The money is going to come from somewhere, and as Willie Sutton says, you go where the money is. The rich are a great rhetorical target, but the middle class is where the bulk of the cash sits. So take it from them. The UK is around 49%. Drop it down to the low 40’s and things would start to work again.

But as we see in Washington this week, even extraordinarily small cuts produce screaming and gnashing of teeth. The sound I hear is the sound of a politician losing his ability to exercise power.

31 The Original D March 1, 2013 at 11:26 am

Presto! Except that’s exactly where political will is needed most.

32 Effem March 1, 2013 at 12:21 pm

Perhaps taxes were just too low? Tax away the wealth inequality that was created via leverage, and presto, there’s a budget surplus.

33 derek March 1, 2013 at 9:27 pm

And what happens next year?

34 Bill March 1, 2013 at 10:23 am

As it happens, I have been in Italy for the last three weeks, and this post, as prior approval pointed out, is the most disingenuous and most misleading of many. Berluscnni eliminated the property taxes, reducing tax revenues, Monti had to reinstate the property tax for solvency reasons (and, in fact they are higher now). Berlusconi creates the debt by eliminating the property tax ( benefiting wealth holders), Monti closes the gap by reinstating them (and also cuts other programs).

You relied on misinformed readers and did not give the necessary background.

So far, have visited all the PIIGS except Greece in the last two years. Spain and Ireland were the worst, due mostly to housing and government bailouts of the financial sector causing greater austerity.

35 Urso March 1, 2013 at 10:45 am

I have no idea how you think anything you said contradicts anything in the original post.

36 Yancey Ward March 1, 2013 at 1:24 pm

Bill can’t read.

37 Bill March 1, 2013 at 2:58 pm

Yancey, Apparently you did not read my comment where I pointed out that Tyler did not disclose that Burlesconni had earlier had been responsible for eliminating the property tax cut.

Maybe you should read my comment first. I am open to you showing me where Tyler made this point, as you imply he did.

Tyler framed the issue the same way as Obama raised taxes by letting part Bush tax cuts expire. Without knowing that Burlesconni cut these taxes, creating a problem, you have an incomplete story, which apparently you are happy with.

38 Bill March 1, 2013 at 3:06 pm

Eliminating the property tax, rather than eliminating the property tax cut.

39 Yancey Ward March 2, 2013 at 7:16 pm


You still can’t read, even when prompted to go back and do so. You wrote that Cowen’s post was misleading and disingenuous, however, all Cowen wrote was that Berlusconi did well in the recent election, in part, because of his opposition to the property tax the Monti government implemented. To Cowen’s point, whether or not Berlusconi previously eliminated the tax is irrelevant, and certainly justify your comment above, nor Prior Approval’s. Urso was correct, nothing you added justified calling the post misleading and disingenuous.

40 dan1111 March 1, 2013 at 11:36 am

I agree with Urso, that information doesn’t contradict what Tyler wrote in any way.

Furthermore, this is a post advocating fiscal solvency through government taxes on wealth and lamenting the lack of political support for the same. Yet somehow you seem to think it is a pro-Berlusconi post?

41 Bill March 1, 2013 at 3:04 pm

Dan, Incompleteness never contradicts, does it? It just let’s you draw the wrong conclusion.

42 dan1111 March 2, 2013 at 3:57 am

Bill, what information matters depends on the context.

If this were a post defending Berlusconi or trying to assign blame for Italy’s tax policies, then I agree that the omission of that history would be indefensible and misleading.

However, the topic of the post was public attitudes toward taxes as expressed in the election. The information presented was true, and I believe it was complete enough for the topic being discussed.

43 Bill March 2, 2013 at 6:28 am

Dan, Tyler’s post begins with a statement that one reason berluscinni did so well is that he opposed an unpopular taxi imposed by his predecessor.

You like to be fooled.

He didn’t mention that the property tax existed previously, was eliminated by Berlusconi, deficits increased as a resulted, Monti reinstated the taxes.

Different picture than the opening lede of Tyler’s post. Or, maybe you think not, in which case other readers are free to judge for themselves.

44 Yancey Ward March 2, 2013 at 7:22 pm


One last time, then I am done- it doesn’t matter whether or not the property taxes were needed or not (an opinion in any case, though one Cowen actually agrees with), and it does not matter whether or not Berlusconi previously eliminated them- the blog post describes the election results and the positions that Berlusconi ran his campaign on. It accurately describes the sentiment of a sizeable portion of the Italian electorate. Your desire to read something more into a straightforward blog post is baffling in either it’s maliciousness or stupidity. Based on my previous experiences with you, I lean increasingly towards the belief that you simply lack the ability to read simple declarative English.

45 GW March 1, 2013 at 11:19 am

It is not unusual for Greeks, Italians, or Spanish to have a home in their family’s hometown or village and live during the week in an urban apartment. Rates of home ownership continue to be high, in particular in comparison with those of Germany, still a nation where the majority are tenants and having a second domicile is rare. I believe that this is one of the great underreported facts providing background to the current crisis and the degree to which Germans, for example, with their comparatively low ownership rates will be willing to continue to subsidize failed states whose citizens are, by some reasonable measures, more wealthy than themselves.

46 Tyler Cowen March 1, 2013 at 11:52 am

Don’t think of me as *advocating* any particular thing in this post, I am simply pointing out that if Italy doesn’t pay back its debt, it means they don’t want to. In reality, maybe I advocate *default*! Right? You don’t know. This post is explanatory.

47 DocMerlin March 1, 2013 at 4:42 pm

“if Italy doesn’t pay back its debt, it means they don’t want to”
Arrow’s theorem put the kibosh on the idea of “group preferences.”

48 Lord March 1, 2013 at 12:23 pm

It is a mistake to compare income and wealth without taking into account how much income that wealth can generate. Wealth only generates one twenty fifth of its value as income, and much of the value of wealth disappears with an increase of taxes on it.

49 Ray Lopez March 1, 2013 at 1:01 pm

Surprised nobody mentioned this point, which btw is true as a matter of law in the USA: you cannot tell voters you will rebate them a specific amount of money if they vote for you–it’s illegal, notwithstanding the First Amendment. Former anti-mafia prosecutor Antonio Ingroia, who leads new left-wing Civic Revolution party, said on his website: “With the letter sent to Italians promising money in exchange for votes, Berlusconi has committed one crime, possibly two.

50 Urso March 1, 2013 at 1:04 pm

Saying “if elected, I will repeal this tax” is very different than saying “if elected, I will send you a check for $___ written on the public fisc.”

51 prior_approval March 1, 2013 at 1:46 pm

Berlusconi has you beat on that distinction, again displaying the intersection between his wealth and his essentially unique political skills –

‘Italian voters on Wednesday began receiving the first letters in a gigantic mail shot ordered by Silvio Berlusconi, promising to pay them back billions of euros in tax.

The former prime minister’s initiative, which drew accusations of foul play and even criminal wrongdoing from adversaries, appeared to be a final attempt to win over undecided voters before Italy’s general election on Sunday and Monday. The last opinion polls to be published before a ban took effect on 9 February showed the media tycoon-turned-conservative leader trailing the centre-left by between five and six percentage points.

Berlusconi has based his campaign around a pledge to abolish a widely resented tax, the Imposta municipale unica (IMU) and refund the amount levied on principal residences. The letter, designed to resemble an official communication comes marked “Important notice”.’ http://www.guardian.co.uk/world/2013/feb/20/silvio-berlusconi-tax-letter

52 Frederick Harrison March 1, 2013 at 1:28 pm

It definitely won’t be easy for Italy to make an economic comeback. Italy ranks number 5 as the country hardest hit by the economic crisis. In February the Orlando Bisegna Index, the US index which specializes in evaluating the economic crisis in various countries, gave 23 crisis intensity points to Italy. Miles away from what you would call growth.

53 Nick March 1, 2013 at 1:52 pm

Maybe that’s why we look at the ratio of debt:GDP instead of debt:wealth despite the stock/flow error. The episodes where large amounts of private wealth are transferred into public wealth are not, by and large, happy affairs, and work best with a large number of well-armed government supporters. Supporting government debts with current period income is a much better way to do it.

54 dearieme March 1, 2013 at 3:30 pm

Why don’t they just nationalise the Roman Catholic Church and auction off its wealth? It’s the sort of trick that worked at the French Revolution, or for Henry VIII. Of course the rascals pissed all the wealth away, but then they were politicians, eh?

55 Nyongesa March 2, 2013 at 5:52 am

were still benefiting to this day from Henry the VIII’s actions.

56 tom March 1, 2013 at 4:26 pm

Why limit the tax to those homeowners with equity? How about those on the other side of the loan? That way the whole value of the property be taxed. Or better yet, why not just carve out 20 percent of the landmass and give it to the bankers? Life would go on. No problem. No need to raise taxes at all. Just confiscate the property. Wouldn’t effect anything.

57 JCW March 2, 2013 at 12:43 am

The real question here is whether bunga-bunga parties are more of a stimulus package or a redistributive transfer payment.

58 Max March 2, 2013 at 3:36 am

@tyler: couldn’t it be that italiens even think farther. Even if we repay the government debt by selling our wealth, does this mean that our general governance increase or will it increase the government’s reliance on bailouts by the people. There underlying management issues why Italy is in this mess in the first place. A blank sleet might not help.

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