Italy’s growth disaster

Hat tip goes to Matt Yglesias.  At the risk of sounding like a broken record player, we are not sufficiently thinking through what it means for an advanced society to have basically zero net economic growth for a ten to twenty year period.  It’s very possible, and this is (more or less) the same Italy that was praised in the 1980s for its dynamism and which overtook the UK in terms of per capita income, at least for a while.


I wonder how much of this is the black market.

Used to be 25%. I'm sure it is larger now.

Good question. It doesn't even have to be "black" - eBay's revenues show up in GDP but do the rest of all the purchase prices? I may just be naive and ignorant and unappreciative of TGS arguments, but I still can't get over the fact that life still "feels" like it's "getting better" with all of its inventions, innovations, and general capitalist-ish progress. If I could choose to be 23 today or 23 ten years ago, I'd take where I am now without a doubt.

Well, to be fair, if you were 23 ten years ago you'd have ten years of zero return in the stock market and zero real wage growth ahead of you.

You'd also be 33 now and closer to the grave.


I'm expecting ten more years of zero stock market returns but I still expect life to be better in 2021.

What do you think it means?

Not sure I understand why this observation is surprising anyone to be honest. Italy is a badly mismanaged country smack in the heart of the Eurozone crash. Assuming they'd always simply default to steady growth because they are generally considered a first world country doesn't make much sense to me.

And the prospect of an "advanced society" suffering zero growth for decades on end is nothing particularly shocking either. Have we all collectively forgotten about Japan?

True, there is Japan, but Japan did experience real GDP growth during the Lost Decades. From 1990 to 2007, Japanese GDP increased by 26% in real terms. Although this was the slowest growth in the OECD during the period, it was growth nonetheless. That it is broadly viewed as an economic disaster by so many provides an indication as to how much more serious two decades of no growth might be.

Go deeper...

What happens to growth worldwide when the population plateaus and perhaps even starts to shrink at around 9 billion people in 2050 or so?

In my mind we probably see flattening to zero real growth EVERYWHERE in aggregate. What happens then? I imagine there is some natural limit to growth, once population stabilizes. At that point it would just be about getting everyone well fed and clothed and housed. And then entertained. And then you have the end of the road.

Perhaps then humanity will have to find other ways to live besides striving for ever 'bigger' lifestyles. Or to be pessimistic, that truly might be a 'zero sum game' where one nation can only prosper more than another by taking from another.

Call it an anti-Malthusian disaster...

Correct me if I'm wrong, but I believe a lifestyle can't be "bigger" unless there is productivity growth. Even in a world of flat population growth, there will still be innovation that creates consumer surplus.

Hopefully TGS is over by then, I guess...

Well, yes, but if you don't include what happens after 2007 Italy's series doesn't look too bad either. For Japan, if you take 1997 to 2009 you have basically 12 years of zero growth, though they've been faring much better than Italy lately.

Maybe I don't understand Tyler's point, but it seems wrong to say there is minimal discussion of this. At least in the popular press, I feel like people been forecasting very mild long term growth rates for the advanced European economies, based on demographics and labor market problems, for at least twenty years and the impact of these trends on unemployment, government finances, health care, pensions, etc. have been discussed ad nauseum. We've been having the same discussions about the impact of slowing long term growth rates in the US too (i.e., Medicare and social security (in)solvency). And, as Tom points out, there is Japan, which I don't think we've collectively forgotten about. It also seems like the immense literature on the Great Depression, when the US experienced almost no net economic growth, would be relevant here.

Corruption is always the enemy of prosperity. The graph inflects in 2001, when Berlusconi is elected and immediately depenalises fraudulent accounting, in order to secure his own impunity against several charges of having committed this crime.. Voted in by those who reason that if they elect a man accused of tax fraud, they have a better chance of getting away with it themselves, the depenalisation of fraudulent accounting is just one of many ways in which corruption has grown under his regime.

Of course if there was an accounting rule change, does the graph actually represent anything other than the accounting rules changing?

When I look at the graph, I see no net growth over the 2000-2010 period, but actually this is due to a decrease over the past 3 years. The first 7 years of the century saw consistent growth. So, I wonder if this really fits the description of "basically zero net economic growth for a ten to twenty year period." I know everybody would rather talk about their belief that Italy is in a downward spiral, but the facts hardly support the headline.

tells you something about the quality of blogging that (1) people are surprised to learn that growth is slow in italy and (2) nobody bothers to adjust for exchange rates

At the risk of sounding like a broken record player, we are not sufficiently thinking through what it means for an advanced society to have basically zero net economic growth for a ten to twenty year period.

It can't be said often enough imho.

It's tempting to think that all societies will eventually choose policies that promote productivity growth, starting with basics like rule of law and progressing to free, properly regulated markets. But sometimes it looks more like the productive few are dragging the rest of the world, drunkenly staggering and protesting, into the light only despite their best attempts to wallow in corruption, superstition, and misguided notions of coercive fairness. It's telling that the great economic story of the last decade is China's clumsy, bellicose attempt to imitate free-market capitalism.

Pro-growth policies are painful, anti-growth policies are pleasurable. Many societies seem to reach an equilibrium where standard of living is such that the desire for growth is smaller than the propensity to do things that inhibit growth, and then they only grow to the extent that productivity improvements bleed into them from vastly more productive societies (e.g., Intel microprocessors arriving in Saudi Arabia, which cannot even make its own drill bits). Maybe the rapid gains of the past couple centuries were a one-offf anomaly that mankind will never see again. But I'm still holding out hope Kurzweil was right.

In other words, societies experience economic growth as long as the parasites are kept in control. Once the parasites dominate any society's economic, all growth comes to a stop.

I have come to the conclusion that most humans are parasites.

You must be a real hoot at parties.

Veh Vant to dink ur blud.

I am not sure we can desegregate the tax cheating from the economic shrinkage. Anyone have any ideas on how to measure actual GDP instead of reported GDP, some sort of index we could use?

Wouldn't it be better to look at this in lire / euros rather than in USD?

Isn't sum of GDP for 2000-2010 still significantly higher than sum of GDP 1990-200?

Forgive my language, but economic growth as a measurable concept is a crock of shit.

Well darn, you just disproved economics. I guess we should all go home now.

totally agreed with Josh. All the economic growth in US has produced lots of debt and Median Income Full Time Male Workers peaked in 1973 (nineteenseventythree!!!!!!!!!!!). Yes, I think we should go home now !

Clearly the US has prioritized growth in Female workers over the last 40 years then.

Basically 1999 signs the end of italian growth. In a not so surprising coincidence, 1999 is the year Euro was introduced: no more devaluations, no more help from exchange rate. Italy couldn't look for help by manipulating nominal variables: from 1999, only real values matter in competing with firms from the euro area.
As an italian, I think we joined a monetary union we couldn't afford, both because our government finance wasn't solid enough and because the structure of our economy was rotten due to too many monetary manipulations that hid the uncompetitiveness of our firms (manipulations that also helped cover the government wastes, coincidentally).
How did we join the Euro? By "cooking the books" of government deficit.
Take the deficit of 2001: in 2002, it was estimated at 1.4%. After an initial revision in early 2003 at 2.2%, the deficit of Italy for 2001 was certified by Istat and Eurostat at 2.6%. A 1.2% difference cannot really be attributed to statistical discrepancies due to early estimates: it's simply a sign of fraud, in my view.
That gives you a rough measure of the lower bound of the size of the deficit hidden in 1997 to enter the euro by the duo Prodi and Ciampi, two people many consider "Fathers of the Country" despite all the malfeasance that happened under them while holding various positions in government, central bank, state-owned companies. If you remember, in march 1997 Prof. Modigliani, who cannot be accused of being a neoliberal extremist (actually, he was a well-known keynesian, like then-ruling centre-left coalition), said in an open letter about the Ciampi-Prodi bill to reduce deficit in order to get below the famous 3% of GDP parameter that it was: bad for the economy, damaging for the reputation of the country and against any accounting rule and common sense. He invoked a pension reform and reduction of public employees' costs, and asked not to pass that bill.
From then on, the country had to face a very hard challenge, forced to respect Maastricht parameters, competing with german firms for exporting in many sectors (our economy is almost as much export-led as the german one: italy has little natural resources, so we must pay our energy and raw materials bills somehow, and tourism isn't enough) without any chance of currency cheating, and almost no time for transition. Add to that that Berlusconi turned out to be not strong enough to reform the public sector and the job market, weakened by personal scandals that made him an easy target for the established interests of the italian èlite, and you get the picture (or, you could go for the alternative version that he had no intention to reform and the personal scandals only added to the situation, choose what version you prefer, results don't change). Complete the story by adding that a big portion of the nation lives with almost no respect for any rule, sucking money from the richest part of the nation, and you have a good picture of what is wrong around here.
You might think small / family firms are the problem, but then you have the bankrupt Fiat group (saved by banks who accepted a debt-for-equity swap five years ago), the almost disappeared Merloni group (home electronic devices), Olivetti (once a leader in electronics), the Parmalat fraud... are big companies really the better, more competitive firms in Italy? Hardly think so: they're all gone, or struggling for help. May God bless America, who decided to replace us in paying the Fiat bill, for once. Where now the acronym FIAT stands for Funded by Italian and American Taxpayers.

How do you save Italy? You have to make italians honest, make them understand that the rule of law is a rule, and not a mere guideline; make them honest, making them understand that retirement at 55 is not a sustainable solution, and living on someone else's taxes and hard work is like theft; make them honest, by making them understand that getting a government job and salary for actually doing nothing most of the day is criminal, and theft.
That's what Italy needs the most; the rest would follow. But how do you change the mentality of a people who has been used at living like that for 50 years? No idea, but a good starting point would be to understand that we have this kind of problem.

But the restaurants are full, said the prime minister.

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