Tyler Cowen offers more thoughts on small firms and pathetic Italian per capita GDP growth. Another neglected element of the story is what I’ve decided I’m going to call Feminist Growth Theory. In the richer countries, including both Big Government Sweden and Small Government America, you have much higher levels of women’s workforce participation:

Southern European countries (and Japan) have a very conservative approach to family structure issues that contrasts sharply with both Anglophone and Nordic norms and depresses output. This is in particular a big deal for public debt issues, since it’s obviously not the case that non-working Italian women are sitting around all day doing nothing. Instead, they’re doing unpaid household work that’s not taxed. Make no mistake, productivity per hour worked in Italy is also low and stagnating compared to the U.S. and Sweden, so it’s not a pure labor supply issue. Still, my suspicion is that even here the failure to take adequate advantage of women’s potential to engage in market production is a major source of productivity stagnation. If you look at the U.S. labor market, maids have low earnings and low productivity. If the median working woman quit her job and went to work as a maid, the economic impact would be immiserating. Having the woman work as an unpaid maid for her husband doesn’t really change the calculus, though of course he eats better under this scenario. I note that in Milan, which is very rich compared to the rest of Italy, there are McDonaldses everywhere.

The only thing really surprising about S&P downgrading Italy’s bond rating is that it took them so long.

Italy is basically the country American conservatives seem to think America is. It has a very low economic growth rate as a structural matter. It has an unusually low labor force participation rate by developed world standards. Despite its large debt load, it also has high pre-existing taxes. Entrepreneurship is crushed by regulations. Labor unions are both very powerful and seemingly uninterested in overall economic growth. Simply saying you’re going to plug the hole in the budget deficit by raising taxes to fill the gap doesn’t really answer any of the outstanding questions. Italy needs more productivity, more labor force participation, etc. And yet over and above all those problems, they also now have inadequate aggregate demand since they’re yoked to the insanity of the European Central Bank.

This is worth Americans’ time and attention not only for its intrinsic importance, but also to note the contrast. The United States really isn’t like Italy. We have lots of successful entrepreneurs. We have high labor force participation. We have low taxes by international standards. If faced with a sudden pressing need to reduce the fiscal gap (which we’re not) we can just go get the money.

Southern Italy: Nice place, bad economic policy

I’ve never heard of a person who approves of Italian economic policy or the Italian political class, so it should come us no surprise that the Berlusconi government’s fiscal consolidation package seems like a stinker or that Alberto Alesina and Francesco Giavazzi are able to pen a forceful and persuasive critique of it.

What’s interesting about the document, however, is that it represents an implicit recantation of Alesina’s previous association with the idea of expansionary fiscal contraction as the key to resolve recession-wracked government’s woes. His points about Italy, after all, are pretty basic. Alesina now thinks tax hikes are contractionary and that certain kinds of tax hikes are also bad for long-term growth. Alesina thinks that pro-growth structural reforms can boost long-term growth. Alesina thinks that some categories of government spending are wasteful and that other categories (pensions, for example) are not growth-enhancing even when they’re perfectly efficient. So Alesina thinks that a country faced with an objective need to close its budget deficit should do so by minimizing growth-stifling taxes and to “offset” the “negative effect on output” of spending cuts “by enacting structural, growth-enhancing measures.” This is all quite sensible, but indeed it’s sensible to the point of being utterly banal.

Now needless to say, if you think about a country you actually live in, you’ll find that there’s ferocious disagreement over questions like which spending programs are wasteful, which taxes are particularly damaging to growth, and which structural reforms are growth-enhancing. This is the stuff of which politics is made. The alleged point of the expansionary contraction intervention was to enter a second-order consideration into the picture in which fiscal austerity would be, as an independent matter, growth enhancing. But now suddenly when faced with an austerity program whose terms he doesn’t like, Alesina retreats to completely banal views.

How is this supposed to play out in 2040?:

Here’s the US by way of comparison. I’m thinking Italians would do well to start feeling a lot more positive about immigration.

I find myself periodically blown away by new representations of Italian macroeconomic performance:

They had two extra recessions! Now this in part reflects the demographic situation which points toward population shrinkage in the near future. But Italy has an extremely high debt:GDP ratio and the debt:GDP ratio doesn’t care about evaluating your data in per working age citizen terms. The country’s not that high on the list for a short-term sovereign debt crisis, but I don’t really understand what the medium-term resolution here is supposed to be.

Ezra Klein and Kevin Drum have an interesting back and forth about Michael Mandel’s idea that regulations should be somehow “counter-cyclical” which, in his formulation, basically amounts to saying they should be laxer during recessions.

The more I think about this, though, the more I think the insights here basically just amount to “it’s always a good idea to have sound public policy.” If you imagine some rule that’s really important to preventing cans of beans from giving people botulism, that rule doesn’t suddenly become less important in a recession. What’s more it’s hard to imagine a 12-month holiday on food safety rules for canned goods leading to a spike of job creation. It would mostly freak people out. Conversely, an unwise regulation like the rule in some parts of DC giving preference to franchised chain restaurants over non-franchised chain restaurants (or consider this) doesn’t actually become worse during a recession.

I think that when there are downturns, public policy questions just become more salient. Good micro policies are, however, always really excellent things to have. Nonetheless, I don’t think anyone really thinks the Italian labor market is holding up better than the American because of superior microeconomic policies.

I thought this WikiLeaked account of a meeting between Assistant Secretary for Europe Philip Gordon and several French officials was kind of fascinating. Here’s a window into what I think is the under-discussed question of the economic consequences of a war with Iran:

Levitte said that he informed the Chinese FM that if they delay [sanctioning Iran] until a possible Israeli raid, then the world will have to deal with a catastrophic energy crisis as well. At the same time, the debate over stopping the flow of gasoline into Iran will be very sensitive and would have to take into account which countries would be only too willing to step in and replace European companies. Levitte informed us that they would like President Sarkozy to talk to President Obama by telephone in the coming days to discuss the G20 and Iran. The French are proposing two possible windows to schedule the call.

Now the other issue here is what about this besides its deployment as a talking point to get China to get tougher on Iran? Does the government of France genuinely think that an Israeli attack on Iran will in fact lead to catastrophic energy crisis? Does the American government think that? Does the Israeli government think that? For all the words that have been written on the Iranian nuclear issue, I think this question remains very poorly understood.