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.

Here’s some data from the OECD on per capita GDP growth during the pre-recession (2001-2007) period:

I cut the graph off to make it fit, but some other countries (Greece, Ireland, Korea, parts of Central Europe) did even better than Finland. But two points that leapt out at me here were that Japan’s allegedly dysfunctional economy outperformed the United States and Germany during this period. The other thing is Italy—what happened here? And how come you never hear about it? That’s a terrible number. These numbers also reflect poorly on Italy. I suppose Italians can always fall back on the fact that they have this beautiful country and delicious food. Or maybe there’s been robust growth in Italy’s black market economy?

Normally I find things written by Slavoj Žižek to be fairly incomprehensible, but this essay on Silvio Berlusconi is funny, accessible, and insightful. Plus this paragraph references Kung Fu Panda which, as a confirmed panda-lover, I greatly enjoyed:

Kung Fu Panda, the 2008 cartoon hit, provides the basic co-ordinates for understanding the ideological situation I have been describing. The fat panda dreams of becoming a kung fu warrior. He is chosen by blind chance (beneath which lurks the hand of destiny, of course), to be the hero to save his city, and succeeds. But the film’s pseudo-Oriental spiritualism is constantly undermined by a cynical humour. The surprise is that this continuous making-fun-of-itself makes it no less spiritual: the film ultimately takes the butt of its endless jokes seriously. A well-known anecdote about Niels Bohr illustrates the same idea. Surprised at seeing a horseshoe above the door of Bohr’s country house, a visiting scientist said he didn’t believe that horseshoes kept evil spirits out of the house, to which Bohr answered: ‘Neither do I; I have it there because I was told that it works just as well if one doesn’t believe in it!’ This is how ideology functions today: nobody takes democracy or justice seriously, we are all aware that they are corrupt, but we practise them anyway because we assume they work even if we don’t believe in them. Berlusconi is our own Kung Fu Panda. As the Marx Brothers might have put it, ‘this man may look like a corrupt idiot and act like a corrupt idiot, but don’t let that deceive you – he is a corrupt idiot.’

The Berlusconi phenomenon strikes me as something that’s almost too disturbing for the western consciousness to process. You have, in essence, an advanced industrialized liberal democracy sliding into a system of government that, were it to exist in a middle-income country, we would just deem straightforwardly un-democratic. And nobody has any idea what one might do about it.

I know people on the right who are aware that climate change is real and problematic, but who somehow don’t really feel that engaging with the denialists on their side and trying to educate people is an important thing to do. It seems like an odd point of view to me. Meanwhile, in the alps:

Melting glaciers in the Alps may prompt Italy and Switzerland to redraw their borders near the Matterhorn, according to parliamentary draft legislation being readied in Rome [...] “This draft law is born out the necessity to revise and verify the frontiers given the changes in climate and atmosphere,” Narducci said. “The 1941 convention between Italy and Switzerland established as criteria [for border revisions] the ridge [crest] of the glaciers. Following the withdrawal of the glaciers in the Alps, a new criterion has been proposed so that the new border coincides with the rock.” [...] Narducci said the same negotiation will be proposed to France and Austria.

Fortunately, boundary adjustments between Western European countries are almost certain to be handled in an amicably bureaucratic manner rather than a violent one thanks to the success in turning international relations within Europe into a rule-governed enterprise. The rest of the world, however, doesn’t have these kind of luxuries and as de-glaciation unsettles established patterns of land- and water-use we’re going to see some very serious political problems.