Tuesday, June 26, 2012

Sand in the gears

Today's Wall Street Journal has a beautifully informative editorial, "Employment, Italian Style." Snippets:
Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include stress that is work-related or caused by age, gender and racial differences. You must also note all precautionary and individual measures to prevent risks, procedures to carry them out, the names of employees in charge of safety, as well as the physician whose presence is required for the assessment.


Once you hire your 16th employee, national unions can set up shop. As your company grows, so does the number of required employee representatives, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties. Management must consult these worker reps on everything from gender equality to the introduction of new technology

Hire No. 16 also means that your next recruit must qualify as disabled. By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way,...

Once you hire your 101st employee, you must submit a report every two years on the gender dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact....
This kind of thing is hard to track down. You can't easily find a prepackaged "list of regulatory sand in the gears lowering productivity and employment in Italy," the way we can find (statutory) tax rates, spending numbers, interest rates, and so on.  So like the drunk in the old joke, looking for his car keys under the light even though he knows he dropped them a block a way, much economic discussion focuses on those headline issues ("Stimulus!" "Austerity!" "Bailout!" "Leave the Euro!" "Raise/lower taxes!") and ignores all the sand in the gears.

The journal writes, 
All of these protections and assurances, along with the bureaucracies that oversee them, subtract 47.6% from the average Italian wage, according to the OECD.
I wish the WSJ had footnotes or links, even in its online edition, to make it easier to track down  numbers of this sort. A quick tour through the OECD website provides some horrifying numbers on
 Labor tax wedges of 40-50%, to which we must add “non-tax compulsory payments (NTCPs)” which "represent a strong increase over and above the overall tax burden. E.g., in 2011, the compulsory payment wedge for the average single worker was 50.4% compared with the corresponding tax wedge of 47.6%" And remember, once they give you a euro, you still pay another 21% VAT before you can eat that plate of delicious pasta.  But the WSJ paragraph suggests 47.6% is the effective wedge of regulation on top of explicit taxation. (If readers know where it came from, add a comment.)

Also left out is the effect of this kind of hyper-regulation on corruption. You can imagine when the inspector comes in to see if all the paperwork is up to date how the conversation evolves. (Ask Luigi Zingales)

Cleaning up this mess is what we mean by "structural reform." How to achieve it politically seems like a nightmare to me.  Fighting each of ten thousand regulations one by one seems hopeless. Each one sounds good, each one taken alone seems minor, each one has an entrenched interest backing it and an army of bureaucrats whose jobs depend on its enforcement. And the economy dies the death of a thousand cuts. Can you really abolish it all in one fell swoop or grand bargain?

Certainly not if you don't try. 

The WSJ headline was
Prime Minister Mario Monti has issued a new "growth decree" to revive Italy's moribund economy. Among other initiatives, the 185-page plan proposes discount loans for corporate R&D, tax credits for businesses that hire employees with advanced degrees,.. 
Not to belabor the obvious, but this is incredibly depressing. More special programs are not what Italy needs. I hope there are better ideas in the rest of the 185 pages.

27 comments:

  1. The Lab school and a couple other primary schools are home to the Model UN. This is their specialty. Teaching children how to be DoGoodErs. "you are so much more mature than your classmates. That is why we chose you to be their leader.". I have heard these words so many times from my nieces. These Model UN charters are pretty bad, but this is not isolated to them. Look at Boy Scouts and Girl Scouts. Communist DoGoodErs indoctrination camps.
    RANT damn right I'm ranting. The body has a serious disease and it is my job to identify it. Now it is the DoGoodErs job to cure it.

    ReplyDelete
  2. Dear Professor Cochrane:

    First, I have often commented negatively on your blog, reacting to your tone and generality, both of which are generally entirely unproductive.

    This time is different. And your comments are extremely extremely useful. Thank you.

    You write, "How to achieve it politically seems like a nightmare to me."

    It seems to me that several things are required, most revolving around a single word, "trust."

    If you were an Italian employee, why would you trust you, an American economist about what is wrong? After all, you have been wrong on: (a) Globalization; (b) the Euro; and (c) the extent of knowledge about modern macro (here I an thinking about what Lucas said in his speech many years ago, and coming forward). Like it or not, Soros and the FT are right. Macro economics is a failed science.

    Respectfully, I would suggest that you could play a very large role, as you have a public voice, by bringing economists together and cutting economics down to size. That would mean throwing out all the rubbish known to be false, like Taylor rules and Laffler curves and Richardian equivalences, that small gov't is best, yada, yada, yada. It would mean the same for Republican Keynesianism (no tax increases) and Keynesians themselves (the list here is to long).

    IOW, the profession needs to clean its house so that it becomes trustworthy. It seems to me that you could and ought to help do that.

    Second, it also seems to me that the best thinking and insight into this problem of what to do poltically has been done by Charles Munger in his essay, The Psychology of Human Misjudgment.

    In that essay, Munger identifies the source of problems with labor unions (and hence laws like those you identify) as being what he calls the Persian Messenger. If those leading unions speak the truth, they will quickly often find themselves out of a job.

    It seems that you could start to work on that problem. Looking to find ways to give union leaders incentives to speak the truth. Now they are as dishonest as management.

    Last, it seems to me that you need to become a public advocate that all the gains from productivity that should comes from changing this kinds of laws should go to the workers. After all, they are being asked to give up legal rights and protections, so they are the ones who should be compensated.

    This brings the conflict between us into clear view. I recognize that distribution of income is entirely a political question. Thus, I recognize that gains in productivity in Italy could be easily achieved if it was assured that the gains went to labor. I am sure you agree, but doubt you will publicly admit to such for you want greater income inequality and favor the 1%.

    ReplyDelete
    Replies
    1. Dear Professor, here is what you can do. GO to Europe with your hat in your hand and repent of all that free market rubbish and help us to adapt our top down socialistic model in a way that will produce good outcomes.

      We know (because Sorros the great told us) that we can have taxes as high as we want to, so don't try and sell us on any supply side snake oil. But really we have to come together and figure out what is really wrong. Because even though we Europeans are so much more enlightened than you for some strange reason we are bankrupt!

      Delete
  3. Dear Professor Cochrane:

    First, I have often commented negatively on your blog, reacting to your tone and generality, both of which are generally entirely unproductive.

    This time is different. And your comments are extremely extremely useful. Thank you.

    You write, "How to achieve it politically seems like a nightmare to me."

    It seems to me that several things are required, most revolving around a single word, "trust."

    If you were an Italian employee, why would you trust you, an American economist about what is wrong? After all, you have been wrong on: (a) Globalization; (b) the Euro; and (c) the extent of knowledge about modern macro (here I an thinking about what Lucas said in his speech many years ago, and coming forward). Like it or not, Soros and the FT are right. Macro economics is a failed science.

    Respectfully, I would suggest that you could play a very large role, as you have a public voice, by bringing economists together and cutting economics down to size. That would mean throwing out all the rubbish known to be false, like Taylor rules and Laffer curves and Richardian equivalences, that small gov't is best, yada, yada, yada. It would mean the same for Republican Keynesianism (no tax increases) and Keynesians themselves (the list here is to long).

    IOW, the profession needs to clean its house so that it becomes trustworthy. It seems to me that you could and ought to help do that.

    Second, it also seems to me that the best thinking and insight into this problem of what to do poltically has been done by Charles Munger in his essay, The Psychology of Human Misjudgment.

    In that essay, Munger identifies the source of problems with labor unions (and hence laws like those you identify) as being what he calls the Persian Messenger. If those leading unions speak the truth, they will quickly often find themselves out of a job.

    It seems that you could start to work on that problem. Looking to find ways to give union leaders incentives to speak the truth. Now they are as dishonest as management.

    Last, it seems to me that you need to become a public advocate that all the gains from productivity that should comes from changing these kinds of laws should go to the workers. After all, they are being asked to give up legal rights and protections, so they are the ones who should be compensated.

    This brings the conflict between us into clear view. I recognize that distribution of income is entirely a political question. Thus, I recognize that gains in productivity in Italy could be easily achieved if it was assured that the gains went to labor. I am sure you agree, but doubt you will publicly admit to such for you want greater income inequality and favor the 1%.

    P.S.

    As regards, Laffer, Chicago Booth is now on record.

    http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_2irlrss5UC27YXi

    It seems to me this is a watershed moment for you. Are you going to do something for the people of Italy, Spain, Greece ( and even the Good Ole US of A, and publicly repudiate Mitt and the entire Republican Party or are you going to still hang with the 1%?

    ReplyDelete
    Replies
    1. If you want to rant and rave, how about doing it just once?

      Delete
    2. Or, even better, no times at all.

      Delete
    3. John,

      How about you turning off the mendacity, which would mean that you blog would we blank. Then I would have nothing to comment upon.

      Here is your best whopper yet. You call this whopper by McCloskey, "gorgeous":

      Unions raised wages for plumbers and auto workers but reduced wages for the non-unionized.

      Now, that could be true only under one condition: that the marginal propensity to spend by union workers is lower than the marginal propensity to spend by the owners, i.e., 1%, the rich, the 1%. And, most certainly, that condition doesn't obtain.

      Beyond that, since the trend in union participation is down, wages of non-union workers should be rising. They have been, instead, going in the opposite direction, but the rich have been getting ever richer.

      If the rich getting richer was so good for the poor, why is it that wages are lower and poverty more prevalent and opportunity (per Stiglitz) gone?

      And, last, if there was some mechanism by which high union wages caused poverty, then high profits would have to have the same effect, since the battle between unions and owners is a zero sum game.

      Do not offer the canard that unions cause prices to rise. Firms are not charities, they are profits maximizers, so that charge the same prices whether union or non-union. They charge what the market will bear.

      Under your logic, if there were no unions, then high profits would be cause low wages.

      Is that your argument why the post is georgous? Let me help you. You play, per Delong, nose guard for Team Republican, you remember, the trickle down guys. Your theory is that high profits eliminates poverty because the 1% pees on people.

      In sum, profits should be kept as low as possible, being no higher than what is required to attract the capital needed for the firm's operation. Any amounts above that target should be re-distributed by some means or other, broadening prosperity for all

      Delete
  4. Hi John,
    the Italian politicians know exactly what is going on. However this is a textbook example of "prisoner dilemma". All this sand in the gear is nothing else than the manger for the "Pachydermic bureaucracy" that is the lifeblood of the political parties cross-sectionally. Now it would require an incredible amount or trust on one party to let the manger go, hoping that the other party does the same. The risk is too high. Even though each pachyderm is perfectly aware that the manger is actually starving the corn field that is feeding it, nobody will leave the corn filed. What will happen then?
    People will get tired eventually and the system will generate new political subjects, probably with a strong populist inclination (this is already happening, with a party lead by a comedian). These new subjects however will be under tremendous pressure from the established bureaucracy to keep the status-quo. A similar situation that is described when you guys talk about Regulatory Capture.
    I know, I am not very optimistic.
    Monti is a smart economist but he know very well that someone is going to slide the chair from under his back if he does not comply with the establishment that put him there in the first place.

    ReplyDelete
  5. Prof. Cochrane,

    Great post! I don't realy know if it is actualy worth trying because I see science in a very idealist way. I don't believe it is possible to acumulate enough knowledge to ever do what you are proposing to do. On the other hand, I respect your realism and think your point is definetly worth a shot. Great post, Congratulations!

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  6. John,
    down in in South America we have a saying "Y por casa como andamos?", meaning, "How are things at home?"
    Italy may be bad, overregulated and ossified, but are things in the US really that much better?
    Did you see the Wall Street Journal's headline today (Wednesday, June 27)? "Court Backs EPA on Warming", meaning that some Federal Court of Appeals backs EPAs claim that it can regulate greenhouse gas emissions. Think about this. ANYTHING - ANYWHERE, even cows that fart methane gas, can be subject to the oligarchs at the EPA.
    Your snow remover in Chicago will be subject to EPAs graces; your lawnmover, anything. Even if the Clean Air Act does not provide for it.
    How about OSHA? They can shut down your business if you do not have the right chairs, the right lighting, the right tables.
    How about the IRS Tax Code? You cannot go walking on the street probably without violating some stupid IRS code or ruling.
    So - yes Italy is bad. But it seems to me that Americans have become way too complacent thinking that Italian conditions do not come to US shores, when in fact, such conditions are already here. Only - it easier to point out the speck in other people's eyes, rather than confess your own.

    ReplyDelete
    Replies
    1. Manfred,
      as an Italian citizen living here in the US:
      The current statuses of the two countries are light years apart, this does not mean that there is no problem here in the US or that there is no risk for the US of trending toward the Italian model. But I believe that saying that such conditions are already here is an exaggeration.

      Delete
    2. While I agree that things in the U.S. are far from good (let alone ideal) and I agree with Gio that it's not as bad as you imply, this is where the U.S. is headed and fast. It's not at all a bad idea to have a look at what our future might be if we become complacent.

      Delete
    3. I didn't mean to pick on povera italia, or to imply the US is doing a whole lot better and had big rights to lecture. Quite the opposite, I see this as a sign of where the US is headed if we don't wake up fast, and our political class' advice to europe -- stimulate like us -- is counterproductive. I sort of thought saying so was too obvious but I guess it's worth being explicit.

      Delete
  7. Gio, Methinks,
    Ok, I do grant the US may not "be Italy"... yet.
    But both of you did grant that the US is heading that way. You both only differ in the speed (the first derivative); Gio says "trending", while Methinks says "headed and fast"; apparently Methinks' first derivative is higher than Gio's, but you both seem to agree on the sign.
    But - be it as it may, the CORE argument stands. Be it "trending" or be it "heading fast", the US is going in that direction, and what worries me is that the electorate and the politicians in this (the US) country do not seem to care too much.
    This would be a unique opportunity for the US to become again first class in free markets, deregulation and capital investment attraction, but it seems that the apathy of (most of) the electorate and the politicians will prevent this.
    [And, I have to say, many of the presumably first class economists populating academia and public policy, especially those proposing a 70% marginal tax rate on income, and those for which moral hazard is only a footnote in the introduction of an econ textbook. Sorry I had to mix this in.]

    ReplyDelete
    Replies
    1. I can't disagree with any of that. I'm an immigrant to this country and I've seen an alarming and (speaking of first and second derivatives) increasing speed of deterioration in basic freedoms since 2001. I've been here since 1976.

      The more government does, the lower the ability of the population to imagine a world where they solve their own problems. Most Americans don't seem to think that roads can be built if government doesn't build them, for instance. Most people don't think they can negotiate with their neighbours, seeking government intervention to deal with all externalities. We are losing the imagination necessary for innovation.

      It is easier to see the mistakes of others, I think. It's worth pointing to the Soviet Gulag and asking if we want that. Pointing to the Greek bookstore/coffee shop that is prevented from selling either books or coffee and asking if we want to do that to ourselves. Pointing to Italy's labour laws and wondering if we should wander that far into the forest ourselves. It's often easier to see why Euroland is falling apart (exaggeration, I know) than it is to realize without a comparison how deeply we've waded into the quicksand.

      Don't look for "first class" economists for help. They are too enamoured by Keynes and too short on original thought. Don't look for politicians to realize the folly as legislation consolidates valuable power in their hands. Certainly don't look to bureaucrats to oppose this growth of their bureaucratic fiefdoms and don't look to rent seeking individuals and companies who hope to buy the power of politicians and bureaucrats. Look only to American culture. To America's dying culture. And maybe the courts will slow the decay. That hope is dim. But, it's certainly worth looking down the road and becoming outraged by what awaits us down the path we're on.

      You know, Italy is not even the worst outcome. I'm from the Soviet Union.

      Delete
    2. The courts? Do you know what a mason is? If any person does research on American social structure without a background in Freemasonry, his picture is incomplete to say the least. One book I liked written by a judge back in 1910?? Called 'The Thirty Years War on Silver" will show that our courts are completely corrupt.

      Delete
  8. Methinks:

    1) According to Delong, Prof. Cochrane is one of the leading rent seekers in America, playing nose guard for "Team Republican." If you really are against Rent Seeking why don't you rant with me?

    2) You argue, "Most Americans don't seem to think that roads can be built if government doesn't build them, for instance."

    We have a 225 year history of the Gov't being very successful at building transportation infrastructure, from the Nat'l Road to the Eire Canal to the railroads to the West, to the locks and dams on the our great rivers and lakes (Miss., MO., Soo Locks, to Superior etc.)?

    The only attempts at "private" infrastruce of which I am aware are small canals like the Canal at Portage Wis. that failed and the barge monopolies, like those across the Miss. from E. St. Louis, Il. to St. Louis, Mo, which badly stunted St. Louis.

    So here we have good solid evidence that you have no idea about what you are talking.

    Right now, we badly need a new interstate from St. L MO to KC Mo. Please take a moment or, better yet a lifetime because it will take that long, and write out and describe to me how a private company could successfully build an interstate highway from St. L to K.C. Mo., without any gov't help, and that includes no right to condemn right of way by eminent domain.

    And, if you are so smart. Go on Google Maps and notice that I-170 terminates in St. L. at I-64.

    What don't you figure out how to privately extend that road south to I-270?

    Understand, that in Missouri, it is a fraud for a buyer to conceal material information, which the seller cannot otherwise acquire (such as the planned right of way of the road). Good luck on your right of way acquisitions, especially when it comes to acquiring rights over existing, city, state, and county owned highways (as well as occassion private roads through subdivisions.

    And, since you have to cross the Missoui river several times, good luck on getting permits to interfere with the barge traffic (helping you would be gov't help).

    Last, did I mention that you have to cross a lot of railroad lines. They are opposed to the highway. Wonder why? Maybe that don't want to help truck companies?

    Do you think that will ever give you easements over their lines by consent?

    And, since you cannot have gov't help, you cannot tie into the existing street or highway systems at either end.

    IOW Methinks I feed very sorry for you. You are in a Great Country and fail to understand its greatness, which did not spring from selfishness and greed.

    ReplyDelete
  9. You are in a Great Country and fail to understand its greatness,

    Funny. That's exactly what the Soviets said to us before they declared us insane, tore up our birth certificates, declared us non-entities and let us leave.

    I don't care about the greatness of countries. I care about the freedom of the little person. True greatness springs from him, not from the grandiose ideas of dictators and their useful idiots.

    ReplyDelete
    Replies
    1. Methinks

      I noticed you didn't answer my question. Such is an admission, which I take for what it is: you must make stuff up as you go along to support your agenda of greed and mendacity.

      The Soviet people and nation are a great people and nation. It is truly sad they have never enjoyed true peace, prosperity, freedom, and democracy, for perhaps no people are nation have made a greater sacrifice to obtain such blessings for others. World War II on the Eastern Front, to us in the West is, perhaps, beyond comprehension and understanding.

      Delete
    2. It's not an admission of anything more than my limit on how much detail I'm willing to waste time on with idiots.

      You're right about one thing: there is obviously so much beyond your comprehension and understanding. If your little bit of drooling about the "Soviet" people cements anything it is that.

      Delete
  10. Methinks,
    well, it is hard to top the fact that you are from the Soviet Union, the ultimate central planning economy, with a small Politbureau that thought it could allocate resources better than about 260 million soviets.

    JLD,
    you bring up highways and transportation. I think many economists would agree that there is a role for government (at all levels) to provide for roads and highways, because they provide a positive externality.
    Now, if there is a "badly needed" (your words) highway from St. Louis to Kansas City, why doesn't Missouri just build it? If it is badly needed, it would probably pass any sensible public good Cost Benefit analysis, and thus, the taxpayer of Missouri can foot the bill without fear.
    But also, there is a literature on private road provision and congestion; and there are successful private highways and tolls around the world.

    ReplyDelete
    Replies
    1. Manfred

      Our state gov't is now totally controlled by Republicans who have pledged never to raise taxes, only to cut them. Since we are already the lowest tax state in the country, or close too, we have no money for the road. Even if the cost benefit proved out, most would still vote against the tax, for the same rule would apply to education, etc.

      Beyond that, the road would be a second highway, not a replacement of an existing one, which is already jammed beyond capacity. Accordingly, to keep traffic from diverting to the old, free road, we would need to toll both, but the Republicans can't agree to do that either (that would be a new tax).

      Last, the few Republicans for the deal will agree to do such only if we gut all our state laws on public bidding. Surprise surprise, they want to select their cronies to own, finance, and operate the toll road (and no surprise here), without regulation of the tolls charged.

      People like Methink do not understand that public roads are a way to combat all this cronyism.

      Delete
  11. And to my list of complaints about Italian conditions in the US, now add the fact that the Supreme Court itself upheld the compulsion of having to purchase health insurance.
    What is next? That I must buy a house of a certain size? That I must buy a defibrillator? That I must have a car?
    That I must have a toilet of a certain size (oh wait - that is already true).

    ReplyDelete
  12. Interesting post! Italy is the home of the Slow Food movement. In my part of the world (Vermont) I hear a lot about Slow Food, Slow Money and Slow Living. Each of those topics has a Wikipedia entry, and indeed there is a Wikipedia entry for "Slow Movement" which includes all of those things and more.

    If the Slow Movement can encompass Slow Food, Slow Money and Slow Living, why not Slow Government? Actually SLOW Government where SLOW is an acronym for Sustainable, Local, Organic, and Wise. I define what I mean by those terms in this blog post:

    http://bremlang.blogspot.com/2012/07/introduction-to-slow-government.html

    If we had more SLOW Government, there would be a lot less "sand in the gears."

    Happy Independence Day!

    ReplyDelete
  13. Hi John -

    On the subject of 'Sand in the Gears', I thought you would be interested in the linked Reuters story on the travails of opening a new business in Greece:

    http://www.reuters.com/article/2012/07/24/us-greece-works-idUSBRE86N0BH20120724

    As you point out, it is quite difficult to quantify and catalogue the amount or extent of 'structural impediments' in any given economy. All the more reason to highlight well reported instances of these.

    Thanks,
    Matt Jacobs

    ReplyDelete

Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.