Sunday 2 October 2011

A demographic proposal to tackle the economic problems of the Italian Republic

In "Finding the tipping point - when sovereign debt turns bad", a recently published article by Mehmet Caner, Thomas Grennes and Fritzi Koehler-Geib, the authors empirical observations are suggesting that, once the public debt to GDP ratio exceeds 77% in a developed economy, such as the Italian Republic, for each percentage point above this limit a 0,017% growth in real GDP will be lost (that is, a 0.17% every 10% when the ratio goes over 77%). I personally find this estimate quite optimistic (although I think the real life it may not be so linear either), but let us take it as good.

What does it means for the taxpaying citizens of the Italian Republic (and all the taxpaying workers living there, their citizenships notwithstanding)?

The last time the debt to GDP ratio was below the limit of 77% Madonna was still recording Like a Virgin, and that was in the 1984.

Since 1984, each year the growth of the country was smaller than what could have been, as it is weighted down by its excessive debt. Computing all of this lost growth each year since 1985, the Italian Republic in 2009 had already lost more than 10% of potential GDP growth. The current salaries of the Italian taxpayers are therefore likely to be 10% lower than the level they might have reached if their country had been better managed.
Giving heed to Caner & co., the effect on individual wealth has been obviously even worst, at about 17.5% of lost wealth per capita; computing all of which for the period in question gives an eye watering 105% of current yearly GDP missing from the country total wealth!. In other words those people who worked from 1985 to 2009 have lost at least 2 if not 3 full years of salary (as not the entire population works at any given time), a potential wealth lost forever that nowadays they will not find anymore among their own savings or investments, where should have been, and, by the way, they are even the lucky ones, because the depressive effects worsens with the passing time, so those who started and are starting to work later than 1985 have increasingly lower wages than whose that should and could have been, and they will eventually find themselves loosing more than 3 whole years of salary, if not much more. Whoever follows the italian job market, should be able to confirm that this effects are already all too obvious.

All of the above without even having started to note that much of that additional debt which raised the ratio above the 77% level has been wasted for inefficient or generational iniquitous or outright stupid expenses, such as the so called "baby pensions" (in 70s or 80s some workers were able to retire in their 30s) or "the costs of politics" (all corruptions and grease you may imagine) or unsustainable pension schemes.
The Bank of Italy let us know that in June 2011 a new public debt record has been set, a staggering 1902 billion euros, probably more than 120% of GDP. In this late summer of 2011 it seems that nobody want to buy more bonds issued and guaranteed by the Italian Republic,  the markets are clearly having a crisis of confidence on the country and especially its government, and probably over all its entire political class. This crisis unfortunately surprises only because did not occurred well earlier. To gain some time the ECB was forced, reluctantly, to intervene to buy large quantities of italian bonds, in exchange so far merely of a few promises from the Italian government.
The Italian government must now decide which fiscal and structural reforms to enact to attempt to heal the country economy, with the aim of reducing the public debt as soon as possible while, however, encouraging growth, at the very same time.
If it keeps going as it started, this is all virtually hopeless.
Some italian economists have been giving good advises for a long time, unheeded. Also this time, among the first reactions to the crisis of confidence, on the NoiseFromAmerika, a blog created by some italian economists working in US, Michele Boldrin is suggesting to change the government immediately, to reduce the wages of a subset of public employees, to delete the so-called federalist reform in its current form, to introduce a new pension reform to compress the pension expenses to 10% of GDP in a very few years, to privatize various state holdings, and obviously to start some liberalization and deregulation, while another author, Francesco Forti, is proposing a reform of the universal health care system, suggesting to improve the efficiency and effectiveness of that sector as well.
We could also write down far more extreme proposals, such as try to get back some dimes from the most blatant wastes (did you retire at 30? do you get a lifelong annuity because you were an MP for one day? Let's tax you to get back hard worked taxpayers money, mortgaging all of your properties, up to the amount due), but would it solve all, or at least a substantial part of the country's problems? No.
No, and not because I believe that these proposals may not be desirable, indeed I do, and not because I do not think that those proposals may well help to swing the trend towards this more or less imaginary limit of 77%, or whatever other magic number, reaching which the country would return to work better and to create more wealth, and nor for many other reasons, but simply because I think that unfortunately the main obstacle for the growth of the country, for thirty years now, has been its demographic structure, and the total inability of the political class, and in general of all of its leadership, to try to mitigate its effects.
The population pyramid, well nowadays clearly just the age structure diagram, of the country is shown in this chart, courtesy of Wikipedia, based on data from ISTAT, the italian national institute of statics:
From the graph it is clear that forty-five years ago there was an epochal demographic change, the birth rate collapsed suddenly, and then halved in two decades, transforming what was a country with a growing population in a country in heavy demographic decline, a decline that was arrested twenty years ago, but unfortunately the ruling classes did not foresight such change and neither they did manage that effectively even in hindsight.
For thirty years now, ever since the nefarious effects of this lack of  foresight began to be felt, it was all a scramble to put patches on patches, to try to revive a system that was built and thought out for a very different demographic structure. These measures, implemented gradually, would have probably been sufficient if the demographic stabilization had occurred forty years ago, but once the demographic stabilization occurred only twenty years ago, these policies were not enough, and I doubt these would have been sufficient even if instead of the Italians we would have seen the Germans or the Swiss struggling with those issues (I admit that the likelihood would have been greater!). Whatever the italian government will try to achieve today, this demographic issue will still be there, that bulge between 35 and 49 will not go away, a swelling with which the Italian Republic will have to deal for the next 40 years at least .
What can they do? Continue to put patches? It seems obvious, to me at least, that the only possible solution is to radically intervene on the demographic structure of the country, artificially reducing the decline in the under 35 age groups. How? "Importing" people, specially over 21, preferably graduates from countries that have the opposite problem than the Italian Republic, that is, they're still in a phase of pronounced population growth (and they would be spoiled for choice, with Morocco, Turkey, Egypt, Mexico, Iran, Brazil, India, almost all African countries, and so on).
Here's how I would like to see transformed the age structure diagram of the Italian Republic by the end of 2012 :
To achieve this, at the same time of all the reforms proposed by Michele Boldrin, to amplify their effects, it would be enough to "import" 2.4 million immigrants next year, half men and half women, in the following age groups:
300 000 in the age class 30-34
900 000 in the age class 25-29
1.2 million in the age class 21-24
In subsequent years, when the positive economic effects on public finances will start to be felt, the public debt should be decreased as quickly as possible, but at the same time the birth rate of the residents should be boosted, improving the benefits available for parents, and immigration should continue to be stimulated, clearly at a lower intensity, but with better demographic foresight, with the aim to achieve a stabilization of the age structure in twenty years at most.
There are risks to apply such a sudden demographic shock, no doubt, and those risks should be assessed and if required mitigated, for example, and just to give an example, it might make sense to start implementing the health insurance reforms proposed by Francesco Fort starting with these immigrants: "are you a graduate? are you in the age group we're interested in? If you pay the health insurance, you can get a work permit!" (which probably would cost less to the wannabe migrant than the current cost of getting hold of a visa by corruption or even of being smuggled illegally in the countrty)
Once assessed all the risks, and mitigated those to the maximum possible level, this is the best way to solve the problems of the country.
In the absence of such a policy to correct the country demographic imbalances, anyone who take a look at the chart above, should realize that for everyone under 45 who is currently residing in the Italian Republic, the future promises, and only allows, very bleak and stormy nights.

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