And Inequality Macroeconomics and Inequality Francesco Saraceno The Euro after the crisis: lessons from the past and challenges for the future Cambridge

Macroeconomics and and InequalityInequality

Macroeconomics and and InequalityInequality

Francesco SaracenoFrancesco Saraceno

The Euro after the crisis:The Euro after the crisis:

lessons from the past and challenges for the lessons from the past and challenges for the futurefuture

CambridgeCambridge December 15, 2010December 15, 2010

OutlineOutline The Trend towards Increasing InequalityThe Trend towards Increasing Inequality

A worldwide phenomenonA worldwide phenomenon

The role of policyThe role of policy

The Macroeconomic Effects of Increased The Macroeconomic Effects of Increased InequalityInequality

Macroeconomic Performance in the EU and Macroeconomic Performance in the EU and in the USin the US

Eurosclerosis?Eurosclerosis? Arguments in favour of structural reformsArguments in favour of structural reforms

Public Sector PerformancePublic Sector Performance

A European ParadoxA European Paradox









The Trend towards Increasing The Trend towards Increasing InequalityInequality

Common trend (and overall undisputed)Common trend (and overall undisputed) ““Superstar Economy” (Gordon and Dew Becker)Superstar Economy” (Gordon and Dew Becker)

The Trend towards Increasing Inequality IIThe Trend towards Increasing Inequality II

The Gini index is subject to many criticisms, so we can just The Gini index is subject to many criticisms, so we can just focus on the trendfocus on the trend

The Causes of Inequality: The Role of PolicyThe Causes of Inequality: The Role of Policy Progressivity of the tax system has strongly Progressivity of the tax system has strongly

decreaseddecreased

The Causes of Inequality: The Role of Policy IIThe Causes of Inequality: The Role of Policy II

The Causes of Inequality: The Role of Policy IIIThe Causes of Inequality: The Role of Policy III Shift of taxation from high to low incomes, and from capital Shift of taxation from high to low incomes, and from capital

to labour.to labour. Result: Generalized decrease of the wage shareResult: Generalized decrease of the wage share









Macroeconomic Effects of Increased InequalityMacroeconomic Effects of Increased Inequality

The poor have a higher propensity to consumeThe poor have a higher propensity to consume Liquidity constraintsLiquidity constraints Subsistence consumptionSubsistence consumption SatiationSatiation Etc.Etc.

Transfer of wealth to the rich reduces propensity to Transfer of wealth to the rich reduces propensity to consume consume as well as the consumption structureas well as the consumption structure

Unless we live in a world in which Unless we live in a world in which S = IS = I ex anteex ante, this , this may lead to the consequence that may lead to the consequence that demand and growth demand and growth stagnatestagnate

Question: if the increase of inequality is widespread, Question: if the increase of inequality is widespread, and if it tends to depress growth, and if it tends to depress growth, why do growth why do growth performances differ, notably across the ocean?performances differ, notably across the ocean?









"My Crisis, your Problem""My Crisis, your Problem"

Change between2010q2 & 2008q1

FRA DEU ITA JPN USA GBR SPAIN

GDP per capita (%) -3.5 -2.3 -7.1 -4.5 -3.2 -5.8 -6.0

GDP (%) -2.2 -2.7 -5.6 -4.3 -1.1 -4.5 -4.6

Unemployment (points)

+2.1 -0.6 +2.2 +1.4 +4.9 +2.6

+10.8

In spite of the sluggish recovery the US did comparatively well in terms of In spite of the sluggish recovery the US did comparatively well in terms of GDPGDP

Caveat: Most of the effects of the recession are felt on employmentCaveat: Most of the effects of the recession are felt on employment

Global Recovery Will Remain ModerateGlobal Recovery Will Remain Moderate

OECD area, unless otherwise stated

Nothing New Under the SkyNothing New Under the Sky

Why the EMU did Worse than the US?Why the EMU did Worse than the US?

At the early stages of the crisis it was At the early stages of the crisis it was expected that Europe would be less hit than expected that Europe would be less hit than the USthe US Excessive activism of macroeconomic policies (in particular Excessive activism of macroeconomic policies (in particular

monetary policy) of the Unites Statesmonetary policy) of the Unites States Excessive deregulation of financial marketsExcessive deregulation of financial markets

Europe’s growth modelEurope’s growth model Strong regulationStrong regulation

Prudent macroeconomic policiesPrudent macroeconomic policies

What went wrong?What went wrong?









Why are the US growing more than Europe?Why are the US growing more than Europe? Common Wisdom: In two words: Washington Common Wisdom: In two words: Washington

ConsensusConsensus More flexible economyMore flexible economy Less regulation, less rigidities.Less regulation, less rigidities. Less distortions in the incentive mechanismLess distortions in the incentive mechanism This explains the difference e.g. in the impact of the ICT This explains the difference e.g. in the impact of the ICT

revolutionrevolution Implication: Europe has to go for structural reformsImplication: Europe has to go for structural reforms This is the philosophy behind the European institutionsThis is the philosophy behind the European institutions

Stability PactStability Pact ECB StatuteECB Statute

Lessons for EuropeLessons for Europe

Problems with Structural ReformsProblems with Structural Reforms

The importance of structural reforms is beyond The importance of structural reforms is beyond doubt, but it may be overstateddoubt, but it may be overstated

A number of reforms have already been A number of reforms have already been implemented.implemented. Goods market: Privatization, deregulationGoods market: Privatization, deregulation

Labour market: Multiplication of contract types, Labour market: Multiplication of contract types, temporary jobs, reform of unemployment benefit temporary jobs, reform of unemployment benefit systems, wage moderationsystems, wage moderation

Problems with Structural Reforms IIProblems with Structural Reforms II

EPL index*. Selected yearsEPL index*. Selected years

19851985 19951995 20052005 20082008

DenmarkDenmark 2.42.4 1.51.5 1.51.5 1.51.5

FinlandFinland 2.332.33 2.162.16 2.022.02 1.961.96

FranceFrance 2.792.79 2.982.98 3.053.05 3.053.05

GermanyGermany 3.173.17 3.093.09 2.122.12 2.122.12

GreeceGreece 3.563.56 3.53.5 2.732.73 2.732.73

ItalyItaly 3.573.57 3.573.57 1.821.82 1.891.89

SpainSpain 3.823.82 3.013.01 2.982.98 2.982.98

SwedenSweden 3.493.49 2.472.47 2.242.24 1.871.87

UKUK 0.60.6 0.60.6 0.750.75 0.750.75

USUS 0.210.21 0.210.21 0.210.21 0.210.21

EMU11**EMU11** - - 2.752.75 2.232.23 2.22.2

Source: Creel and Saraceno (2010)Source: Creel and Saraceno (2010)

While we have dual system, with protected insiders While we have dual system, with protected insiders and outsiders, and outsiders, the marginal workerthe marginal worker is not a source of is not a source of rigidityrigidity

So, if it is not (only) market flexibility, what else can it So, if it is not (only) market flexibility, what else can it be?be?

Difference often neglected: Difference often neglected: Policies are also very Policies are also very differentdifferent

Active in the USActive in the US

Very inertial in EuropeVery inertial in Europe

This corresponds to two different theoretical This corresponds to two different theoretical backgroundsbackgrounds

Shocks plus Institutions, Once MoreShocks plus Institutions, Once More

Macroeconomic policy has been proactive in the US, and very Macroeconomic policy has been proactive in the US, and very inertial in the EMUinertial in the EMU

Policy Divergence or Market Flexibility?Policy Divergence or Market Flexibility?

Fiscal Policy

Monetary Policy

US, UK, Spain, increasing indebtednessUS, UK, Spain, increasing indebtedness Consumption out of income substituted by consumption out of Consumption out of income substituted by consumption out of

debtdebt

Institutions, not Only PolicyInstitutions, not Only Policy

Institutions, not Only Policy IIInstitutions, not Only Policy II

Conclusion: A European ParadoxConclusion: A European Paradox

The US institutional setup is consistent:The US institutional setup is consistent: Extreme market flexibility and weak collective Extreme market flexibility and weak collective

insuranceinsurance Fluctuations are smoothed by proactive Fluctuations are smoothed by proactive

macroeconomic policiesmacroeconomic policies

The EMU on paper is also consistentThe EMU on paper is also consistent Strong welfare state and automatic stabilizationStrong welfare state and automatic stabilization Constraints to discretionary macroeconomic Constraints to discretionary macroeconomic

policiespolicies

What about the EMU in reality?What about the EMU in reality? Huston, we have a problem…Huston, we have a problem…

One First (impossible) best, One First (impossible) best, political integrationpolitical integration……

… … four feasible reformsfour feasible reforms

A “solidarity stabilization fund”A “solidarity stabilization fund” Golden Rule of Public Finance (to allow financing public Golden Rule of Public Finance (to allow financing public

investment by borrowing) investment by borrowing) ““Political” determination of the inflation objective (Bank of Political” determination of the inflation objective (Bank of

England?)England?) More pragmatic approach to competition policy, in order to allow More pragmatic approach to competition policy, in order to allow

the conduct of a true industrial policy…the conduct of a true industrial policy… ……and a question mark:and a question mark:

Exchange rate policy?Exchange rate policy?

The Future?

Where does this come from?Where does this come from?Fitoussi, J. P. and F. Saraceno (2010), "Europe: How Deep Is a Crisis? Fitoussi, J. P. and F. Saraceno (2010), "Europe: How Deep Is a Crisis?

Policy Responses and Structural Factors Behind Diverging Policy Responses and Structural Factors Behind Diverging Performances", Performances", Journal of Globalization and DevelopmentJournal of Globalization and Development, 1(1), , 1(1), Article 17.Article 17.

Fitoussi, J. P. and F. Saraceno (2010), " Inequality and Macroeconomic Fitoussi, J. P. and F. Saraceno (2010), " Inequality and Macroeconomic Performance “Performance “Document de Travail de l’OFCEDocument de Travail de l’OFCE, 2010-13, 2010-13

Creel, J. and F. Saraceno (2010). "Automatic Stabilisation, Creel, J. and F. Saraceno (2010). "Automatic Stabilisation, Discretionary Policy and the Stability Pact", paper presented at Discretionary Policy and the Stability Pact", paper presented at the Bank of Italy Conference on Fiscal Policy and the Crisis, March the Bank of Italy Conference on Fiscal Policy and the Crisis, March 24, 201024, 2010

Fitoussi, J.-P. and F. Saraceno (2008), "Fiscal Discipline as a Social Fitoussi, J.-P. and F. Saraceno (2008), "Fiscal Discipline as a Social Norm: The European Stability Pact", Norm: The European Stability Pact", Journal of Public Economic Journal of Public Economic TheoryTheory, 10(6), pp. 1143-68., 10(6), pp. 1143-68.

Fitoussi, J.-P. and F. Saraceno (2004). " The Brussels-Frankfurt-Fitoussi, J.-P. and F. Saraceno (2004). " The Brussels-Frankfurt-Washington Consensus. Old and New Tradeoffs in Economics " Washington Consensus. Old and New Tradeoffs in Economics " Document de Travail de l’OFCEDocument de Travail de l’OFCE, 2004-02, 2004-02

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And Inequality Macroeconomics and Inequality Francesco Saraceno The Euro after the crisis: lessons from the past and challenges for the future Cambridge