Interview with Jean-Paul Fitoussi, PIIGS Can Fly, 21.05.2014 (en)

24 maggio -

lampione

 

The latest – and last – guest of our radio show PIIGS Can Fly was an exceptional one. Jean-Paul Fitoussi, professor at Sciences Po, Paris, and at our own university Luiss Guido Carli, Rome, came over to our studios to talk about his 2013 book, “The Theorem of the Street Lamp” (french title, “Le théorème du lampadaire”). The title refers to the popular story of the drunk man looking for his keys under a street light, the only place where he can see; a joke that may serve as a metaphorical description of current mainstream economics.

A prolific source of anecdotes, Prof. Fitoussi expressed his views on a wide range of topics, including poverty, macroeconomic indicators, pluralism in economics, and Italian politics.
Here we provide a synopsis of the interview.

 

Here is a passage from the introduction of your book: “We’re living in unreasonable times, where the greatest wealth and the deepest misery exist side by side. Maybe our systems are unable to guarantee survival to their citizens?”

 

In the United Kingdom, hospitals are discharging old patients at 3 am, when the management thinks that there is no hope for their survival. It means that social security, there, is not concerned with the goal to provide the most basic health to all of its citizens. That’s because sanitary structures operate under a budget – obviously not just in the UK.

We are witnessing an enourmous increase in poverty within the European Union: it hits 135 million people, and, even worse, one out of four children. This is not negligible.

 

Outside the light of the lamp. How did the dominance of a single theory affect today’s societies?

 

There is always a dominating theory that governments believe, even if it’s false and even if its outcomes are extremely poor. An example is the current European economic policy: we’re having the highest unemployment rate since the 1930s, the longest continuous span of recession since WWII… but these policies are still going on. To justify this, policy-makers argue that the doctrine was not fully developed: for instance, the labour market – they claim – has not been fully deregulated, and we need more flexibility in that sector.

To refuse a theory we just ought to look at the plain facts, but an alternative one has yet to show up. As Robert Solow once said, to refuse a theory, we need another one.
The pattern we are following now is just a sophisticated version of a theory from the early 20th century. We made it so complicated that people cannot understand it, but what they can figure out is a basic conclusion: in an ideal market economy, we should automatically have full employment and social efficiency. Today it is clear that we can only have social efficiency with a decreasing population: in crude words, it is uncertain whether people will survive it.

 

You just said “current policies results are poor”, while even the indices used to measure them are questionable. Should we take more in account other indicators, such as  measurements of inequality?

 

Unemployment rate seems to be a generally accepted measure, but it is not an objective indicator: it is based on surveys, so it has an inherent element of subjectivity.

GDP does not mean much anymore. It used to when inequality did not rise, as GDP represents the mean of income growth. When different levels of income rise differently, GDP does not mean much anymore.
As it was proposed in my work with Joseph Stiglitz, we should look at the spread between average growth and median growth. Governments, too, should measure income growth of the bottom 80% and not be concerned with the top 1%.

In the last few years, in Europe and in the US, the former segment of the population did not experience any kind growth, while median salaries diminished: this is dangerous for democracy, and a number of noticeable studies on the matter in recent times – such as Piketty’s one – showed that is necessary to distinguish between oligarchy and the rest of the society.

 

Finance. The third chapter of your book is called “The Rich Man and the Shoemaker” [in the Italian version, “finanziere”, same meaning as “broker”]. It looks like a good metaphor of two sectors – the financial one and the real one – that look totally unrelated today, but that are actually closely connected in the economic cycle.

 

What I meant with this title is that the main duty of the banking system should be to give loans to the real economy, like the shoemaker. We should probably define the financial system as an intermediate product, similarly to what tyres are for a car. The financial system, instead, developed as a predator of the real economy, and not just as a tool at its service. If the shoemaker cannot rely on the credit system, then he cannot rely on anyone.

I am talking about shoemakers drawing from a fable by Jean de la Fontaine, “The Rich Man and the Shoemaker”. The shoemaker did not sleep at night because he owed money to the rich man. His wife told him “Just sleep, and tell the rich man that you will never pay him”. So, when the shoemaker told this to his lender, it was his turn to stay awake at night!

The story tells us that in a contract we have two responsible parties: the borrower and the lender. If the borrower goes bankrupt, the lender follows suit. That is why we need a sort of symmetric adjustment.

There is something else that is wrong with the current European economic policy: after a tremendous crisis, our public debt is still relatively low compared to that of the US and Japan. Yet nobody, in this case, forecasts a default. Those countries have a central bank that can act as a lender of last resort, while in Europe we make debts in a currency we cannot control. This weakens the position of the member States and opens them up to financial speculation.
A possible solution would be the creation of a common bond for the whole Eurozone.

 

So, who should act to reform the EU, and how?

 

There is not a single answer. Some countries, such as Germany, are paying less, and benefit from the situation, while others pay more. This is not normal in an Union we built knowing that some States had higher debts than others.

Debt is not a problem per se: countries with a higher debt are not necessarily poorer. You can have a high debt, but at the same time have huge resources.

Debt says nothing about how rich a country is. In an argument with the former Bundesbank president, Tittmeyer, I said I chose to work in Florence and not in Düsseldorf because the former is richer than the latter. Just think about the Uffizi Museum: some paintings there most likely are worth more than the entire Italian public debt.

What really matters are investments, and how much governments are going to spend for the youth. Future workers are the real key for future growth, and growth is a spontaneous factor in reducing debt. Instead, low growth and low inflation result in automatic debt growth. These two phenomena explain why public debts are rising and will keep doing so. Germany, the only country where debt is decreasing, has a debt/GDP ratio way higher than the 60% EU target, and its growth rate is a rather unsatisfying 0.7%, lower than Japan’s.

 

Italian politics. What’s your opinion about the recent “80 euros policy”, the tax grant for low income workers implemented by the new PM Matteo Renzi?

 

The “European side” of fiscal policy has been focused mainly on austerity. Renzi, for the first time, marked the will to go further, with an expansive measure. 80 euros are not negligible: they are 1,000 euros a year! The only shortcoming is that it oncovers a part of the low-earning families, and only the employed ones. Even Hollande is trying, to a much smaller extent, to follow a similar path.

 

Our manifesto. A sentence in your book has been a source of inspiration for us: “It’s up to us to choose where to put the street lights”. You used the plural here, “lights”, something that fits our campaign for pluralism.

 

I totally agree with your initiative. I wrote a book on the very same issue, ten years ago.

I think there are a number of theories able to explain the same facts, and an appropriate teaching should cover different facts, different theories, different policies.

Multidisciplinarity is desirable as well. I wish that there wasn’t such a clear distinction between economy, philosophy, politics, and mathematics in today’s faculties… I would like it if students could choose between very broad courses, and then “tighten” their range of choice as they continue their studies. A student who chooses an economics faculty after high school, does not know anything about economics yet. By enjoying a broader curriculum, a student will have “a lot of things on his mind” and shape his or her own beliefs and aspiration. I call this “active multidisciplinarity”.