To Grow or Not to Grow? From Secular Stagnation to Robust Recovery

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I’m not really sure about new data on growth. It is measured by looking at nominal GDP increases deflated through price index. If you decrease inflation, you artificially increase real growth. I’m not sure that inflation in Europe nowadays is zero percent. If you ask people in Italy everybody will tell you now that the prices are increasing. If that were true and, for example, you take Italy which is growing in a staggering 0,3-0,4 per cent, we go from positive growth into negative growth. If you take away the boost we have from the weak euro and the boost we have from collapsing oil prices, which in a country like Italy should account for about 2 per cent growth rate, we would be in recession.

Therefore, forget about growth you are lucky to have in some European countries. I’m thinking about countries like Italy, France, Spain or let’s say Southern Europe, plus some weaklings in the North. We should ask ourselves – how that has been possible? As a benchmark bear in mind that technological growth, i.e. the theoretical increases in production that are made possible by increases and improvements in productivity is about 2-2,5 per cent a year. Theoretically, our potential growth if we worked hard enough, if we invested normally, if we took advantage of our opportunities, could be at least 2 per cent a year. The real question is, why don’t we grow at this rate? I’ll give you two sets of answers and you’ll get the consequences later. The two sets of answers regard two chapters.

One can be titled ‘visions’, and the other can be titled ‘ideologies’. We are victims of our own visions or lack of vision and we are victims of our lack of good ideas. We are also victims of our past distorted ideological legacies. What are the bad visions? The bad vision is that technological growth is inevitable and it must bring about economic growth. This is a mistake. Technological growth does not, per se, lead to economic growth. In order to have economic growth we must transform technological opportunities into entrepreneurial stories, into success stories, into competitive companies coming to the surface and meeting consumers’ needs. If you don’t have this critical link between technological opportunities and business realities, you are missing growth. And this is what is happening in Europe. We are doing our best in order to discourage entrepreneurial spirits and our best talents. It is not necessarily the brain drain, it is entrepreneurial drain. Those who have ideas pack and go rather than asking or begging for government subsidies in their home countries. They may go to China, U.S. or India. They often go to Switzerland. The point is, we are weakening entrepreneurial spirits, talents and opportunities. The vision is that entrepreneurship has disappeared from our screens and we have to bring it back.

Second vision, or second distorted vision, is that the only way, or the simple way, of transforming supply chances into growth is aggregate demand. This is the Keynesian legacy, according to which we just have to give resources to the government so that the government increases the aggregate demand where private demand is sluggish, and we’ll have growth. We all know that this is nonsense but most of our policymakers don’t. If you read Paul Krugman you see this mantra every day – that you have to increase government expenditures. Or he will tell you to increase the money supply and the crisis will take care of itself. Unfortunately we have all seen there are no easy solutions. By increasing the money supply you are creating illusions. Paper money is not wealth. It’s the illusion of wealth. And the illusion stays alive as long as nobody uncovers the bluff. So, we’ll wait until the bluff shows up and when that happens, we’ll be in trouble. The second point is that the Keynesian multiplier is at best zero. You do not create wealth by taking away money from private people and giving it to bureaucrats. Private individuals feel responsible for their money because it’s their money and it’s their loss. Bureaucrats do not feel too responsible for that money because it is not their money and they all know that if something goes awry, the cost and consequences will be evident at the much later stage and the solution will be more public spending. There is no incentive for government expenditure to be efficient, let alone selecting projects.

Third bad vision is that individuals don’t matter. It means individual preferences are left aside, or pushed aside in the name of governmental paternalism. The bureaucrats know better. Regrettably, economic engineering is what we are taught at schools and I can guarantee that in 95 per cent of Western European universities economic engineering is the name of the game. It’s not about getting common sense. It’s about getting the right model. If something goes wrong you are taught to change your model. But the idea that the very notion of modeling is conceptually and logically wrong never goes across their minds. Unfortunately majority of economic textbooks follow this model-making and estimations as if we were charlatans. And sometimes we are. We have replaced individualism and subjectivism or methodological individualism with technocratic engineering. Now where does that come from? The legacy is basically the Keynesian vision. This vision is not just a matter of public spending against private spending, deficit spending against balanced budget. It is the idea that past mistakes don’t count. We went into the crisis due to many mistakes – government illusions, bad public finance, overregulation, bad information about banking system given by central banks, easy money, which brought down interest rates so that people engaged in all sorts of crazy investments that did not pay off. What is a free market response to that? Past mistakes have costs. Unless we pay that cost, we cannot start over again. If you have lived above your means, which applies to Greeks, but also to Italians, to Spaniards, to Frenchmen, even to Germans, you have to pay the cost. If you can’t pay back the loans, you are bust, and if you are not paying back the loans, your creditors are going to pay the cost. If they refuse to pay the cost, distortions will go on. Bailing out bankrupt countries like Italy, France, Greece and others, just prolongs the distortions. If you have distortions, if you have illusions, if you have paper money and think that that paper money is actually wealth, you’re never going to grow.

The Keynesian vision, or the Keynesian ideology, is that the past does not count and you can fix problems just by forgetting about the past and looking into the future. What is the outcome? We have a crisis? Increase public spending and budget deficit. The market does not buy your debts because they don’t believe you are solvent? Never mind, have quantitative easing. The European authorities have promised to carry on quantitative easing until September – October 2016, and to keep going that way, I think it’s about 60 billion euro a month, beyond that time if necessary. We are forgetting the mistake from the past and keep going repeating the same mistakes in the future. We will not generate growth this way. Aggregate demand does not pick up not because people are stupid or because people are freaking out. If you have excessive regulations, if you have high taxation, if you have enormous discretionary power exercised by the policymakers who tell you ‘the tax system is going to change next month’, ‘your pensions will now be paid’ or ‘we don’t know whether they are going to be paid’, you’re never going to spend a penny. You are going to save more and more, and the more and more. Those guys are going to tell you ‘look, don’t pay attention, we’ll fix it’ and they often don’t tell you how they’re going to fix it, Even when they are telling you they are going to fix it by printing paper, of course you are fretting over the future and of course you don’t consume or invest.

We all know that the past policies were wrong, but the ideological background stays constant. It is the idea that nobody has to pay a cost for the mistakes they’ve done. It is why we’ve lost the notion of individual responsibility and we have replaced the notion with the notion of ethical state. The ethical state is the notion in according to which government is perfect. And if it is not perfect, it can be made perfect. This ideology claims that the government is far wiser than what individuals can decide. If the government decides for you then you believe that you don’t have to take responsibility for what you’re doing. The demise of the notion of personal responsibility, of individual responsibility, is crucial. Unfortunately, this is not going to change overnight.

The debate on policies is not about getting rid of policies. It’s about conceiving of better policies. This is what we should focus on and teach our children. We should open our minds to the notion of individual responsibility and entrepreneurship. We have to take responsibility and the costs of our mistakes. The recipe for growth is no technocratic engineering. Growth goes through entrepreneurship, mistakes, reactions to mistakes and risk-taking. These elements are critical and regrettably during the past two or three decades they have been vanishing from the textbooks of economics and from the blueprints circulating in Brussels and in other European countries. I hope Poland we’ll keep and stick to the notion of individual responsibility and keep Eurocrats out of the door.

Keynote speech by Professor Enrico Colombatto (IREF, University of Turin) during the 2015 Free Market Road Show Conference in Warsaw, Poland. Event was co-organized by the Civil Development Forum (FOR).

Transcribed by: Marcel Wojtyniak; Edited by: Marek Tatala

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Enrico Colombatto
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