This blog is the unedited English version of the article that appeared in La Repubblica on December 31, 2014.
The global financial crisis that began in 2008, and whose remnants are still felt strongly in countries facing full blown economic crises, was caused by two key factors. First: rising inequality, especially in the US, which caused those people with falling living standards to take out massive levels of debt, beyond what their income levels could later repay. Second: by a de-regulated financial sector which outstripped industrial production in the last decades because finance was speculatively lending to itself (other forms of finance), rather than to industry. Post crisis policies should thus be focussing on reducing inequality (thus also reducing personal debt levels), and getting finance to nurture and lend to the real economy. Yet today we are failing miserably on both levels.
Inequality is rising. And while the bleak US figures are well known, in the Eurozone periphery it is even worse. Ill concentrate here on Italy, which plays a pivotal role in the future of the region: if it goes down, the EZ goes down. Eurostat figures show that the richest 10% in Italy earn 3X more than the remaining 90%, and while the income of the bottom 1% has actually been growing in the rest of the OECD (from 1.8% to 2.6%), in Italy it is still falling. Furthermore, while it is convenient to pretend business has problems, the reality is that the profit share of total income is at record levels globally; and in Italy is one of the highest in the the EC: 45% compared to an EC average of 40%. And as Mario Pianta has shown in his recent book Nove su Dieci, the average salary of Italian workers has fallen by .1% every year for two decades!
To reduce inequality, its not enough to consider the power of redistributive taxation or handounts, like Renzi’s ’80 euro monthly bonus’. It is essential to tackle the more intrinsic problems of corporate governance which have allowed profit wage levels to sore to record levels, leaving wages falling behind. It is indeed this point that brings us to the second problem. The notion that big bad finance must be somehow tamed in order to rebalance the economy to good old industry, ignores how sick the real economy has become. Industry itself has become financialised, focussing too much on ‘hoarding cash’ (at record levels) and/or spending on areas that boost short term stock prices (thus stock options and executive pay), than on long run areas like R&D and human capital formation. Indeed, Since 2003 Fortune 500 companies have spent 3 trillion dollars on share buybacks, often justifying these with the excuse that there are ‘no investment opportunities’. Yet a look at the largest buy-backers (pharma and oil) reveals that these are in two sectors yearning for investment in new opportunities: health and renewables. And as I show in my work, it has been a select group of public sector institutions in the world, that have been spending the most on these opportunities rather than the sick and financialised private sector.
Thus it is urgent for industrial policy, which is finally becoming fashionable again, to not simply throw support to certain firms and sectors, such as IT or ‘life sciences’, but ask companies within these and other sectors to be part of the reform that is needed. Instead we are witnessing the opposite: sycophant governments bending backwards to unquestioningly please the ‘growth’ requests of big business, and a widespread attack on workers rights.
An example of the latter is way in which the Italian government continues to pretend that the impediment to Italy’s growth is the power of worker earnings (which the data above proves otherwise), and hence the solution anything that reduces labour costs (the Jobs Act). The reality is that the rise in unit labour costs is a result of a fall in productivity due to falling private (and public) sector investments in all areas that increase human capital and innovation. Recent studies also show that an increasing number of factories around the world are being given the green light to go against labour and health regulations, in order to produce more ‘growth’ (for an example in the US meat industry, see here.
An example of the former (government captured by business requests) is the less well known introduction of the ‘patent box’, in Italy in 2014 by Renzi (and in the UK in 2013 by Osborne). This policy, which greatly reduces tax on income generated from patented goods, increases business profits even more while doing little or nothing to increase private sector investment in innovation (the goal of the policy). Patents are already monopolies: policies must target not the income they generate (protected for 20 years!) but the research that leads to them–especially in a country like Italy that has one of the lowest business sector spends on R&D. Instead, this policy will only reduce government revenue, forcing cuts elsewhere in order to remain ‘on target’ with the deficit. For a comprehensive critique of the patent box, see chapter 2 of my book The Entrepreneurial State: debunking public vs. private sector myths, and this excellent piece by the Institute for Fiscal Studies.
Another example of business getting its way in a period in which governments are starving for growth, is the other side of the Jobs Act which reduces taxes for private equity, crowdfinancing, and venture capital funds, as though these are the secret to innovation financing. The reality is that what is required by both small high growth innovative companies is patient long term committed finance, not the increasingly speculative VC model that focuses only on the ‘exit’ phase. Yet the wrong model of what drives growth–an obsession with SMEs and VC– has seen the time that private equity has to be invested from 10 to 2 years to receive capital gains tax reductions–causing many of these companies to focus on short term returns.
So what should we do in 2015? Financial reform–aimed at bringing finance and the real economy together again–must thus critically first study the facts, not the myths, in the real economy. Periods of longest stable growth in most economies is when medium to large firms have invested their profits in R&D and human capital. What is needed today is long-term committed finance, in the form of public banks (such as German’s KfW or Brazil’s BNDES) and a taxation policy that fosters long-termism, rather than constant tax cuts for speculators. And while taxation policy must be progressive and not regressive its fundamental to also build those institutions that can continue to negotiate a better deal for labour, in a period in which the profit wage ratio continue to sore. Trade unions are not the problem, they are the answer–and must of course become the key pillars fighting for innovation led growth rather than the status quo, no matter how much the latter might be good for a select few.
Until we bring together innovation policy, financial reform, and the strengthening of institutions that can fight on the behalf of labour (the wage share of income), we will continue to obsess over ‘fixing finance’, while leaving the real economy as sick as before: rising inequality, many small weak firms, and a few large financialised ones, asking for more and more while giving back less and less. The perfect recipe for the next financial casino and… bust.
Tags: Entrepreneurial State, Financialization, Industrial Policy, Inequality, Italy, State Investment Banks