Abstract
The 1st Semi-annual Report, of November 1997, discussed the causes of the decline suffered in Italy between the mid-’70s and the early ’90s in enterprise and in inclusion. The decline in enterprise is evidenced by a range of data including a striking contraction of employment in the business sector (rivaled only by Scandinavia and Portugal) and a plunge in the growth rate of total factor productivity within the business sector (from the league-leading rate to a rate in line with that in the U.K.).[1 The decline in inclusion is reflected both by the large rise in the unemployment rate (to a level now one of the highest in Western Europe) and even more strikingly by the participation rate, which has fallen further from its already deficient level since 1980, especially in the formal economy (thus leaving the participation rate markedly lower than in France, Spain and Portugal and far below the rates found elsewhere in Western Europe).2 The Report explained that the two problems—slowdown and slump—are strongly linked. Much of the decline of inclusion can be explained statistically by the cessation of the breakneck productivity growth enjoyed in the period of the economic miracle. And no doubt some of the growth slowdown can be attributed to the pressures, public and private, on firms and banks to reject downsizing and maintain job security.
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References
OECD, Economic Outlook, June 1998, p. 284, and OECD, Implementing the OECD Jobs Strategy: Member Countries’ Experience, 1997, Figure 7, p. 37.
On these two wealth hypotheses see the regression results reported in the research memorandum by Una Louise Bell in the Annex to the 1st Report.
Francesco Nucci, “Firms’ Performance by Type of Ownership: Some Evidence from Italy,” Research Memorandum of the Advisory Group, May 1998.
Luigi Bonatti, “The Impact of the Social Security Tax on the Size of the Informal Economy,” Research Memorandum of the Advisory Group, preliminary, October 1998.
The formal specification of the model and the basic steps to an analysis of the solution have been left in the main body of the Report rather than allocated to the Annex.
Branko Milanović, Liberalization and Entrepreneurship: Dynamics of Reform in Socialism and Capitalism, London, M. E. Sharpe, Inc., 1989, Table 1.4. Another data source gives radically smaller figures for all countries and these only for output but the ranking are similar: World Bank, Bureaucrats in Business: The Economics and Politics of Government Ownership, Washington, D.C., 1995, Table A4, 282–287.
See F. Barca and S. Trento, “La parabola delle partecipazioni statali: una missione tradita,” in Barca, ed, Storia del Capitalismo Italiano dal Dopoguerra a Oggi, Rome, Donzelli Editore, 1997.
Darius Palia and Edmund Phelps, “The Empirical Importance of Private Ownership for Economic Growth,” in Luigi Paganetto and Edmund Phelps, eds, Finance, Research, Education and Growth, London, Macmillan, 1998, and R.E. Hall and C.I. Jones, “The Productivity of Nations,” National Bureau of Economic Research, Working Paper 5812, November 1966.
R.R. Nelson and E.S. Phelps, “Investment in Humans, Technological Diffusion and Economic Growth,” American Economic Review, 56, May 1966. For a discussion of both Lucas and Nelson-Phelps see Philippe Aghion and Peter Howitt, Endogenous Gmwth Theory, Cambridge, Mass., MIT Press, 1998, Chapter 10. See also J. Benhabiv and M.M. Spiegel, “The Role of Human Capital in Economic Development: Evidence from Cross-Country Data,” Journal of Monetary Economics, 34(2), 143–173.
Schumpeter, who might be regarded as the Capitalism school’s patron saint (though not more profound on the subject than Hayek, Keynes, Polanyi and Shackle), apparently believed that industry concentration is permissible and innocuous, perhaps helpful in some ways.
A brief summary of the arguments is in Phelps, “Conclusions of the 3rd Villa Mondragone International Seminar: Mass Privatization in Eastern Europe,” Rivista di Politico Economica, 82, December 1992. See also the same author’s work in Annex, “Arguments for Private Ownership,” in European Bank for Reconstruction and Development, Annual Economic Outlook, London, September 1993.
See for example A. Schleifer and R. Vishny, “Politicians and Firms,” Quarterly Journal of Economics, 109, November 1994, 995–1025.
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F. Nucci, “Firms’ Performance by Type of Ownership: Some Evidence from Italy,” May 1998.
There is some discussion of this phenomenon, dubbed “privatization from below,” in Jan Winiecki, Post-Soviet-Type Economies in Transition, Aldershot (Hants), Avebury, 1993.
The original model of a customer market is E.S. Phelps and S.G. Winter, Jr., “Optimal Price Policy under Atomistic Competition,” in Phelps et al., Microeconomic Foundations of Employment and Inflation Theory, New York, Norton, 1970, 309–337. Entry is introduced in Alvaro Rodriguez, “Entry and Price Dynamics in a Perfect Foresight Model,” Journal of Economic Dynamics and Control, 9, June 1985, 251–271. (The frictional models of business activity that focus on the labor market do not fit Italy very well, though such frictions surely have some effects.)
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See Phelps, “Profits Theory and Profits Taxation,” IMF Staff Papers, 33, December 1986.
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Several liberal economic thinkers—libertarians in American parlance—such as Friedrich Hayek, Milton Friedman and Henry Wallich argued that, whether or not private enterprise proved superior in terms of net economic benefit, it conferred the political benefit of liberating the population from dependence on the public sector for their job and their livelihood and this benefit was a bulwark against the rise of totalitarian and authoritarian government. Writing in the 1940s and 1950s, they were none too sure there was any conventional economic benefit.
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Actually, there is another paper (with Kumaraswamy Velupillai) in which I struggled with aspects of the question, “Optimum Fiscal Policy when Monetary Policy is Bound by a Rule,” in K.J. Arrow and M.J. Boskin, eds, The Economics of the Public Debt, London, Macmillan, 1988. There is also an early book of mine on signalling households a fiscal burden of the right size, Fiscal Neutrality toward Economic Growth, New York, McGraw-Hill, 1965.
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This means that the elasticity of the marginal utility of consumption with respect to the consumption level is greater than one (at least asymptotically). This elasticity is conceptually orthogonal to and thus independent of the coefficient of relative risk aversion, which pertains to the willingness to risk wealth, lifetime wage rate, etc.
Of course there is no contradiction between one or more episodes of deficit spending in the past, saddling the present with a burdensome debt, and a plan not to run deficits in future.
In the curly-brace expression for the agent’s saving the balanced budget constraint has been used to substitute for r h.
This is Bellman’s equation, which Isaacs calls the “main equation” in differential games. However the present problem has the added dimension that there are many private agents.
A departure from the optimal tax-mix policy (making the tax rates an optimal function of A) will make the righthand side smaller than the lefthand side.
It should be conceded that such a completely one-sided tax mix could not be optimal, regard-less of the other complications in the above equation, ifthe necessary taxation of wealth when wage taxation is negative left r h nonpositive. The reason is that a policy keeping the after-tax rate of return to saving nonpositive would block the approach of the net rate of utility toward the bliss level to which it would approach if r h were bounded above zero, and such a deprivation would accumulate toward infinity, thus being dominated by paths that do approach bliss. Further, there is a real risk that total reliance on wealth taxation would leave no return on wealth, since if the ratio of total private wealth to national income is less than 8, as in the United States, taxing even as much as 3 per cent of it would raise revenue of less than 24 per cent of the national income44—not enough to finance today’s “welfare state,” though it could be supplemented with modest land and corporate profits levies.
The procedure here appears in Richard Bellman, Dynamic Programming, Princeton Univ. Press, Princeton, 1956, p. 264, and in Thomas J. Sargent, Dynamic Macroeconomic Theory, Harvard University Press, Cambridge, Mass., 1987, 21, where the literature is surveyed.
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Phelps, E.S. (2002). Ways to Boost Enterprise and Inclusion: Ownership, the Underground, Tax Structure. In: Enterprise and Inclusion in Italy. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-0901-1_3
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