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The Therapy Sessions
Monday, May 24, 2004

Warning signs from Italy

Bad economic future for Italy?

What else is new?

Italy has been limping along for much longer than Europe in general, but Europe is working to catch up.
A good dose of Italian-style socialism should do it:
Italy's economic growth has been 25 percent lower than that of the EU average during the last 15 years - and that gap has widened of late. The economy is projected to grow less than 1 percent this year, compared with 1.6 percent for the EU as a whole and 4 percent for the United States.

Among Italy's major problems is one of the world's lowest workforce participation rates, 59.6 percent, compared with an EU rate of 69 percent. This high level of what some experts call "disguised unemployment" is fueled by a lack of women in the workforce and a pension system that allows workers to retire in their 50s with annual payments of nearly their entire salaries.

Another issue is labor rules. It is risky to fire anyone, because they can bring lengthy and expensive court proceedings to get their jobs back. Berlusconi liberalized those rules a bit in what may be his most far-reaching reform effort, but experts say Italians remain steeped in a "job for life" ethos.

Unions claim to represent 60 percent of the workforce, and Italy is one of the few places in the world where workers still march in the streets flying the red Communist flag with hammer and sickle.

But it's not just labor. Italy's public sector is among the world's most bloated, while its private economy is dominated by small and medium-size businesses that have used their political clout to erect high barriers to competition...

...Garelli's survey measures such factors as tax burden, regulation, labor rules, government efficiency, and quality of infrastructure. Anyone who spends time in Italy can see why the country is falling behind on those measures, why entrepreneurialism is stifled, and why foreign companies swallow hard before attempting to enter the market.

All it takes is a trip to the post office, where people wait in line to pay bills in cash because utilities do not accept checks. Or a ride on Rome's dingy, overcrowded two-line subway system, which makes London's oft-criticized Underground look like the model of efficiency and comfort.

Liberals like to point to Europe as a collection of gleaming welfare states. The press works with them, and it rarely reports stories like this.

Europeans are clearly proud of their system and its policies, but they can't understand why they keep falling further behind the US. They boast about their socialized medicine, but they'd rather not think of their ageing populations, high public sector debt, and stubborn unemployment.

Government policies are at the root of these things.

The Democratic Party wants to copy many of these failed policies: increased protectionism, more social spending and higher taxes.

The Republicans want somewhat higher social spending, a little protectionism and TAX CUTS.

Both parties are insane.

At the heart of these policies is risk avoidance:
"Italians prefer to fight to preserve what they have, rather than to take the risk of something new," he said.

Letting the market sort things out sounds cruel, but it works.

Those who believe market forces don't apply in - say - medicine should be forced to explain why medical inflation keeps rising as political controls increase (to me, a clear sign that government control is inhibiting price signaling).

Would price signaling work with something like surgery?

A few years ago (1999) I got lasik for my eyes. It cost me about $4500, and most of that was out of pocket.

Today, the same operation, same facility, with improved equipment costs about $1800.

In contrast, the birth of my first son (C-section in 2000) cost $11,000 (!). The birth of my second son (normal delivery in a different hospital, 2003) cost $22,000 (!). Cost to me? Nothing. Insurance handled it all.

I think the main difference between the two is that in the former, people usually pay out of pocket, eventually depressing costs: the same way it works with any new electronic gadget that comes on the market.

In the latter case, some mysterious third party picks up the tab and costs don't really matter. In my case, insurance paid part of those huge birth costs to the hospital. I paid a small copay.

People who say that health is more complicated than anything else ignore the simplicity of basic ecomomic law: Efficiency increases when price signaling is allowed to function.

The free market works fine to keep costs under control in every other sector of our economy. I don't see shy medicine is different than food, housing or labor.

As for the global fixation with big government, eventually annoying economic reality will intrude.

It will just come first Italy, second to Europe and finally to the US:
"Italy is going to reach a situation where, suddenly, people are going to realize they are going full speed into a wall. The problem is, they may not realize it until they hit it."

So it will be for everyone.

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