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Italy’s Chance of a Lifetime for Economy Could Yet Be Squandered

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Italy’s Chance of a Lifetime for Economy Could Yet Be Squandered

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(Bloomberg) — No Italian government has ever had so much cash at its disposal as Prime Minister Giuseppe Conte — enough possibly to transform the region’s laggard economy.

But if that fiscal hoard swelled by European Union rescue funds and central bank-backed cheap borrowing is spent unwisely, it could become the biggest missed opportunity of a generation.

Avoiding that outcome is the test confronting Conte and his finance minister, Roberto Gualtieri. While targeting a revamp of the economy, they face pressure to throw funds at protecting existing jobs rather than investing in new ones, expanding the role of the state despite a troubled history of such policies in the country.

“In Italy, too many people think that any kind of public expenditure can boost output,” said Riccardo Puglisi, economics professor at the University of Pavia. “This increases the risk that recovery-fund money is not used properly and efficiently.”

The fiscal windfall that Italy’s governing class is about to sink its teeth into is staggering. Gone are the days of haggling over 0.1% budget deviations with Brussels officials concerned about burgeoning borrowings that are now well on the way to exceed 150% of gross domestic product.

The country stands ready to receive as much as 209 billion euros ($248 billion) in EU aid funded by jointly issued debt to help its post-coronavirus reconstruction.

Further bolstering its public finances are European Central Bank efforts to keep borrowing costs low. That help allowed Conte to spend 100 billion euros in stimulus on a battered economy that analysts anticipate may contract as much as a 10th this year. The yield on Italian 10-year bonds has more than halved since the peak of the pandemic in mid-March.

Deep Pockets

“Italy will have billions in its pockets,” said Paolo Pizzoli, a senior economist at ING Bank. The government “needs to show it is not only able to access European Union funds, but also to focus spending effectively to ultimately boost growth.”

With strict strings attached to EU money, officials intend to use it to boost growth to at least 1.6% a year and increase employment by 10 percentage points from the 2019 tally of 63.5% to bridge the gap with regional peers, according to draft guidelines seen by Bloomberg.

The plan is to invest in digitalization, a unified ultra-broadband network, innovation, education, more efficient infrastructure, a green economy, and also reforms of the judicial system and state bureaucracy.

“It’s a once-in-a-lifetime opportunity to exit a long period of stagnation,” Gualtieri told lawmakers last week.

That ambitious growth agenda is pulling in one direction, while the government’s own spending plans for the rest of its budget are pulling in another. Conte’s coalition of the left-wing Democratic Party and the populist Five Star Movement — newly emboldened after holding its ground in local elections this week — is increasingly tending toward state aid and government intervention.

The premier has pushed for the creation of a single broadband network company, halting the sale by Telecom Italia SpA of a minority stake in its network. He has also pressured the Benetton family’s Atlantia holding company to sell its 88% stake in toll road operator Autostrade per l’Italia. Meanwhile Gualtieri has publicly favored a sale of the Italian Stock Exchange and its MTS bond market to a European company.

The government wants the state-backed lender, Cassa Depositi e Prestiti, to take stakes in all three enterprises, and it has also set up a new publicly controlled company to run failed airline Alitalia SpA. Italy has seen such measures before, but not for a while.

Not the Solution

“The successful Italian economy of the 1950s, which was a mixed system — with strong government involvement in companies through a vehicle called IRI — worked for a time but degenerated quickly into cronyism and wasting public funds,” said Giovanni Orsina head of LUISS University’s School of Government in Rome. “Regenerating that system for all the wrong reasons is not the solution.”

The Institute for Industrial Reconstruction — known as IRI — was a state company established by the fascists in 1933. It helped rebuilding after the war, constructing roads and the phone network, and was once Italy’s biggest employer.

If Cassa Depositi becomes a revamped version of that, it would ultimately turn back the clock, reversing decades of economic policy since IRI was dissolved during a sell-off of assets in the 1990s.

“We hope the government will use the funds to boost competitiveness with a market approach rather than acting as a nanny state,” said Paolo Magni, parter at Alpha Group, a private equity fund with 2 billion euros of assets under management in Italy.

For Orsina, such an outcome would prolong Italy’s history of failing to deliver on economic reforms, hampered by special interests and a political cycle with frequent elections.

“Politicians gain very little from long-term planning and very much from spending on solutions that increase their power and popularity,” he said. “The country is condemned to short-termism.”

 

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Only state investment can revive Britain's zombie economy – The Guardian

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Only state investment can revive Britain’s zombie economy  The Guardian



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Trump’s Biggest Economic Legacy Isn’t About the Numbers – The New York Times

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BETHLEHEM, Pa. — To understand how much President Trump has altered the conversation around the economy, just listen to Bruce Haines, who spent decades as an executive at U.S. Steel before becoming a managing partner of the elegant Historic Hotel Bethlehem.

The steel mills that still dominate Bethlehem’s skyline have long been empty. And now, so are the tables in the Tap Room, the hotel’s restaurant, a sign of the economic hardship caused by the coronavirus pandemic. “It’s been very difficult,” Mr. Haines said.

The president’s management of the pandemic is a prime reason many voters cite for backing his opponent. But Mr. Haines, who lives in a swing county in a swing state, is struck most by a different aspect of Mr. Trump’s record.

“I spent 35 years in the steel business and I can tell you unfair trade deals were done by Republicans and Democrats,” Mr. Haines said. Both parties, he complained, had given up on manufacturing — once a wellspring of stable middle-class jobs. “Trump has been the savior of American industry. He got it. He’s the only one.”

Bruce Haines, co-owner of Hotel Bethlehem, said the business has lost 40 percent of its income because it is unable to host large events and gatherings.
Credit…Hannah Yoon for The New York Times

In perhaps the greatest reversal of fortune of the Trump presidency, a microscopically tiny virus upended the outsize economic legacy that Mr. Trump had planned to run on for re-election. Instead of record-low unemployment rates, supercharged confidence levels and broad-based gains in personal income, Mr. Trump will end his term with rising poverty, wounded growth and a higher jobless rate than when he took office.

Still, despite one of the worst years in recent American history, the issue on which Mr. Trump gets his highest approval ratings remains the economy. It points to the resilience of his reputation as a savvy businessman and hard-nosed negotiator. And it is evidence that his most enduring economic legacy may not rest in any statistical almanac, but in how much he has shifted the conversation around the economy.

Long before Mr. Trump appeared on the political stage, powerful forces were reshaping the economy and inciting deep-rooted anxieties about secure middle-income jobs and America’s economic pre-eminence in the world. Mr. Trump recognized, stoked and channeled those currents in ways that are likely to persist whether he wins or loses the election.

By ignoring economic and political orthodoxies, he at times successfully married seemingly contradictory or inconsistent positions to win over both hard-core capitalists and the working class. There would be large tax breaks and deregulation for business owners and investors, and trade protection and aid for manufacturers, miners and farmers.

In the process, he scrambled party positions on key issues like immigration and globalization, and helped topple sacred verities about government debt. He took a Republican Party that preached free trade, low spending and debt reduction and transformed it into one that picked trade wars even with allies, ran up record-level peacetime deficits and shielded critical social programs from cuts.

Credit…Mark Makela for The New York Times

“He completely moved the Republican Party away from reducing Social Security and Medicare spending,” said Michael R. Strain, an economist at the conservative American Enterprise Institute.

On immigration, Mr. Trump remade the political landscape in a different way. He has accused immigrants of stealing jobs or committing crimes and — as he did in Thursday night’s debate — continued to disparage their intelligence. In doing so, he rallied hard-line sentiments that could be found in each party and turned them into a mostly Republican cri de coeur.

The Democrats changed in turn. Former Vice President Joseph R. Biden Jr. has positioned himself as the champion of immigrants, pledging to reverse Mr. Trump’s most restrictive policies, while rejecting more radical proposals like eliminating the Immigration and Customs Enforcement agency.

He has also been pushed to finesse his position on fracking and the oil industry, promising not to ban the controversial drilling method on private lands, and trying — with mixed success — to walk back comments he had made during the presidential debate about transitioning away from fossil fuels.

Shifts on trade were more momentous. Mr. Biden and other party leaders who had once promoted the benefits of globalization found themselves playing defense against a Republican who outflanked them on issues like industrial flight and foreign competition. They responded by embracing elements of protectionism that they had previously abandoned.

No matter who spends the next four years in the White House, economic policy is likely to pay more attention to American jobs and industries threatened by China and other foreign competition and less attention to worries about deficits caused by government efforts to stimulate the economy.

The reshuffling is clear to Charles Jefferson, the managing owner of Montage Mountain Ski Resort near Scranton, Pa.

“Those were not conversations we were having five years ago,” he said. “The exodus of manufacturing jobs, that was considered a fait accompli.”

Mr. Jefferson, 55, grew up in North Philadelphia in a blue-collar union family and remembers the hemorrhaging of jobs that many Democratic leaders said was unstoppable in a globalized world — even though such positions were deeply unpopular with many rank-and-file Democrats.

Manufacturing revived after bottoming out during the Great Recession but floundered during President Barack Obama’s second term. Mr. Jefferson, who said he voted for Mr. Obama, supported Mr. Trump in 2016. He plans to do so again.

Credit…Doug Mills/The New York Times

The sector still represents a relatively small slice of the economy, accounting for 11 percent of the country’s total output and employing less than 9 percent of American workers. But Mr. Trump has been a relentless cheerleader. While he often took credit for manufacturing jobs at companies like General Motors and Foxconn that later disappeared or never materialized, the pace of hiring in the sector sped up considerably in 2018 before stalling out last year.

As a result, in this election, unlike the last, the significance of manufacturing and the need for a more skeptical approach to free trade are not contested.

Mr. Biden, after decades of supporting trade pacts, is now running on a “made in all of America” program that promises to “use full power of the federal government to bolster American industrial and technological strength.” He has also vowed to use the tax code to encourage businesses to keep or create jobs on American soil.

Even voters who don’t particularly like Mr. Trump credit him with re-energizing the U.S. economy.

Walter Dealtrey Jr., who runs a tire service, sales and retreading business in Bethlehem that his father started 65 years ago, said he voted for Mr. Trump in 2016, but he was never a big fan of the president.

Credit…Hannah Yoon for The New York Times

“He talks too much,” said Mr. Dealtrey, who’s been around long enough to distinguish a new Goodyear or Michelin tire by its smell. “And his tone is terrible.” A year ago, he had considered the possibility of supporting a moderate Democrat like Mr. Biden or Senator Amy Klobuchar of Minnesota.

But with Election Day just over a week away, Mr. Dealtrey plans to once again support the president. Even after a few unnervingly slow months in the spring and some layoffs among the 960 people he employed at his company, Service Tire Truck Centers, he stills trusts Mr. Trump on the economy.

Mr. Dealtrey talked as he walked around stacks of giant tires that towered above his own six-foot frame, a Stonehenge-size monument to wheeled transport. He likes the president’s focus on “big manufacturing” and the way he “instills confidence in businesses to invest in this country.”

Just how much responsibility Mr. Trump deserves for reframing some key economic issues is up for debate. Frustration about job losses in the United States has been brewing for decades; the parties were diverging on immigration; and antagonism toward China over trade practices, suspicions of technology theft and its authoritarian tactics extends beyond the United States.

Credit…Ruth Fremson/The New York Times

“I don’t think he really has pushed the boundaries of any of those policy issues beyond where they already were,” said Mr. Strain of the American Enterprise Institute.

Similarly, Jason Furman, a chairman of the Council of Economic Advisers during the Obama administration, argues that Mr. Trump was pushed along by the same trends and forces that spurred his supporters. And on some issues, like immigration, he caused public opinion to move in the opposite direction.

In the end, it may turn out that the president’s most significant impact on economic policy is not one that he intended: overturning the conventional wisdom about the impact of government deficits.

By simultaneously pursuing steep tax cuts for businesses and wealthy individuals, raising military spending and ruling out Medicare and Social Security reductions, Mr. Trump presided over unprecedented trillion-dollar deficits. Emergency pandemic relief added to the bill. Such sums were supposed to cause interest rates and inflation to spike and crowd out private investment. They didn’t.

“Trump has done a lot to legitimize deficit spending,” Mr. Furman said.

Mr. Furman is one of a growing circle of economists and bankers who have called for Washington to let go of its debt obsession. Investing in infrastructure, health care, education and job creation are worth borrowing for, they argue, particularly in an era of low interest rates.

That doesn’t mean the issue has disappeared. Republicans will undoubtedly oppose deficits resulting from proposals put forward by a Democratic White House — and vice versa. But warnings about the calamitous consequences of federal borrowing are unlikely to have the same resonance as before the Trump presidency.

Back in his office, Mr. Dealtrey remembers how disturbed he once was about the size of the deficit. “I used to care about my kids and grandkids being stuck with it,” he said, leaning back in his chair. “But nobody cares anymore.”

“Maybe I don’t care anymore,” he said, momentarily surprised at his own words. “We’ve got bigger problems than that.”

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How Trump’s and Biden’s Tax Plans Will Help or Hurt the Economy’s Recovery – Barron's

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While political rivals are forecasting economic devastation if former Vice President Joe Biden were to raise taxes on the wealthy and corporations, many economists and tax analysts who have modeled outcomes have a different take.

The net effect of Biden’s proposals, when analyzed independently of spending and economic policies, would be negative economic growth ranging from -0.16% to -1.62% over the next 10 years, according to analyses by the American Enterprise Institute and Tax Foundation.

Slowed growth is attributed to higher taxes on the very wealthy, and major changes to businesses taxation, including an increase in the corporate tax rate from 21% to 28%, a doubling of the tax rate on certain income earned by foreign subsidiaries of U.S. corporations, and elimination of a 20% deduction for owners of pass-through entities with income of more than $400,000.

But when factoring in spending and economic plans—including those for trade, immigration, education, housing, health care, and other policies—the outlook varies by scenario.

An analysis by Moody’s Analytics finds that if Biden wins and Democrats win a majority in both the Senate and the House and enact his plans, average annual economic growth would be 2.9% and average annual wage growth would be 0.9% through 2030.

Moody’s finds that some 18.6 million jobs would be created over Biden’s four-year term, and full employment would be reached in the second half of 2022. Full employment is typically defined as an unemployment rate under 5%. It is about 8% today.

In contrast, if President Donald Trump wins the election and Republicans win the majority in both houses of Congress, the economic picture dims: 10-year economic growth would average 2.4%, wages would grow by 0.7% over a decade, 11.2 million jobs would be created over four years, and full employment would be reached in 2024.

If Congress maintains its split majority, with Republicans dominating the Senate and the Democrats in the House, the economic outcomes will be similar whether Biden’s or Trump’s tax policies are in effect—though somewhat more favorable under Biden’s presidency, according to Moody’s.

Read more: Here’s How Much You Would Pay Under Biden’s and Trump’s Tax Plans

Analyses that compare the two candidates’ plans are handicapped by a lack of detail issued by Trump. For example, while he has stated that he supports a capital-gains tax cut, none of the analyses factor this in.

Generally speaking, however, capital-gains tax cuts don’t typically help the economy, says Garrett Watson, a senior policy analyst at the Tax Foundation. “There is no evidence that capital-gains tax cuts are growth-enhancing.”

Email: editors@barrons.com

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