A few suggestions on how to emerge from the crisis
by Maurizio d'Orlando
Everyone is talking about the economic crisis but few dare suggest steps towards a solution. Like the Americans and the Swiss, Italy could issue its own currency (without leaving the Euro), cut public spending and tax Chinese imports until the Yuan is revalued. Above all, it could support creative private sector innovation by cutting taxes and protecting patents (Second part. The first was published yesterday, 20 September 2011).
Milan (AsiaNews) – One feature of the crisis that is currently affecting the world is the great number of analyses and concerns. Good proposals that do not seek scapegoats are instead few and far in between, and are too often too modest and uncertain about finding ways out of the current predicament. Can something be done? The answer is yes. This author’s solution is based on two short-term and one long-term proposals.
a) For the short-term
1. Proposal to avoid Italy’s public debt insolvency
Italy is a member of the G7 and nothing could stop it from doing what the United States, Japan and Great Britain do, namely issue its own currency with legal tender to pay for its public debt securities that it cannot cover on euro financial markets. As Greenspan said about the dollar and as the Swiss National Bank said it might to do, Italy could issue money at its own discretion. Because the Bank of Italy (BI) was established under private law and under the treaties establishing the European Central Bank (ECB) the Bank of Italy can issue Euros only in accordance with ECB rules, new Italian Liras would be issued by the Italian Treasury as ‘treasury notes’ on par with the Euro. Italy would thus have two currencies with legal tender with the new Lira restricted to Italian territory. This should boost the economy following the same notion about deficit spending that saw Italy’s national debt start to grow in the 1960s. Anyone who bought bonds issued in Euros was aware of Italy’s existing public debt and its role as economic stimulus in Italy for which it was incurred. Thus, they would get a return on their investment according to the original conditions to be spent in Italy or to pay taxes. This would not be either sovereign debt insolvency or the abandonment of the Euro, which would continue to be use for ongoing transactions. By issuing a new Lira, Italy would have greater social flexibility to meet its commitments (balanced budget and lower public debt), thus avoiding the danger of social unrest. Italy’s solution could be adopted by other countries on their own terms and needs. A balanced budget and the transformation of past excess debt into income that can be spent at home should be the guiding principle.
2. Cutting public spending
The aforementioned step (1.) should be temporary and would not exempt Italy, or any other country in the world, from achieving a balanced budget, even whilst maintaining public services. It would be possible because, in Italy as elsewhere, waste public spending is high and eliminating such an outrage is a duty towards one’s countrymen and women as well as the rest of the world. Reducing irresponsible public spending, in Italy and elsewhere, is possible and necessary. This is especially true in relation to health care and retirement costs, which are not covered on the basis of contributions but are borrowed from future generations. It is also possible and desirable to cut the cost of politics, whose level is higher than that of pre-revolutionary France. Few people realise that all states in the modern world could end up like the French monarchy and the Ancien Regime, brought down by debt and mechanisms of automatic and uncontrolled spending. In this sense, French royalists and the French court were the best allies of the country’s republican revolutionaries.
Hence, as suggested by Italy’s Berlusconi government, we must go beyond a balanced budget and change the constitution. Italy, like Hungary, should make at least public debt reduction constitutionally mandatory. It is a necessary act of responsibility towards the rest of the world.
3. Proposal to avoid currency distortions
Since China’s Communist leaders show no intention of letting their currency freely float, a custom duty should be imposed based on the difference between the Yuan’s domestic purchasing power and the exchange rate fixed by the Chinese government. Chinese leaders would have no reason to continue on a path that will certainly lead to a brutal and ominous fall, following an age of drugged expansion based on underpriced exports. Gradually, they will be forced to slow domestic growth to a healthier and more manageable level on the medium and long term, focusing on the welfare of the large segments of the Chinese population that are currently not enjoying much from the country’s export-driven boom. Other countries will see their economies benefit from fairer prices and competition. Efficiencies will increase for the entire world since currency distortions come with a wasteful allocation of human and material resources, including low wages to maintain the parasitical consumption of the few and excessive use of raw materials against comparable production and functional levels.
b) For the medium and long term
The current crisis is also technological in nature because of the lack of innovation. It might appear a paradox because every day new products and discoveries as well as tools of production come on line. However, today’s innovation is incremental—what are missing are radical advances. For instance, land and naval transportation are still based on engines, petrol and diesel fuel, discoveries of the 19th century. Even the jet engine goes back more than 70 years. The same is true for electric engines and many other devices. Thanks to spending in research, highly innovative technologies are nevertheless available. We must favour the development of radical innovations. Two reasons and two possible stimuli underlie human creativity.
1. Radical innovations come more naturally in companies run by individuals because they call for a more long-term perspective, which can cover several generations. The existing development model favours instead listed companies run by managers with easy access to capital and circumstances. Obviously, the latter have a short-term timeframe focused on quarterly results and share prices. A solution would include instead a number of safeguards and stimuli for family businesses, including the abolition or reduction of the estate tax.
2. Patents, especially by individuals, need greater simplicity and protection. One solution would be to have people who break patent laws prosecuted in the jurisdiction where the patent is registered with sentences served in the country where patent protection was infringed.
a) For the short-term
1. Proposal to avoid Italy’s public debt insolvency
Italy is a member of the G7 and nothing could stop it from doing what the United States, Japan and Great Britain do, namely issue its own currency with legal tender to pay for its public debt securities that it cannot cover on euro financial markets. As Greenspan said about the dollar and as the Swiss National Bank said it might to do, Italy could issue money at its own discretion. Because the Bank of Italy (BI) was established under private law and under the treaties establishing the European Central Bank (ECB) the Bank of Italy can issue Euros only in accordance with ECB rules, new Italian Liras would be issued by the Italian Treasury as ‘treasury notes’ on par with the Euro. Italy would thus have two currencies with legal tender with the new Lira restricted to Italian territory. This should boost the economy following the same notion about deficit spending that saw Italy’s national debt start to grow in the 1960s. Anyone who bought bonds issued in Euros was aware of Italy’s existing public debt and its role as economic stimulus in Italy for which it was incurred. Thus, they would get a return on their investment according to the original conditions to be spent in Italy or to pay taxes. This would not be either sovereign debt insolvency or the abandonment of the Euro, which would continue to be use for ongoing transactions. By issuing a new Lira, Italy would have greater social flexibility to meet its commitments (balanced budget and lower public debt), thus avoiding the danger of social unrest. Italy’s solution could be adopted by other countries on their own terms and needs. A balanced budget and the transformation of past excess debt into income that can be spent at home should be the guiding principle.
2. Cutting public spending
The aforementioned step (1.) should be temporary and would not exempt Italy, or any other country in the world, from achieving a balanced budget, even whilst maintaining public services. It would be possible because, in Italy as elsewhere, waste public spending is high and eliminating such an outrage is a duty towards one’s countrymen and women as well as the rest of the world. Reducing irresponsible public spending, in Italy and elsewhere, is possible and necessary. This is especially true in relation to health care and retirement costs, which are not covered on the basis of contributions but are borrowed from future generations. It is also possible and desirable to cut the cost of politics, whose level is higher than that of pre-revolutionary France. Few people realise that all states in the modern world could end up like the French monarchy and the Ancien Regime, brought down by debt and mechanisms of automatic and uncontrolled spending. In this sense, French royalists and the French court were the best allies of the country’s republican revolutionaries.
Hence, as suggested by Italy’s Berlusconi government, we must go beyond a balanced budget and change the constitution. Italy, like Hungary, should make at least public debt reduction constitutionally mandatory. It is a necessary act of responsibility towards the rest of the world.
3. Proposal to avoid currency distortions
Since China’s Communist leaders show no intention of letting their currency freely float, a custom duty should be imposed based on the difference between the Yuan’s domestic purchasing power and the exchange rate fixed by the Chinese government. Chinese leaders would have no reason to continue on a path that will certainly lead to a brutal and ominous fall, following an age of drugged expansion based on underpriced exports. Gradually, they will be forced to slow domestic growth to a healthier and more manageable level on the medium and long term, focusing on the welfare of the large segments of the Chinese population that are currently not enjoying much from the country’s export-driven boom. Other countries will see their economies benefit from fairer prices and competition. Efficiencies will increase for the entire world since currency distortions come with a wasteful allocation of human and material resources, including low wages to maintain the parasitical consumption of the few and excessive use of raw materials against comparable production and functional levels.
b) For the medium and long term
The current crisis is also technological in nature because of the lack of innovation. It might appear a paradox because every day new products and discoveries as well as tools of production come on line. However, today’s innovation is incremental—what are missing are radical advances. For instance, land and naval transportation are still based on engines, petrol and diesel fuel, discoveries of the 19th century. Even the jet engine goes back more than 70 years. The same is true for electric engines and many other devices. Thanks to spending in research, highly innovative technologies are nevertheless available. We must favour the development of radical innovations. Two reasons and two possible stimuli underlie human creativity.
1. Radical innovations come more naturally in companies run by individuals because they call for a more long-term perspective, which can cover several generations. The existing development model favours instead listed companies run by managers with easy access to capital and circumstances. Obviously, the latter have a short-term timeframe focused on quarterly results and share prices. A solution would include instead a number of safeguards and stimuli for family businesses, including the abolition or reduction of the estate tax.
2. Patents, especially by individuals, need greater simplicity and protection. One solution would be to have people who break patent laws prosecuted in the jurisdiction where the patent is registered with sentences served in the country where patent protection was infringed.
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