Podcast: Why Italy’s Economy Offers a Cautionary Tale for the U.S.

“Young Americans have become discouraged about their economic future. Many have student debt. They don’t think buying a home is a realistic goal, and many don’t expect to do as well as their parents,” said Persico, a professor of managerial economics and decision sciences.

You can read a summary of his The Insightful Leader Live webinar on the topic, here.

In this episode of The Insightful Leader, Persico says America’s current economic situation echoes Italy’s in the ‘90s, signaling we could be headed for a low-growth future if certain measures aren’t taken.

Podcast Transcript

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Laura PAVIN: There’s a lot to love about Italy.

Nicola PERSICO: Italy is a great place to visit. We all know this.

There’s the art, the wine, the history. And you can’t bring up Italy without talking about the food.

And of course the pasta. My god, the pasta.

PAVIN: The pasta indeed. That’s Nicola Persico. He’s a professor of managerial economics and decision sciences at Kellogg. And he was born and raised in Italy. But as an adult, he decided to leave Italy and pursue his career here in the U.S. And he’s not alone. Italy has seen a pretty big brain drain over the last 20 years. And that’s because Italy isn’t the easiest place to build a life or run a business. Taxes are high. There’s a lot of government regulation. Also bureaucracy. And Persico says all of this has young people in Italy feeling pretty discouraged these days.

PERSICO: Many don’t work. Most struggle to buy a house or an apartment. And they don’t think that they will be able to have the same good life that their parents had.

PAVIN: That kind of sounds like how a lot of younger people in the U.S. are feeling lately too.

PERSICO: Young Americans have become discouraged about their economic future. Many have student debt. They don’t think buying a home is a realistic goal, and many don’t expect to do as well as their parents.

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Clip #1: So let’s talk real quick about the fact that 73 percent of millennials are living paycheck to paycheck. What is that about?

Clip #2: I’m 32 years old. Me and my husband want to eventually buy a house, you know? And then you start looking. And then you start realizing: we live in South Florida. There’s no damn way you can afford a house.

Clip #3: For a lot of us millennials, you’ve heard the story. We were told: “Go to college! That’s how you’re going to get a great job and make all this money.” Granted, my current full time job, I am making the most I’ve ever made. However, it’s still not enough at all.

PAVIN: Persico has been thinking a lot about how Italy could be a cautionary tale for the U.S. when it comes to economic growth.

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PAVIN: The two countries are different in so many ways, but thirty years ago, their economic prospects actually looked pretty similar. Today, not so much. So what changed? And what can the U.S. learn from some of Italy’s struggles?

Welcome to The Insightful Leader. I’m your host, Laura Pavin. Today, I’m joined by Jess Love. She’s the editor inchief of Kellogg Insight.

LOVE: Hi, Laura.

PAVIN: Hi, Jess. So a few months ago, you invited Kellogg faculty member Nicola Persico to give a webinar. It was called “Is the Future of the U.S. … Italy?” So what was his hypothesis?

PERSICO: My hypothesis here is that young Americans, they might be experiencing the first symptoms of a low-growth era. And that’s the topic that I want to talk about.

LOVE: Just to be clear, when professor Persico talks about symptoms of a “low-growth era,” he’s specifically referring to low economic growth, like, gross domestic product, the total value of a country’s goods and services. If you look back to the early 1990s, Italy and the U.S. were neck and neck in terms of per-capita GDP.

PERSICO: In 1990, the best times for Italy. The GDP per capita was $20,000. In the U.S., it was $23,000. So Italy was close to the U.S., but now in the U.S. it’s $80,000 and in Italy it’s only $37,000. So Italy has dropped dramatically—has lost ground.

LOVE: In other words, the U.S.’s per capita GDP is now more than double what Italy’s is.

PAVIN: Okay. So what happened? Why did Italy lose ground?

LOVE: Professor Persico says two big things happened. One was that taxes in Italy started going up. The second thing was an increase in government regulation. And when you put those two things together, the result is that Italy is now an expensive place to do business—more expensive than other countries, including the U.S.

PERSICO: For example, [in Italy] if you wanna hire someone, and you wanna pay them, just to give an example, $100,000, this is gonna cost the firm $200,000, and the gap is taxes. In the U.S., the same number is $130,000. Just to give you an idea of how much higher the cost of labor is in Italy. And why are taxes high? Because the government is broke in Italy.

PAVIN: Yikes! Okay, so the government is broke. How does that compare to what we’re seeing in the U.S.? We’ve been having issues with rising government debt too.

LOVE: We have. Persico talked about that. And the metric he uses, by the way, is the debt-to-GDP ratio. In general, a lower debt-to-GDP ratio is considered a good thing because it means that a country is producing enough goods and services to pay back what it owes.

PERSICO: The U.S. government now today is also broke. The debt to GDP ratio is 120 percent, which is even higher than the level at which Italy stopped growing in the 1990s or stopped catching up with the United States.

LOVE: And the problem with government debt going up is that it can lead to higher taxes. That’s because governments need a way to pay for all that debt, and raising taxes is one way to do that. But Professor Persico isn’t making an apples-to-apples comparison between Italy and the U.S. His argument is that some of the forces that have slowed Italy’s economy are now becoming more of an issue here. And that includes our rising national debt.

Then there’s also the issue of regulation.

He showed this one slide to illustrate his point. It shows a graph with a skinny blue bar for each year going back to 1950.

PERSICO: What you see on this slide is the total pages in the code of federal regulations. These are not laws. These are regulations, which implement laws.

LOVE: Year over year, the bars grow taller.

PERSICO: And as you can see from 1950 to today, there’s been a very healthy growth of regulation.

LOVE: And these regulations, they cover everything from food safety, which you might expect, to these really specific rules about, say, waterskiing in a national wildlife refuge! Pro tip: according to this national code of federal regulations, skiers must wear U.S. Coast Guard–approved ski belts, life jackets, or buoyant vests.

PAVIN: Okay, I’ll make sure to bring those things along the next time I go water skiing in a national wildlife refuge. But, I want to stop you there to say that not all regulations are bad, right? It feels like we’re painting regulation with a really broad brush here. And also, I don’t think it’s too crazy to make sure people who are waterskiing in a national wildlife refuge are being safe, right?

LOVE: Agreed. Regulations are really important. Think of child-labor laws. Or food safety laws. Not to mention regulations to protect the environment, which is obviously a really big issue right now. Professor Persico acknowledged that regulation can be a good thing.

PERSICO: There are advantages to regulation. There are benefits, of course. And so I want to be a little more cautious here. I don’t want to say necessarily that the U.S. is overregulated or that Italy is overregulated. It’s possible that the U.S. is underregulated and maybe it would be good to have more regulations. But my only point is if we go down that path of greater regulation, we can expect, I think, lower economic growth.

PAVIN: So it sounds like he’s speaking as an economist here in terms of the factors that can support economic growth or alternately get in the way of it.

LOVE: Right. Persico’s point is that when you ask CEOs about what they say gets in the way of growing their companies – what they call “overregulation” is one of the big hurdles. And while there’s more government regulation in Italy compared with the U.S., like Professor Persico said, the U.S. has been seeing an increase in regulation. And so for him, that’s a concern.

PERSICO: And so if we want economic growth, it would be good for the U.S. to preserve the source of competitive advantage, which is low regulation, relatively.

PAVIN: All right. So he thinks the U.S. still has this competitive advantage when it comes to having fewer regulations than Italy. But still, I gotta say that listening to all of this has me feeling not so great about what our economic future could look like here in the U.S.

LOVE: I get it.

PAVIN: I wonder if there are any holes we can poke in his hypothesis? Like, maybe there are other reasons for slow growth that are unique to Italy that he hasn’t taken into account? And therefore, maybe we aren’t fated to this future of low-growth here in America?

LOVE: Yeah, so there were a few things we ran by him. Like one difference between Italy’s economy and the U.S.’s is that Italy has a pretty active black market.

PAVIN: Woah. Explain what that is, please. How does their black market work exactly?

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LOVE: So In Italy, people use cash to avoid paying taxes on everyday consumer stuff like clothing and haircuts. Taxes on those things can be as high as 22 percent. And the taxes people aren’t paying, that’s not exactly helping to pay down the country’s debt.

PAVIN: So it’s essentially tax evasion.

LOVE: Exactly. Persico mentioned that some estimates say Italy’s black market accounts for 15 percent of its GDP! But he still doesn’t think this untaxed, underground economy is at the root of the country’s low growth problem.

PAVIN: Why not?

PERSICO: It bears saying that this underground economy has been there for a while. Now it may have increased recently. But it’s been there for a while. So the point that I’m trying to drive at here is that Italy’s lackluster growth in the last 15 years cannot be attributed to a disproportionate increase in the black market. Yes, the black market has increased a little bit. But it does not account for the disproportionate low growth or de-growth that we have in Italy.

PAVIN: Okay, so he doesn’t think the black market is at the root of the problem, because it’s sort of been there, more or less, all along—since the 90s. Got it.

But I’m still really reluctant to accept that America’s future will look like Italy’s, no offense! And so, I’m wondering what the political landscape looks like there. Could we attribute their sluggish economy to some kind of unique political situation that we don’t have here in the U.S.? And therefore maybe we will be okay?

LOVE: Well, I will say that since World War II, Italy has cycled through 69 different governments. So a lot of turnover. The U.S., by comparison, has gone through 14 different presidential administrations since World War II. We don’t have quite as much churn. Which sounds like a point in our favor, going forward, right?

But Persico says that’s not necessarily the right way to look at it.

PERSICO: These days, and I’m talking the last 20 years, probably the greatest source of uncertainty in terms of the rules of the game for a firm that wants to invest in Italy is not so much political turnover, it’s the fact that the government of whatever variety it is broke. And so they have to invent new taxes that are unexpected in such a way that you can’t forecast them and you cannot avoid them in essence. And so it is not so much the political uncertainty. It is what you might call the bureaucratic uncertainty or the taxation uncertainty, which is due to the fact that the government needs to make money in whatever way, shape, or form that they can.

PAVIN: Okay, and so he’s saying that regardless of political situation, the government is broke, and that is the real issue. Because then you have to find new revenue streams from taxes that no one can quite predict. And he sees America going down that similar path?

LOVE: Yep. It creates a very uncertain landscape when no one is sure how the government is gonna find more revenue.

PAVIN: So, long story short, let me know if this sounds right:

our economy is headed down a path that looks eerily similar to where Italy’s went a few decades ago. And Persico thinks that’s because we have all of the regulation, rising government debt, and taxation hallmarks Italy exhibited around that time.

LOVE: One hundred percent.

PAVIN: That feels pretty bad to me.

LOVE: Well, Persico did say something else that might give our U.S. listeners a bit of comfort.

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He talked about how we have a unique culture of innovation in the U.S., as well as pretty strong IP protections. And he thinks that both of those things could work in our favor.

I would say the United States is, really, the leader in innovation, technological innovation, and a lot of its prosperity comes from that. So I think, innovation helps, of course—very important. And we must keep that engine of innovation going. That would be my message for the United States.

PAVIN: So maybe there’s hope for the U.S. after all?

LOVE: Hopefully, yes.

PAVIN: Well, thanks, Jess. It’s been fun chatting with you about all of this. As the Italians would say: Grazie mille!

LOVE: Prego!

[CREDITS]

PAVIN: This episode of The Insightful Leader was produced by Nancy Rosenbaum, Laura Pavin, Jessica Love, Fred Schmalz, Maja Kos, and Blake Goble. It was mixed by Nancy Rosenbaum. Special thanks to Nicola Persico. Want more The Insightful Leader episodes? You can find us on iTunes, Spotify, or our website: insight.kellogg.northwestern.edu. We’ll be back in a couple weeks with another episode of The Insightful Leader Podcast.