Is Italy Too Italian?

Today's New York Times features an article on some of the problems faced by Italy's economy, including widespread unionization:

“This is a country with a lot of rents,” says Professor Giavazzi, sitting in his office one recent afternoon, using the economists’ term for excess profits that flow to a business because of a lack of competition. “You need a notary public, it’s like 1,000 euros before you even open your mouth. If you’re a notary public in this country, you live like a king.”

For Mr. Barbera, as is true with every entrepreneur here, the prevalence and power of Italy’s guilds explains much of what is driving up costs. He says he must overspend for accountants, lawyers, truckers and other members of guilds on a list that goes on and on: “Everything has a tariff, and you have to pay.”

The protectionistimpulses of the guilds are mimicked throughout the Italian labor market. The rules are different for small companies, but in effect, people with a full-time job in a company with more than 18 workers have what amounts to tenure, even if they don’t belong to a union. This makes managers reluctant to hire, especially in a downturn. You are stuck with new employees in perpetuity, whether they’re good or not.

A sclerotic job market is a major reason that the Italian economy has been all but dormant for the past decade, growing far more slowly than its European peers. And this is a country that never had a housing bust or a major bank crisis.

So how does Italy keep going? Given the numbers, you expect it to be flat on its back. But when you visit, there are hardly any signs of despair, even in Biella, where hundreds of factories and warehouses have closed in the last decade. Why?

One answer is the black economy, say economists. Roughly one-quarter of Italy’s G.D.P. is off the books. When you inquire about the cause and persistence of this longstanding fact of life, people here say that most Italians have little sense of national identity, an obstacle to a system of national taxation. The country didn’t really begin to transcend its clannish roots and regional dialects until after World War II; even today, displays of national pride are reserved for World Cup victories and little else.

Italians, notes Professor Altomonte, are among the world’s heaviest consumers of bottled water. “Do you know why? Because the water in the tap comes from the government.”

That last sentence speaks volumes. Unions, meanwhile, serve to drive costs higher without creating any corresponding value, amounting to a type of beggar thy neighbor policy. The article, however, misses the mark a bit in my opinion in explaining Italian tax evasion. While cultural factors certainly play a part, it is a surprise that no mention was made the economic burden presented by taxes as noted by this Times article:

At the same time, the tax burden in Italy stood at 42.3 percent of gross domestic product in 2006, up 1.7 percent from the previous year, according to Istat, the national statistics agency. To ease fiscal pressure, the Bank of Italy advised the government in April to cut taxes, "which are higher than the euro-area average and have reached an all-time high."

[Maurizio Bovi, a researcher and fiscal expert at ISAE, a state-funded research center] warned that the problem is complex and that a total clampdown on evasion could be counterproductive. "In some cases, companies can only survive by not paying taxes," he said.

After taxes reach a certain point in both their bite and complexity you begin to understand the person quoted in the piece who divides Italians into "Those who are wily and don't pay taxes, and those who are stupid and do."