Rivista di diritto finanziario e scienza delle finanze. 1996, Anno 55, settembre, n.3

S E T T E M B R E 1996 Pubblicazione trimestrale Sprd. in A .P . comma 26 / art. 2 legge 549/95 • A ut Filiale Varese

A n n o L V - N . 3

RIVISTA DI DIRITTO FINANZIARIO

E S C I E N Z A D E L L E F I N A N Z E

Fondata da BENVENUTO GRIZIOTTI

(e

RIVISTA ITALIANA DI DIRITTO FINANZIARIO)

DI REZI ONE

EMILIO GERELLI - GIULIO TREMONTI COMITATO SCIENTIFICO

ENRICO DE MITA - ANDREA FEDELE - FRANCESCO FORTE AMEDEO FOSSATI - FRANCO GALLO - SALVATORE LA ROSA IGNAZIO MANZONI - GIANNINO PARRAVICINI - ANTONIO PEDONE

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FRANCESCO TESAURO - ROLANDO VALIANI

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INDICE-SOMMARIO

P A R T E P R I M A

Fhancks( o Fo r t h- JosE Ca s a s Pa r d o- The Ebb Tide of the Keynesian Welfare

State. A general Explanation... 359 El is a b e t t a Io ss a- Competition, Ownership and Efficiency: An Empirical Ana­

lysis of the European Airline Industry ... 391 Fa b r i z i a La p e c o r e i.l a - Er n e s t o So m m a- L ’analisi economica della dimensio­

ne ottima degli enti sub-statali e la formulazione di proposte di riforma istitu­ zionale ... 402 An d r e a Si l v e s t r i- Il regime tributario delle operazioni di riorganizzazione tran­

snazionale in ambito Cee ( I ) ... 428

NUOVI LIBRI ₅₂₀

RASSEGNA D I PUBBLICAZIONI RECENTI ... 525

P A R T E S E C O N D A

Si l v i a Cip o l l i n a- La reiterazione dei decreti-legge fra equilibri istituzionali e cri­ si della legge ...

Fi l i p p o Cip o o n a n i - La Cassazione tra forma e sostanza: un caso problematico in

materia di fatturazione e detrazione d’imposta ai fin i Iva ...

SENTENZE ANNOTATE

Diritto costituzionale - Art. 77 Cost. - D.L. n. 463/1995 - Reiterazioni plurime - Requisito della straordinaria necessità ed urgenza - Insussistenza - Que­ stione di legittimità costituzionale - Fondatezza (Corte Cost., 24 ottobre

1996, n. 360) (con nota di S. Ci p o l l i n a) ...

Iva - Liquidazione delle provvigioni - Fatture - Utilizzatore del servizio - Com­ pilazione - Agente - « Appropriazione » - Versamento dell’ imposta - Danno per l’erario - Insussistenza - Detrazione dell'Iva assolta sugli acquisti - L e­ gittimità (Cass., Sez. I eiv., 1 ottobre 1994, n. 4299) (con nota di F. Cico-

BALDASSARRE SANTAMARIA

LINEAMENTI

DI

DIRITTO TRIBUTARIO

PARTE GENERALE

Sommario:

Principi costituzionali - L’attuazione della norma - Riscossione e

rimborsi - Il sistema sanzionatone - Il nuovo processo tributario.

8°, p. XII-446, L. 52.000

PARTE SPECIALE

Sommario:

Le imposte sui redditi - L’imposta sul valore aggiunto - L’imposta

di registro - La finanza locale. L’imposta comunale sugli immobili.

8°, p. XVIII-652, L. 70.000

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Rivista di diritto finanziario e scienza delle finanze, LV, 3, I, 359-390 (1996)

THE EBB TIDE OF THE K EYNESIAN W ELFARE STATE. A GENERAL EXPLAN ATION (*)

by Francesco Forte and José Casas Pardo

Su m m a r y: 1. Introduction. — I. The Basic Theorem. — II. Second part. — III. Third

part. — Bibliography.

The purpose of this paper is to offer a general theoretical expla­ nation of the « impossibility » o f the present « welfare-keynesian » mo­ del of state, which prevailed in the industrialized Western countries since the after-war period and which is now — indeed — in a deep crisis in its both wings: deficit financing and pay-as-you-go pension schemes of social security. When the rate o f interest r is lower than the rate of growth of GDP g, there is a room for a permanent deficit financing given by the difference between r and g time the ratio of the stock of debt on GDP. Furthermore it is possible to pay social securi­ ty pension based on the pay-as-you-go system more rentable, in ter­ ms o f contribution handed over to obtain them, than comparable (private) insurance schemes based on the investment of the same amount of contributions. This is so because pay-as-you-go allows to Pay pensions higher than the contributions by the compounded g

while insurances can only give pensions based on the compounded r. The situation however overturns when, as now, r exceeds g because growth is down and interest rate is up, in relation to the mature eco­ nomy stage. To keep the ratio o f debt stock on GDP, a surplus in the primary Budget is needed equal to r minus g time that ratio while pay-as-you-go pensions become less rentable than private insurances; and harsh reforms o f social security are needed together with reduc­ tions in deficit financing for investment.

(*) The present paper has benefited from a discussion at the Bar-Han Conference on Public Choice, march 1996. The equations o f the model have not been changed but some clarification has been added, particular to take account of professor Peter Bernholz and Hott. Silvia Fedeli s comments, to whom the authors are particularly grateful.

— 360 —

1. Introduction.

In the last decades various explanations have been offered about why the welfare state, as it has developed, particularly since the 60’s and at its present size (with its implication of a very large public sec­ tor) (see Table 6C) can no longer be substained in some of the most advanced countries. Several explanations have been put forward, mainly based on arguments such as the overall negative effect of a very large public sector on the efficient working of the economy as a whole (the private sector, being considered to be the main generator of productivity in the economy); the negative effects of public inter­ ventions, which by distorting prices and other factors, and by interfe­ ring with the proper working of markets (regulations, monopolistic elements, non-competitive participants in the markets, particularly in the capital markets, etc.) have reduced the growth rate; the ineffi­ cient allocation and use o f resources inside the public sector due to political reasons and inefficient bureaucracies (Table 6C reminds us that in Western countries around 50% of GDP and in several cases even a higher % , is decided upon by political mechanism and not by market mechanisms); the aging of the population and the decrease of fertility rates and the increase of unemployment that have changed the ratio between workers and retired persons; and other reasons as the fact that citizens are becoming increasingly less and less willing to accept the fiscal burden needed to keep the present welfare state going.

We believe that, although these various reasons (factors) explain to some extent, that the welfare state cannot be kept at its present si­ ze and promises in the majority of the developed countries, they do not explain the real roots of the crisis and do not throw enough light on future perspectives.

During the 60s and 70s the welfare state grew rapidly apparently without any problem. Governments were able to finance it without fi­ nancial, fiscal or political difficulties and without creating inflation. Nowadays, Governments are facing increasingly mounting difficulties to keep this same welfare state running and many of them are shar­ ply cutting it down. In most countries where this has not yet be do­ ne, the request to do so is mounting.

The question, then is why can the welfare state no longer be kept at its present size (1995) and has to bitterly compete with public inve­

stments and merit goods in the now difficult balance of the public sec­

se-— 361 —

curity system with private old age and health insurances and to mini­ mize the deficit financing for investments? The purpose of this paper is to offer a theoretically general explanation of this two phenome­ nons — the reduced room for investments’ deficit finacing and the re­ duced role of social security pension systems which differs from the ones so far advanced being based on the relation between the ma­ gnitude of the rate of interest r (real) and that of the rate of the GDP growth g (real). Within this general view, separate explanations as those related to the demographic factors or to the lower growth of economies with a too large public sector, may find a proper role.

I

The Basic Theorem

2. The general theoretical argument we find for explaining the need of reducing the deficit financing o f public investments and of di­ minishing the role of social security pensions (allowing a similar tax treatment to private programmes) in the relationship between the in­ terests rate r and the GDP growth rate g. When r is higher than the GDP real growth rate g the crisis explodes, while with g>r the cornu­ copia period is there. The phenomenon of g<r is becoming permanent — we believe — in developed countries, according to the observation of the long run trend and to the existing theory o f growth which tell us that r>g until the golden age shall be reached.

The opposite situation o f a g>r, prevailing in the first 3 decades after the war in Western countries, appears to be a transitional phe­ nomenon due, among others, to a permissive monetary policy made possible by the potential output available, because of the reconstruc­ tion and reconversion phase o f the industrialized countries. If this is true, the big role of the state in investments and welfare and the rela­ ted « democracy in deficit » appear a transitional phenomenon. Politi­ cians have much less room than before for offering « fiscal illusions ». Choices need to be more rational because the transitional « fat cows » period is over. On the other hand, more attention to growth and m o­ netary stability must be given to reduce the gap between g and r.

of inflation (which in the ’70 were brought about by the oil crisis), be­ cause g was higher than r which was low. From there onwards (end of ’70 after the oil crisis, the 80’ s and the ’90) a new trend has been de­ veloping in which r has becomes > than g. Consequently, social securi­ ty programmes « better » than private pension schemes no longer are equilibrium schemes. There also is less room form investment deficit financing, as we shall explain later on. In the transitional period of the 70’s this « impossibility theorem » was not perceived because of the prevailing ideologies, and in many countries public debt grew out of the equilibrium parameters, thus aggravating the situation.

3. It is known from the literature on deficit spending (Domar 1944, Samuelson 1958, Buiter 1985, Cohen 1985) that if r is lower than g, it is possible to issue additional public debt without increasing the ratio between public debt and GDP by an amount equal to the difference between the two time the existing ratio between the stock of public debt and GDP. This has been, indeed, the main justification for Keynesian long run deficit financing, versus the Swedish (Lindhal 1911, 1928) and Pigouvian (Pigou 1949) thesis of fiscal deficits in the depressions with surplus during the boom i.e. of the cyclical balan­ cing of the Budget.

The model is simple but not easily understood in its consequen­ ces.

When g=r one can finance the existing debt without any (addi­ tional) burden on future generations, simply by issuing new debt to pay the interest services of the previous debt. Thus, the « norm al» Budget, i.e. that of all public revenues and all public expenditures exclusive of interests on public debt — we call it, according to the prevailing usage, « primary B u dget» B I (Forte 1993) — may be in equilibrium, while — as a consequence — the Budget for the services on the public debt, the « secondary B u dget», B II, can be totally fi­ nanced through issuing new debt.

4. The demonstration is elementary. Assuming r=g; and calling

Yt0 to the GDP of country A at the end of the first to, YtI the GDP

flow of A in the second year tl, g the real rate of growth of the Y,(h flowing in tl, so that Ya = Yt0 + gYt0, r the real rate of interest existing in tl. Dio the stock o f public debt of A at the end o f to, inclusive of the

debt made A to pay the deficit during to; m the required ratio of debt

stock on GDP, DtI its value in tl; d,, the deficit of tl — as percentage on GDP — consisting of d’tl deficit of B I and d",; the interests on Dt0

— 363 —

flowing in tl and becoming gradually new debt stock during tl, we may easily show that with a 0 d'tl the ratio m existing in country A at the end of to shall remain at the end of tl privided that the flow of g and d tI have the same timing.

Indeed if r=g it follows that at the end of tl we have:

[1] D„, + r D„ Du = m

Yw + g Y0 Yt0

simply because we can replace r with g.

It is now easy to understand that if r<g, there is some room to run a deficit not only in the entire B II (of the mere size d"tl =

(gDtolYio) but also in B I so that also d/>0: the allowed deficit shall be

equal to (g-r) . rn. Demonstration follows.

5. How much shall be the value of d'tl of BI, i.e. of the Keyne­ sian deficit which can be undertaken in the primary Budget B I devo­ ting expenses, for instance to the investment sector which helps to su­ stain r in the immediate and in the longer run -— under all the above assumptions — except that g>r — to keep Da\Ytl = m?

The answer is immediately clear: d'a = r-g time m. Indeed, let us come back to [1], Let us call k — g—r the Keynesian « dividend » allo­ wing for a new (permanent) budgetary deficit for investments, while financing the past investments’ deficit. Since g = k+r, we shall be able to write the following

[2] and therefore Dw + (r + k) Dw Yto + g Y w = ( l ) = m [2-bis] D,(> + r Dw + k Dl0 _ Ya + g Yw

from which clearly d'a = k D10/Y10. In other words, d'a = k m.

6. But here, a complication, having to do with fiscal illusion due to monetary illusion enters the picture. So far we have considered an inflation = 0 and therefore r and g were both nominal and real ra­ tes. Assuming a rate o f inflation/ and furtherly assuming (this simpli­ fying assumption unfortunately is not that realistic) that / increase equally g and r by is amount, we may write

Dio ( f + J-J Dw Yw ( f + g ) Yt0

and with k>0 we shall have

[3-bis] Dio + ( f + r + k) Dw _

Ytp + ( f + g) Yl0 m.

And therefore the resulting dtl = df]I+d"tI shall be equal = m

(k+f+r).

But fm is a fiscal illusion which increases the expenditures of BII to pay for the reduction in real value of Dt0, through the increase of f, the nominal interest rate by / such that f=r+f.

7. All this appear « trivial » aritmetic, but assuming, for instan­ ce for country A, a debt burden of 50% of GDP, whith r=3 g=5 and a rate of inflation of 3% , A shall be allowed a permanent deficit of

5+3=8 . 0,5 = 4% to finance let us say — its investments: (in the

perspective of getting an higher r). Of this 4% 1,5% is rZ)to/F te, 1% is km and 1,5% is inflation.

But the Keynesian divided of g>r here is only 1 % of GDP! Still some deficit financing is permanently allowed by the g—r positive re­

8. It is easy to understand that with an high r and a low g and therefore, a negative value of g—r, in order to keep constant the ratio of the stock of public debt to GDP, one must add a surplus S to the primary Budget BI. The formula leading to the value of S, the « sacri­

fice » required in the « lean cows » period, necessary to keep the level of in- dehtment constant at m it is obviously specular to that leading to k, the

Keynesian dividend of the « cornucopia » (temporary) stage.

S shall be equal to the difference between the rate of interest r

and the rate of growth g multiplied by m, the existing ratio of the stock of debt to GDP. The higher is the value of m the higher the ra­

tio of S to GDP, at any given (negative) value of g-r ..

9. In the « lean cows » period, the situation is symmetrical to that o f cornucopia: the more A runs in debt, the bigger is the s

(1) To complicate the picture in favour of Keynesianism, one might add the

possibility of the Treasury of issuing money easily which occurs when the demand for money increases with a positive elasticity, with the increase in national income and product. But if this demand is employed by the Central Bank to case the supply of money, we shall see its effect in a lower level of the general r. If — on the other hand — the Treasury is allowed to finance the public debt at reduced rate, exploiting part of this non inflationary money surplus, the r relevant for the Treasury shall be (as it was often in the past) lower than the prevailing interest rate. So we can leave out this complication and come to the change of the colour of the painting.

— 365 —

that A must sacrifice to keep the level of m, which now appears in a much daker light than before. And the greater is the risk o f not co­ ping with this requirement, the more r shall increase, while the more the tax burden is increased to increase S the more is likely that g is compressed.

10. From the above reasoning provided that one can see (as we shall do in the III Part) that the trend of the relation r—g has been bitterely reversed from the first decades after the second worldwar to the last ones, with the turning point at the end o f the ’70, one can ea­ sily understand why the Keynesian rule of permanent « painless » de­ ficit financing for investments is now simply an « impossible rule ».

Even the Maastricht rule o f a top deficit d at 3% of GDP for in­ vestments now becomes almost impossible in the long run — looking at the Budget without fiscal and money illusions — , if one wants to respect the 60% level o f the stock o f the debt D on GDP prescribed by the same Treaty. Indeed, take a country A with exactly that debt burden (as Germany now), a g of 2,5 and an r of 4,5 so that r-g = 2. The surplus s in B I needed to keep the above ratio o f 60% for A is

2x0,6=1,2. Assume that the inflation rate / o f A is 2% (which implies

a nominal interest rate r=6,5). To keep m (the 60% rule for D on GDP), A cannot have a deficit of 3% since its nominal rate of growth

i is 2,5t-_2=4,5 which time 0,60 gives only 2,7. Its d shall be 2,7. Now

of this d, 1,2 points are the nominal part, which corresponds to the extra payment to compensate for inflation on the interest flow (:f-r= 2). But another S=l,2 is needed in B I to keep m, so that share of

d « truly » available for « painless » investments’ deficit financing is

only 0,3% even if one may have the illusion that is 2,7, overlooking both S needed in B I and the r-r . m differential due to / .

With a r-g = 2 , 5 giving an s=l, 5 and g still =2,5 and f= 2 (and the­ refore a d o f 2,7 to keep m) the room for financing investments by debt has — in reality — disappeared! Actually the r=4,5 implies a di­ sbursem ent of 2,7=d the entire deficit.

II

Second Part

11. Now we must come to the second part of the picture: which means to enter in the core of the central feature of the welfare state, i.e. the social security pension system based on the « pay-as-you-go » repartition method: i.e. on paying to the present retired persons their pensions with the social security contributions of the working genera­ tions.

Here again we shall see that the disruption of the « easy way » of a « cornucopia stage » comes when and because the rate of interest r exceeds the rate of growth g. A « lean cows » period succeeds to the one in which g -r was led to exaggerated programs, which now appear unsustainable.

As has been pointed out (Musgrave 1981, Smith 1982) the « pay- as-you-go » scheme corresponds to an implicit social contract among generations, where a flow of generations of workers cd is continuously trasferring to a flow of retired workers ¡31 — i.e. of pensioneers — the amount of contribution collected on them (cd), expecting a similar treatment from the incoming generations of workers cd', when at their turn they (cd) shall retire and as long as they (and perhaps their spouse) shall survive. There are however several ways to model this sort of « social intergenerational contract » (Musgrave 1981, Thom­ pson 1983).

It has often been pointed out with elaborate models (among others, Auerbach and K othiloff 1984, Yon Weizsacker 1990, Lopez Garcia 1988, 1990, 1991 and 1992) that the rate of growth of popula­ tion together with aging of the population, i.e. the dynamic of the po­ pulation and its composition by classes of age, greatly affects the via­ bility of the « pay-as-you-go » social insurance system, because the « social contract » equivalence pensions obtained by the former wor­ kers and contributions paid by the present ones is conceived to rest on at least the stability — or perhaps a given growth rate — of the

ratio of the population of active workers, let us call it cd, to that of

the retired ones let us call it ¡31. Only a stable or growing cdl¡31, may assure to the present workers — without budgetary unbalance — the individual quid pro quo (ratio of exchange) between contributions paid and pensions obtained, as it was conceived in the intergeneratio­ nal social contract accepted by the citizens. A « surplus » might also be available temporarily, (in the transitional period of increase in the

— 367 —

employment rate caused by industrialization, which may be a long one) in which al/fil is greater than the equilibrium crf//JZ.

12. Normally, however, — we must observe — this intergenera- tional social contract is more generous than that based on the increa­ se of alj/il. It includes also a supposely « free lunch » protection for the less favoured, because this is the essence of the welfare state’s phi­ losophy (Lindbeck 1993). How the « miracle » can be done of giving the normal workers a pension « fair » in terms of full equivalence plus the population growth rate with the contributions paid and simulta­ neously providing a really « free lunch » to the less favoured (and may be to some proviledged strongly unionized groups of workers) and still get a balance in the social security pensions’ budget? Here there are two fixtures, not so easy to disclose. One should, at the outset, di­ stinguish an intergenerational social security contract with « strict » equivalence, from one with (working) population-growth equivalence, from one with economic growth equivalence and from that with « ac­ tuarial » equivalence. In other terms, one should distinguish between schemes of strict equivalence, schemes in which the rate of growth of population p, g or W (the growth o f the wage bill) is included in the basis of the calculus o f the pensions given by the contributions pad by cd and schemes where r is included to simulate a pension scheme based on the investment o f the above contributions. In the strict equivalence, obviously, the rate of inflation has to be included. But, then, one should also consider the life expectancy e at the age of reti­ rement. As for W equivalences, they are often calculated as proxies to

g (2). And, as for the g equivalence, it is easy to show that when g>r,

the social security pay-as-you-go scheme may be better a normal market economy insurance scheme (see the seminal paper o f Azon

(2) The logic of recognizing p, over and above the contributions paid, in the

— 368 —

1968), coeteris paribus as fo the risk characteristics of the two sche­ mes (3). Then, obviously, one may finance the « social » pensions of the « less favoured » workers (those with minimal number of years of contributions) and still give to the others a pension with « actuarial » equivalence.

13. Let us, then, first analyse the conditions of strict equivalen­ ce, under the pay-as-you-go system.

Considering an average worker l, under this strict equivalence, this pension P, calculated as a percentage of his average wage w, shall be composed of a number of percentage points n of * corresponding to the number of years n of work time the rate of contribution t paid on w divided by the number of years of expected life after retirement

e. 71, the fraction of w which originates the size of P, as funcion of n

shall be

and therefore

[4-6w] P = n n = nfw

e

Now — if w is constant — if the ratio of the working population subject to the social security system to the retired one is constant, this strict individual equivalence o f l shall also become a collective equivalence, giving a perfect balance between contributions paid by the workers subject to the social security system od and pensions re­ ceived by the tired persons ¡31.

If al/pi < n/e there shall not be enough contributions to pay the pensions, while the opposite shall be true with all¡31 > n/e.

14. Normally, in the period in which the welfare state was in­ troduced, the working population subject to the social security system a l was growing, as the population was growing at a positive rate p (often with p>l) (see Table 5) and employment was growing as g was high (see again Table 1). Furthemore the social security provisions where gradually extended from blue collars, to white collars, from in­ dustry to trades and independent workers. Therefore — even

disregar-(3) On the private side there is a market risk; on the public side there is a poli­

— 369

ding the growth o f w on which we shall come in a while — the social security integration social contract was capable of offering a n much better than the n corresponding to the strict individual equivalence and comparable or better than private insurance pensions, in spite of the important redistributional factors included in this « social Con­ tract » aiming to protect the less fortunate with few years o f contri­ butions (or small contributions as agricultural seasonal workers) by the solidarity o f the other workers with the contributions paid by them. A way of going beyond the strict equivalence was to measure

K on the last wages before retirement, which is greater than w. Ano­

ther way was to favour early retirement and another to recognize con­ ventional seniorities for the military service, the training period, chil­ dren procreation and so on.

Obviously, with the diminution o f the value o f p and with the decline o f the rate o f employment (related among others to the rigidi­ ties and costs of the welfare state) etí/y® diminished and a problem of balance of the social security pensions’ budget emerged. Moreover there was the reversal of the g—r relation.

15. The fact it is that in the intergenerational contract promi­ ses, in order to entice the workers as electorate, an equivalence was implicit much bigger than the one allowed by the growth of cri/y®. It was implicit, indeed, the expectation of a growth o f w allowing for pensions more than proportional to the actual wages on which the contributions had been paid. On the other hand, the increase o f life expectancy was overlooked.

This may appear paradoxical, because this improvement is large­ ly a result o f the development o f the health services o f the welfare state (Lindbeck 1993).

pay-as-you-— - 370 —

go » system now becomes lower than g and lower than that of market insurance related to r since r>g. One has to realize, now, that the « so­ cial contract » cannot even give g to the successful workers, when they become pensioneers, since they must provide for the less lucky, as their insurance is a « collective » and not an « individual » insurance (Thompson 1983).

16. Under the social security « pay-as-you-go » dynamic equili­ brium schemes theorized and studies by the demographers, the popu­ lation growth p the change in life expectancy e, and (often but not al­ ways) the ratio of L\P, i.e. of the variation in the labour force to that of the population growth are the key variables. They distinguish the optimistic period, on whose demographic projections an overly opti­ mistic program was built, and transitional pessimistic period of crisis and necessary revision of it until a new equilibrium can be reached, with a zero growth of the population cd and an invariant e which ma­ kes stable also the population ¡31.

Particularly in a « public choice » perspective, it is clear that in those simple « demographic equilibrium » schemes, several componen­ ts are missing. The behaviour of g as a proxy to W is paramount for the rentability of the pay as you go scheme. As noted intergeneratio- nal justice may be grounded on the right of pi of sharing g or W pro­ duced when they were in the cd labour army. However, g and W and the rate of W/g may be adversely affected by the « democracy in defi­ cit » and by the loss o f incentives (Lindbeck 1955), to which the fi­ nancial crisis of the welfare state (together with the other above exa­ mined factors) may contribute. Let us consider the ratio of W to g. What matters, to provide the rentability of the intergenerational pay-as-you-go social contract, is not g directly, but W, i.e. the increa­ se of the total wage bill which is function o f g, but also of other varia­ bles. Among them the burden of the social security taxes which may discourage employment (Delors 1994) and an excessive w increase, which may reduce the amount of cd, even if not the number of em­ ployed. And if g<r and Wig deteriorates because of unemployment and « domestic » employment (Lindbeck 1993), necessarily the private insurances’ intergenerational justice is better.

371 —

of the country has grown or not (through the fertility rate), and whe­ ther employment has or not increased. What it is decisive, is W the growth of the aggregate wage bill cdw on which the given t paid, to provide the total pensions bill ¡51P to be distributed to the given ¡31.

18. Several variables may influence W, including the welfare state’s schemes. Garcia (1992), following the seminal work of Aaron (1968), has pointed out that in a given demographic dynamic model, introducing the technological progress variable, one is able to produce the complete intergenerational equilibrium results. In a public choice perspective, however, one may note than the « expectations » relating to the (positive) effects of these variables may change it if the future beneficiaries of pensions are aware that with their choice (at the Union’s level), they may influence W. Now, in the most recent refor­ ms of the welfare scheme (as the Italian of 1995), the variable g has been introduced: as a parameter applied to the contributions paid to determine the pensions to be revised every three years according to the ex post data on GDP. However, g is only a proxy, as we have no­ ted above, to the changes of W. Because of the perverse effects of the burden of the social security charges and other social security features (Delors 1994, Lindbeck 1995), the value of W may be smaller than that of g, even with a low g (not unrelated to these perversities).

Indeed, a crucial assumption of the model where — as in the Ita­ lian case — g is the basis of the intergenerational justice of the social security « pay-as-you-go » pension scheme is that there is a constant relation between g and W, the growth o f the wage bill. This assum­ ption — under normal circumstances — may corresponds to the plau­ sible hypotesis that the shares of capital and labour remain constant through time, in net national income. But one must observe that not all the labour is compensated with wages; and that this is not a cha­ racteristic prevailing in less developed economies. I f the social securi­ ty system becomes less rentable than private insurances, and its tax rates are rather high (see Table 7F for the incidence o f aggregate pa­ yroll taxes on wages) one must expect a diminution of the ratio of W to g, in spite of the effort by the bureucracy of social security of inclu­ ding in its taxable matter any kind of non wage payment which, even if it is not a legal wage, may be assimilated to it, being a compensa­ tion for labour services.

activities have been incentivated by the changed perspective about the ratio burdens/benefits of the welfare system. This is an important — and, for the supporter of welfare statism, disturbing — effect of the collapse of the basic equation g>r. The crisis is much deeper than prima facie might appear.

19. Indeed when g<r the previous room for combining the inter- generational contractarian pensions scheme on an individual equiva­ lence basis with collective protection of the less favoured is lost; and, therefore, the social securi ty pension schemes becomes — for many people — less attractive than a private insurance scheme: the « cheap » solidarity among lucky workers and « less lucky » workers is lost, the « lunch » of these latter is no more free. It has to paid either within the social security scheme (as Thompson 1989, but against Lindbeck 1993) or by the general tax payers (as it actually happens in several countries because o f the electoral weight of the mature age and old age voters).

On the other hand, the reality is not only that of g<r but also of

W<g. Thus the belief that, without saving and investing, the welfare

state can give more pensions than the market through savings and re­ lated investments, appears what it is: the illusion that a transitional phenomenon, i.e. g>r with W>g is a permanent one. An impossibility theorem here holds. In the long run for developed countries r>g. This theorem is based both on empirical evidence and theoretical reaso­ ning.

Ill

Third Part

20. Let us then look into the empirical evidence. To do so, we have considered the data, relevant for our reasoning to the Oecd countries, since the late ’50 since when they became available throu­ gh the Oecd statistics on national accounting and through the IMF fi­ nancial statistics. These countries, with a few exceptions, are the W e­ stern countries plus Japan, which were developed or developing after the second worldwar and who, in the most, have adopted important welfare state structures (Tables 7) and where a large public sectors has (gradually) grown (Tables 6A). In these countries — mostly with de­ mocratic regimes — Keynesian precepts have had a large application,

— 373 —

favoured by the Marshall plan postwar doctrine. The principle of de­ ficit financing lasted through the ’80, as it is demonstrated by the lar­ ge share of public debt on GDP, gradually accumulated and by the high (related) share of interests payments or public debt on GDP (Ta­

ble 6B).

21. A clear trend of a high g exceeding a low r — through the IMF data — emerges until the ’70. The long term real rate of interest ranked from 2.8 to 1.63 in the 1958-62 period (Tables 2B and Figure 1), dropping during the next five years period to 1.58; and to 0.49% at the end o f third five years period (1972). It became negative down to —3.23% in the year 1973-77 i.e. those o f the oil crisis and disruption of the previous monetary order o f Bretton Woods. Afterwards it reco­ vered to a still low 1.15 in 1980. But after this transitory period, the « cornucopia age » was over. The « lean cows » age dramatically shows up in the decade from 1983 to 1993 and it is still lasting in the present period, with an increasing trend of the long run r from 4.61 in 1983 to 5.01 in 1988, to 5.67 in 1995. Lack of monetary constitution is paid through inflation and consequently high interest rates (Bernholz 1983 and 1990).

22. On the other hand, the behaviour of g ( Table 1 and Figure 1 and 2) is just the opposite, with an earlier turning point, in the Kip- pur war-oil crisis years. In the first five years for which Oe c d stati­

stics are available i.e. 1958-62, the average o f the yearly date gives a g o f 4,4% which increases to 4.86% in the next five years and to 5.22 in 1968-72. Then there is the drop to 1.82% due to the above mentioned crisis which reflected the ecological scarcity of natural resources in the vital energy sector. In the next five years, g, on average, ranged 1.92%. Real growth raised to an average o f 2.76 in the 1983-87 pe­ riod. Again it went down to an average 2.32% in the 1988-92 period. The average o f the decade, then, is 2.54%. This rate o f growth seems to be the trend for the end of the century (and may be after, as far as one can make forecasts), for the gouup of « mature » industrialized countries under consideration.

— 374 —

3.14% in the next five years period to 3.35% in the 1968-72 period; and to a huge 4.12% of GDP in the critical five years period of the oil crisis. In this period (1973-1977), the Western industrialized countries whith their big welfare state, should have realized that the « fat co­ ws » were over, and that a « lean cows » prolonged age had already be­ gan. But due of the paradoxical behaviour of the interest rates, which became (unexpectely) negative both because of the unexpected explo­ sion of inflation and the large flow of petrodollars, the reversal of the

r-g relation was retarded. The next period leading into the ’80, in­

deed was nearly a period of g=r (the average of the 1978-82 period is 0.05). But then the harsh change in the situation becomes clear, with an unquestionable jump of 2.12 percentage points of long term r abo­ ve g in the 1983-87. And in the next five years the differentials jum­ ped to 2.93% while from 1993 to 1995 it was 2.95%. The differential of about 3% of r over g long term is due to a rate of growth of about 2.5%, which reflects the mature age of the economy of the countries concerned and to a rate of interest of near 5.5% which reflects both the heavy drainage by the Governments on savings and the reduction of the savings ratio on GDP of most of these countries. Among others, this reduction of saving is due to the effects of the « pay-as-you-go » pensions system, which obviously implies the displacement of savings from this important aspect of the « life cycle » normal behaviour.

24. Short term r's averages confirm, with a bigger emphasis

(Table 3B and Figure 3) the above observed trends having to do with

this long run r.

— 375 —

five years period of positive K of 1.69. But from 1981 there was an up turn. And therefore the 1983-1987 period shows of a negative K of 1.07%. In the next five years the negative K grows to 2.58% and in the last three years to 3% as the K differential.

25. We do not aim to offer any policy conclusion here, except that of the reduced room for « bad politics » based on entincing pro­ mises, since our purpose was simply that of showing that the ebb tide of the budgetary Keynesianism and o f the welfare state basically re­ sults from the change from a g>r with a particularly low r and a high

g, which was not and could not be sustained permanently, to a r>g of

about the same magnitude. The high value of r is likely to gradually diminish to less anomalous levels under the pressure to improve the budgets, to supplement the welfare state with saving creating devices and to halten inflation. But the value of g in unlikely to increase — in the considered countries — to the levels observed in the decades after the ’45, because of their mature stage, still the high unemployment rate shows that there is more rooms for growth than a mere demogra­ phic view about the reduced p may suggest.

Therefore, one can safely say that — while, in the optimistic unlikely golden age g=r — it is more likely that r in the long run shall remain higher than g, even if with a less disturbing differential than now. Clearly, therefore, both the principle of permanently costless budgetary deficit in the investment area and the possibility o f offe­ ring, through the « pay-as-you-earn » pensions system of the welfare state a solution as rentable as private insurance with more solidarity are over. But the period of required changes in approaches to the wel­ fare and investments issues shall not be easy, because illusion are hard to die.

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— 378 —

Fi g. 1A. — Results with long term rate of interest

Moving averages of 3 years

Fi g. IB. — Results with long term rate of interest

379 —

Fi g. 2 A . — Results with short term rate of interest

Moving averages of 3 years

Fi g. 2 B . — Results with long term rate of interest

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