Thread by @FabioGhironi

Some thoughts on this article by @ChrisGiles_ and Miles Johnson: amp.ft.com/content/28666e… @FT

I agree with @RobinBrooksIIF that there is a serious problem with how estimates of output gaps are constructed: 1/n

Output gaps can close not because actual output has recovered toward an unchanged potential trend, but because the path of potential has “bent down” toward the actual. 2/n

Among other reasons, this “bending down” may be happening also as an effect of the estimate of potential incorporating the consequences of past policy mistakes. 3/n

The EU Commission is correct in saying that it is fairly applying the same methodology to all euro area countries. But the question is how much trust we should put in the methodology. 4/n

I think it is legitimate to ask whether, in estimating potential (or a range of possible paths for potential), we should also account for the possible effects of corrective policy actions that would (at least to some extent) undo the effects of past mistakes on potential. 5/n

It is a difficult question, and one that I think we should address carefully, especially given the role that GDP potential estimates have in crucial policy decisions. 6/n

Having said this, I strongly believe that @RobinBrooksIIF’s and @adam_tooze’s observations ***should not*** be used to support #Salvini’s goals, and especially not those supported by the pseudo-economists (like #Borghi and #Bagnai) who have been advising him. 7/n

As @ojblanchard points out, it matters what the government is spending for. There is a difference between using government resources to engage in handouts that will do close to nothing for growth, and engaging in investment the country needs. 8/n

#Salvini’s fight with the Commission is to pursue deficit-financed spending purely motivated by electoral-consensus-seeking, spending for the old rather than investing for the young and for future generations (who, sadly, do not vote). 9/n

Estimates ***produced by this Italian government*** have confirmed that its signature deficit-expenses will have no significant growth effect: dt.tesoro.it/modules/docume… 10/n

#Salvini’s advisors and fans have been using @RobinBrooksIIF’s legitimate observations on a complicated issue to bolster their claims that Italy should leave the euro, that there is no such a thing as “limited resources,” 11/n

that we should just follow #MMT and start printing our own currency to unlock the unlimited resources Italy should rightfully have access to. 12/n

I think there are demand-side policy actions that can have a beneficial effect on potential, so I do not completely agree with @monacelt’s quote that expansionary fiscal policy is useless tout court (if that’s what he really meant). 13/n

I agree strongly with @monacelt that Italy’s key problem is years of low investment, R&D & technology adoption, 14/n

but I also think the analysis in, for instance, @BenignoGianluca & @LucaFornaro3’s recent @RevEconStud article explains why demand-side policy can matter for precisely those things: crei.cat/wp-content/upl… 15/n

In the end, the key is what we use deficit spending for. And, @monacelt is absolutely correct in pointing out that lack of credibility is the other major problem Italy has been facing. 16/n

Sadly, given #Salvini’s (and Five Star’s) policy choices so far (i.e.,what they want to spend on), and given the advice #Salvini and Di Maio have been receiving from their cadre of pseudo-economists, 17/n

I think supporting them on the basis of @RobinBrooksIIF’s and @adam_tooze’s arguments *will do nothing* to solve Italy’s problems with investment, education, R&D, and technology adoption, and it *will only worsen* Italy’s credibility problems. 18/n

PS: For your fun, you may enjoy knowing that some pseudo-economists that gravitate around the Italian government think that credibility is irrelevant in macroeconomics. I doubt @RobinBrooksIIF’s and @adam_tooze want to end up supporting these (and other) crackpot views. n/n