29 June 2016
San Francesco - Via della Quarquonia 1 (Classroom 2 )
In economics, as in physics, certain concepts are not well defined. In physics it is absolute time and distance, whose measurement depends on direction and speed through space. This frame of reference determines how we perceive the time of day or the length of a desk. In economics, every dollar a government takes in or pays out can be referenced with different words or labels to produce almost any level of official debt one wishes to present. In the economic literature this phenomena is called the "labelling problem". Idealized market participants should be immune against the "labelling problem" because they are rational. However, as the Chilean pension reform of the early 1980's has demonstrated, real world market participants are not. For a rational agent it should have made no difference when the Chilean government funneled receipts denoted as taxes into private pension funds, which the government then borrowed to cover pensions. However, one could observe markets reacting to this change of language. The same holds when Argentina also "reformed" its pensions, albeit with no fiscal tightening. Recently, Argentina changed words again by nationalizing its pension funds. The confiscated assets were labelled revenue and the future liabilities were kept off the books. Thus, Argentina sold unofficial IOUs for current cash. Greece did the same in selling future airport fees and lottery proceeds. So did France in confiscating France Télécom pension assets to join the Euro. And etc. Fortunately, economic theory suggests a meaningful, language-free measure of an economy's fiscal sustainability. It is called the fiscal gap and equals the present value difference between all future projected expenditures and all future receipts. The fiscal gap is label-free. Different labels produce different cash flows, but the same fiscal gap. We present new estimates for fiscal gaps in Europe and discuss their implications and shortcomings.
Hagist , Christian