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Social investment for inclusive growth: a Southern European perspective

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Inequality has emerged as a major economic issue: sharp increases in the share of income going to those at the very top of the income distribution, a rising share of income going to profits, stagnant real wages, and a fall in median family income have raised concern over the sustainability of our economies and societies.

Although globalization and technological change are usually singled out as the main culprits, the belief that unfettered markets and trickle-down economics would have delivered rapid growth and benefits to all might have played a major role. Supply-side economic policies – tax cuts on higher income, structural reforms aimed at increasing competition, privatization and deregulation of the financial and labour markets – variously implemented on both sides of the Atlantic did not deliver growth but led to greater inequality.

These policies have been especially disastrous in Europe, where a deep and prolonged recession now follows two decades of slow growth. In the peripheral countries the fiscal crisis has been met with more fiscal austerity, more labour market deregulation, cuts in social spending and progressive dismantling of the welfare state. While inequalities have increased in many advanced economies, they have shown a dramatic rise in the financially distressed countries, which have experienced negative rates of growth, record high unemployment and widespread precariousness, with dreadful consequences for the more vulnerable segments of the labour market, especially youth, and sharply increased poverty.

Faced with the evidence of the disastrous effects of the implementation of fiscal austerity at a time when the private sector is de-leveraging, several institutions have switched to advocating higher government spending as a policy urgently needed to boost demand and employment and, indeed, to reduce inequality. The idea that sustaining demand may also play a role in determining the potential growth rate of the economy, via investment, human capital and durable consumption, (Fitoussi and Saraceno 2013) is also slowly re-gaining ground. At the same time, research findings indicating that inequality can undermine long-term growth – for instance by depressing progress in health and education – are providing support for policies targeting a more even income distribution, not only for the sake of equity, but also for long-term growth. For all these reasons, higher public investments are widely advocated as the right policy to take advantage of the current period of economic slack and exceptionally low interest rates in order to revive the economy and renew and build up the infrastructure.