ALEX BLUMBERG, HOST:
Luigi Zingales got his first lesson in the differences between Italians and Americans soon after he arrived in this country from his native Italy. This lesson came courtesy of some bad weather.
LUIGI ZINGALES: When I just arrived in Boston, there was a tornado watch. And they told us to go in the house, tape the windows and stay inside. And my reaction is, if the mayor of Boston tells me to tape the windows, it must be that his brother sells tape because that's the typical thing in Italy. And second, if the government tells me to do something, I do the opposite because generally that's what - the good way to act. And I was shocked that everybody was taking this super seriously. So one of the thing that shocked me when I moved to this country is how much people trust the public institutions and how much they trust the fairness of the system overall.
BLUMBERG: Hello and welcome to PLANET MONEY. I'm Alex Blumberg.
ROBERT SMITH, HOST:
And I'm Robert Smith. Today is Tuesday, July 10.
BLUMBERG: And on the program today, a conversation with Luigi Zingales who since that tornado warning has gone on to become an economics professor at the University of Chicago and the author of a book about, among other things, how the U.S., which used to be so different from Italy, is now starting to look more and more like Italy, and why that's a bad thing for our economy.
(SOUNDBITE OF FUTURE OF FORESTRY SONG, "CHARIOTS")
BLUMBERG: Luigi Zingales is someone you don't meet every day. He's a passionate economist. He actually got into the field of economics and fled his own country to practice in that field all out of the sense of mission. Economics, he believed, if you apply it correctly, can make societies better off, people happier, more prosperous.
SMITH: And to him, there's often this comparison that he makes in his mind between the economy of his adopted country, the economy of the United States, and the country of his birth, Italy. Italy's economy - that's the one to avoid, if I have to give a cheat sheet here. And for a long time, he believed the U.S. had managed to avoid it.
BLUMBERG: The problem with Italy's economy, says Zingales, is epitomized by one man - Silvio Berlusconi. Berlusconi, many of you may know, was the longtime prime minister of Italy who finally resigned last year. And most of us are probably familiar with the scandals, but let's be honest, you can actually never get enough Berlusconi scandal. So I'm just going to just tick them off very quickly. He's been accused of mafia links, having sex with minors, bribery, corruption, tax fraud. In several cases, he got the legislature to change the statute of limitations on the crimes he was being charged with so that the cases could no longer proceed.
SMITH: Believe me, we could go on and on. But Zingales says Berlusconi is an extreme version of a major underlying problem with the Italian economy. And the problem is two words - crony capitalism. And this is where economic success is due not to how well your product or your service performs in the market but to the political connections you have. For example, Berlusconi himself owns the three major private television networks, and when he became prime minister, he took effective control of the three major state-run networks as well, meaning...
ZINGALES: All the six major TV channels are - were controlled by him. And so when he appoints sort of a ministry - or used to appoint the ministry or sort of a regulator, these are generally past employees of his or a close business associate.
BLUMBERG: It's a little hard to imagine someone like Berlusconi becoming president, say, here in the United States. You know, imagine - somebody would have to become president of all three major networks, right? Somebody would have become president of NBC, CBS and ABC combined.
SMITH: And don't forget about FOX. You'd have to be president of FOX, too. And then you would have to somehow be appealing enough to the public that you are elected president of the country.
BLUMBERG: And, as Berlusconi did, you'd then have to appoint your former employees to be heads of the main governmental regulatory agencies like the CBB and the FCC.
SMITH: And then, as Berlusconi also did, you'd have to sponsor former executives - your friends, your lawyers, even showgirls you may have dated from your former television shows - you would have to sponsor them to run for Congress and then get them elected.
BLUMBERG: And then you'd get all of these loyalists, now in government, to work further to rig the system to benefit your own personal fortune.
SMITH: As a news reporter, I have to say that would be a thrilling vision of America.
BLUMBERG: It'd be a good story.
SMITH: It would be a great story. But as a realist, I have to say it can't happen. There are laws against monopolies. There are all sorts of checks and balances in the U.S. government to make sure that this does not happen here.
BLUMBERG: That is exactly what Luigi Zingales thought. That's why he came to this country - because that couldn't happen here. You know, Americans as opposed to Italians generally have faith in their government. We pay our taxes, we listen to our tornado warnings. But recently, in the last decade or so, Zingales has started to notice some positively Italian trends. Americans, he feels, are losing faith in the system as well.
SMITH: Zingales helps run something called the financial trust index, where they do a survey about how everyday Americans feel about the financial system. And as part of that survey, in 2008 - during the financial crisis - they asked questions about then-Treasury Secretary Hank Paulson, who you may remember had previously been the head of Goldman Sachs.
ZINGALES: We asked some questions about, do you think that Hank Paulson, in designing his policy response to the crisis, acted in the interest of the American people or in the interest of Goldman Sachs? And 20 percent of the people did not answer, but all of the one who answer - 50 percent - said in the interest of Goldman Sachs. So I think that this is not typical in America.
And then a few months later, we did a similar question with Obama. And the only difference is that some - I think 30 percent were saying the unions. Another 30 percent say the financial industry. But the majority still did not think that the sort of high authorities in the country act in the interest of the American people.
SMITH: Now, Luigi Zingales is an economist. And so he's worried about this trend not because he's naive, good-government type. He's worried because of the potential economic impact. Italy during the Berlusconi period had one of the lowest growth rates in Europe. And by the time he left office in 2011, it had one of the highest debt-to-GDP ratios as well.
BLUMBERG: And Zingales would argue this isn't a coincidence. When a society loses faith in its governments, it actually distorts the economy. And there's a couple reasons for this. One, if you think the system is fair and the only way to get ahead as a company is to make better products and make better services, then that's what you put your money and your resources into. That's what you invest in. But if you feel like the system is fundamentally unfair and that getting better products or services won't actually help you, then it makes no sense to put your money and resources into getting better. It's much more logical to put your money and resources into influencing the government, like everyone else is doing.
ZINGALES: You know, once - once the system is not fair, why shouldn't I lobby stronger than the other one? And so if we go down that path, it's a bit like leaving a theater in flames. If everybody walks slowly and orderly, we know that's the best solution. But when people start to rush the door, why shouldn't I?
SMITH: Now, I know what you're thinking - OK, OK, it's the financial crisis. People are in a bad mood. They're a little jaded. But, you know, America has been here before. We've had a divided country. We've lost faith in our government - Vietnam, the Civil War. We had an entire...
BLUMBERG: The Civil War - a big one.
SMITH: ...We had an entire Civil War. The idea in America is that we have systems, checks and balances, specifically to prevent an American Berlusconi.
BLUMBERG: Yeah, and Zingales agrees with that. But he says there is this path that a country goes down that leads to Berlusconi. Italy went down it. And the U.S. might be taking a few tentative steps down that path as well.
SMITH: So here's how it happened in Italy. After World War II, there was a strong Communist Party in the country. And with any Communist Party, there is always the threat of nationalization - that if you start a business there or an industry or a factory, that the government will all of a sudden take it away from you and give it to the people.
BLUMBERG: But of course, Italy is trying to recover from the war at this time as well. So they want businesses to invest. And so Zingales says the government does this dance. Businesses are afraid of the Communists nationalizing them. So what the government does is it says, yeah, yeah, yeah, we've made these promises to the people, but don't worry. We've got your back. We'll make it worth your while. I know you're freaked out, but we'll give you the sweetheart deal.
ZINGALES: And so there was this attempt to please the crowd on the one hand, but sort of also - sort of make the business sector understand that they wouldn't actually carry through what they say. And I think this duplicity created all this sort of spiraling.
SMITH: Ah yes, the spiral. You make a promise to the people, businesses freak out, so then you cut your sweetheart deal with the businesses to keep them investing. But the people aren't stupid, right? They see the sweetheart deals. They hear about them. They know about the bribes. They know about all of this. And so they get even more angry than they were before.
ZINGALES: And the more that you have this public outrage, the more sort of, in order to do business, you need to be protected by the government. And it's a sort of vicious circle, from which it's very difficult to get out.
BLUMBERG: And the ultimate expression of this vicious circle - Silvio Berlusconi, a billionaire oligarch who is also an overspending populist.
SMITH: The human personification of the spiral.
SMITH: So that's Italy. But Zingales is starting to see the very beginnings of this dynamic in the United States, especially right after the financial crisis. Remember there was that whole thing about AIG? And there was this news report that, even after the bailout of AIG, executives at AIG were getting these bonuses that had been previously contracted. And there was this huge sense of outrage in the United States that Congress had to respond to.
ZINGALES: In - I think it was March 2009 that Congress voted 100 percent tax on bonuses. And that never became law. But I think that the fact that Congress voted for that is an indication of the response to this populist pressure.
BLUMBERG: Now, maybe you were mad about the bonuses, too. I know lots of people were. But a lot like this, says Zingales, just like in Italy, one of the main things it does - it terrifies business. You can think of it this way - like, a bonus - that's a contract. And by slapping a retroactive tax on that contract, you know, you're effectively changing the contract. That's sort of scary to a lot of businesses. If Congress can do that to these bonus contracts, what else might they do? And this puts pressure on Congress to go the opposite direction and sort of suck up to the businesses.
SMITH: And Zingales points to a couple of examples. There's this program some of you may remember. We covered it a bunch here on PLANET MONEY. The PPIP - the Public Private Investment Program, which you may remember, had to do with toxic assets and how the government was going to deal with these. And Zingales - and a lot of people at the time - saw this essentially as the government enticing businesses to invest their money by offering very, very sweet terms. Critics said the government covered all the risks. And the companies - they got the profits.
ZINGALES: And what I argue is that those two action that seem exactly at the opposite end logically, in fact they are very much linked because the moment that you have a populist outrage, then you are not confident that rule of law will be in place. And whatever law you're designing is meant to stick. And so if you want to motivate the market to work, if you want to motivate investors to invest, you have to give them some monopoly power, some privileges, some favoritism. Now, the irony of course is that this favoritism is going to exacerbate even more the populist outrage.
SMITH: Once you understand the Italian spiral, we'll call it, you see it everywhere in government. So take, for example, something in the news - the Volcker Rule.
BLUMBERG: The Volcker rule, you may have heard about. This is the rule named after that former Fed chairman Paul Volcker that says banks that are insured by the government can't speculate for their own profit with their money. They call it proprietary trading. The essential argument is it's not fair if a insured bank is betting for its own account because if they lose the bet, the government pays because it's insured. But if they win, they keep the profits. The problem, according to Zingales, is that this is a textbook case of a law that sounds good to the masses. You know, get rid of speculation by Wall Street.
SMITH: Who wouldn't want that?
BLUMBERG: But in practice, it'll have very little effect.
ZINGALES: I have the deepest respect for Paul Volcker. I think he's a fantastic sort of economist and human being. I think that the rule that he proposed is not enforceable. And my fear is that it's been chosen precisely for that reason - again, trying to strike a balance between the populous and the capture (ph) by businessmen. You use sort of pick a law, a regulation, that pleases the crowd but de facto does not put any restriction on business.
BLUMBERG: And so that's the Volcker Rule, you think? The Volcker Rule is the perfect answer to both constituencies - the banks and the crowd.
ZINGALES: Unfortunately, yes.
SMITH: Zingales says that one of the reasons the Volcker rule doesn't work is that it is so complicated. He says the more nuanced a rule becomes, the more it carves out exemptions, the longer the bill gets, even exemptions that seem to make sense, the less effective it becomes.
BLUMBERG: And this is something you hear from economists a lot - if a law is so complicated that an ordinary person can't really understand it, then the only people who read it are people looking for loopholes, people looking to game it, looking to carve out that provision that will give them their own advantage. And these people then will put pressure on lawmakers and regulators to further complicate the bill, to further amend it, to put in even more exemptions and exceptions.
SMITH: But Zingales does have a solution that he says will slow down the Berlusconi spiral, this back and forth between pleasing the businesses and being a populist government. This spiral only happens if you don't know what the government is promising everyone else, if things are too complicated - if you don't know there's a sweetheart deal for the banks and you only find out later.
BLUMBERG: So, he says, make the rules simpler and shorter and more understandable. And he has this example of a law - Glass-Steagall. This was one of the landmark laws passed during the Great Depression after the crash of '29. And Glass-Steagall basically divides banks into two categories. There's sort of commercial banks, which is where normal ordinary people put their money, and then there are the Wall Street banks, the investment banks. And Glass-Steagall said, essentially, commercial banks, you can't be as risky as the investment banks.
SMITH: But in the late 1990s, Glass-Steagall went away. And here's the weird thing about Zingales - he was actually in favor of that law going away. Luigi Zingales is a conservative economist. He believes in the free market. He's not someone who advocates excessive regulation. And so when Glass-Steagall went away, he thought, well, you know, that's good. But over the last few years, as he's written this book, Zingales changed his mind. He thought, you know, Glass-Steagall was simple. And it did seem to work. And perhaps - perhaps we need more of our rules to be like that.
ZINGALES: Rules simple enough that even congressmen can understand them because it is true. Nancy Pelosi, I think when she passed the health care bill, said let's pass it to see what is in it. That's pretty scary. I think that I want sort of rules that are simple enough that there can be a public debate and that individuals can pressure their congressman to - or congresswoman - to sort of vote in the way they want because they have an opinion. I'd like to repeat that Glass-Steagall was 24 pages. The creation of the Federal Reserve, I think, was 13. And Dodd-Frank was 2,400. So you can create important institution in a limited amount of space.
(SOUNDBITE OF SONG, "CHARIOTS")
FUTURE OF FORESTRY: (Singing) I will be in the darkest hour the brightest light...
BLUMBERG: Luigi Zingales' new book is called, "A Capitalism For The People." I've posted a link to it and some of his recent op-eds on our blog, npr.org/money.
SMITH: As always, we're interested in what you thought of the show. Email us - email@example.com, check out our blog, npr.org/money, or find us on Facebook or Twitter. I'm Robert Smith.
BLUMBERG: And I'm Alex Blumberg. Thanks for listening.
(SOUNDBITE OF SONG, "CHARIOTS")
FUTURE OF FORESTRY: (Singing) Away we fly, oh. You say you don't know how to put them down and start again. You say that you are stronger now.
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