Month: July 2015

Over at Grasping RealityArthur Goldhammer: Weekend Reading: The Old Continent Creaks: “Austerity and the failures of the technocratic elite have created the current populist backlash. France’s experience is instructive—and, possibly, ominous:

What’s the matter with Europe? Wherever one looks these days, there are signs of deep trouble. Economic growth has stagnated. Deflation threatens. Unemployment is rampant in many member states of the European Union. Support for the former mainstream parties of the center-right and center-left is waning. Populist parties of the far right and far left are on the rise. Anti-Islamic movements such as PEGIDA in Germany have attracted worrisome support, while in France the xenophobic National Front has topped all other parties in recent polls. Terrorist attacks by native-born citizens in Paris and Copenhagen have raised fears that the social fabric has irreparably deteriorated—fears compounded by the flight of several thousand young Europeans to join the Islamic State in Syria. And to top it all off, Ukraine has been racked by civil war and threatened with disintegration since Russian-backed separatists rejected the rule of the government in Kiev…

Must-Read: Max Galka: The Housing Value of Every County in the U.S.:

Thomas Piketty: Germany Has Never Repaid: “What struck me while I was writing is that Germany…

…is really the single best example of a country that, throughout its history, has never repaid its external debt…. However, it has frequently made other nations pay up…. The history of public debt is full of irony. It rarely follows our ideas of order and justice…. When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations…

Must- and Should-Reads:

• Must-Read: Simon Wren-Lewis: The Ideologues of the Eurozone
• Paul de Grauwe: “Accepting that the (restructured) Greek debt is sustainable opens the door to both a softening of the austerity programme and to liquidity support of the Greek banking sector…”
• Duncan Wheldon: “Syriza has transformed from ‘end austerity’ to ‘implement austerity in a left wing redistributionary way’ to ‘slightly tweak existing austerity’. That’s quite a journey in a matter of weeks…”

Might Like to Be Aware of:

• Duncan Black: “Policy positions of Republicans have no bearing on whether the Villagers love them, it’s all about whether they play the ‘serious’ part well. Have the policies of Ted Cruz, just don’t act like him. You’re a moderate!…”
• Imran Rasul: Imran Rasul
• Imran Rasul: Vita

Angel Ubide writes:

@mark_dow Good points.Sadly we'll never know if pre-Syriza growth sustainable. Bberg consensus thought so cc:@delong pic.twitter.com/QpQ1m4vcwN

— Angel Ubide (@AngelUbide) July 4, 2015

Ummmm…

“Pre-Syriza growth” would return Greek GDP to its 1975-1999 trend… never.

“Pre-Syriza growth” was at a pace that would not return Greek real GDP to the 2007 level of the 1975-1999 trend (if you think that was Greece’s “real” potential output in 2007) until… 2023.

“Pre-Syriza growth” was at a pace that would not return Greek real GDP to the 2007 level of potential output (if you think that was Greece’s “real” potential output in 2007) until… 2037.

Splitting the difference, “pre-Syriza growth” would not return Greece to the center-point of estimates of 2007 potential output until 2030. And “pre-Syriza growth” would reduce Greek unemployment from its current levels… never:

Must-Read: Simon Wren-Lewis, who is very smart and has followed the Eurozone crisis much more closely than I have, seems to have joined the Ancient, Hermetic, and Occult Order of the Shrill: “Ph’nglui mglw’nafh Euro R’lyeh wgah’nagl fhtagn!”. We wish him luck with his new appointment at Miskatonic University in picturesque Arkham, Massachusetts. And we are seriously considering, after reading him, whether the Euro project needs to blown up–indeed, whether the fundamental flaw was in U.S. occupation authorities allowing the formation of the Bundesrepublik, because a European Union that now had five members named “Brandenburg”, “Saxony”, “Bavaria”, “Rhineland”, and “Hanover” would be likely to have a much healthier politics and economics than our current one, with one member named “Germany”:

Simon Wren-Lewis: The Ideologues of the Eurozone: “It was all going so well…

…True, Greek GDP did shrink by 25% over 4 years, unemployment rose to 25% and youth unemployment to 50%, but before Syriza’s election Greek GDP had actually stopped falling. Further austerity was planned so that Greece could start to pay interest on its enormous debts, together with various ‘reforms’ that were so obviously in the interests of the Greek economy, and the consensus forecast was that the Greek economy might start to grow at a pace that would also stop unemployment rising. Who knows, in a decade or so it might even fall below 20%. But then disaster struck. The Greek people went and spoilt everything by electing a government that suggested that there might be an alternative…. The real blame must lie with the ‘populist’ politicians who pretended there could be an alternative. The ever patient and understanding Troika negotiators then had to deal with ‘adolescent ideologues’… cheered on by pundits and economists on the left in the UK and US who wanted nothing more than to use Greece as part of a ‘proxy war’ to get more Keynesian policies in their own countries.

If you think the above parody is over the top, click on the two links. The hypocrisy of some of the commentary on Greece is amazing. When the ‘adolescent ideologue’ Mr Tsipras shows a statesman-like maturity in being prepared to compromise… he is accused of inconsistency…. When those who he is negotiating with push him further than he is prepared to go, he is accused of ‘taking Greece to the brink’ by having the temerity to ask the Greek people to choose…. The OECD estimate that the output gap in Greece is currently well over 10%. In plain English that means that those currently unemployed could be producing something useful and GDP could easily expand by at least 10% without generating any increase in inflation. (Greek inflation is currently around -2%)…

• Philip Stephens: Greece should vote for the rule of law
• Angel Ubide: A Political and Intellectual Proxy War over Greece

Must- and Should-Reads:

• James Galbraith: Greece: Only the ‘No’ Can Save the Euro: As Greece prepares for a referendum on its creditors’ demands for austerity, the future of Europe hangs in the balance
• Cardiff Garcia and Diane Coyle: Camp Alphaville videos: Is GDP losing its relevance?
• Simon Wren-Lewis: The Greek people have paid for their governments’ mistakes – and for the errors of the Troika
• Joseph Cotterill: “It’s a Greek debt sustainability analysis by IMF staff… the frankest effort… so far to acknowledge the straits Greece is in regarding its debt to official creditors, and accordingly, their most radical proposal yet to euthanise large parts of that official debt…”
• Phillip Inman and Larry Elliott: IMF says Greece needs extra €60bn in funds and debt relief, issues strong message to Europe by warning that Athens’ debts are unsustainable and it needs 20-year grace period on debt repayments
• Must-Read: Mark Thoma: Austerity: The Public-Sector Jobs Gap
• Must-Read: Miles Kimball: Bruce Greenwald: The Death of Manufacturing
• Must-Read: Mark Thoma: The Problem with Completely Free Markets
• Must-Read: Angel Ubide: A Political and Intellectual Proxy War over Greece
• Must-Read: Paul Krugman: Europe’s Many Economic Disasters

Must-Read: Paul Krugman: Europe’s Many Economic Disasters: “It’s depressing thinking about Greece…

…So let’s talk about something else… Finland, which couldn’t be more different from that corrupt, irresponsible country to the south… a model European citizen; it has honest government, sound finances and a solid credit rating, which lets it borrow money at incredibly low interest rates. It’s also in the eighth year of a slump that has cut real gross domestic product per capita by 10 percent and shows no sign of ending…. If it weren’t for the nightmare in southern Europe, the… Finnish economy might well be seen as an epic disaster. And Finland isn’t alone. It’s part of an arc of economic decline that extends across northern Europe through Denmark–which isn’t on the euro, but is managing its money as if it were–to the Netherlands. All of these countries are, by the way, doing much worse than France…. And what about southern Europe outside Greece?… Spain… real income per capita that is still down 7 percent from its pre-crisis level. Portugal has also obediently implemented harsh austerity — and is 6 percent poorer than it used to be….

What’s striking at this point is how much the origin stories of European crises differ…. The Greek government borrowed too much…the Spanish government didn’t… private lending and a housing bubble… Finland’s story doesn’t involve debt… [but] weak demand for forest products… and the stumbles of Finnish manufacturing…. What all of these economies have in common, however, is that by joining the eurozone they put themselves into an economic straitjacket…. [Was] creating the euro… a mistake? Well, yes. But that’s not the same as saying that it should be eliminated now that it exists. The urgent thing now is to loosen that straitjacket… a unified system of bank guarantees… a willingness to offer debt relief… a more favorable overall environment… by renouncing excessive austerity and doing everything possible to raise Europe’s underlying inflation rate–currently below 1 percent–at least back up to the official target of 2 percent. But there are many European officials and politicians who are opposed to anything and everything that might make the euro workable, who still believe that all would be well if everyone exhibited sufficient discipline. And that’s why there is even more at stake in Sunday’s Greek referendum than most observers realize.

Must-Read: There is an astonishing antinomy in this column by the Peterson Institute’s Angel Ubide. (A) On the one hand, he says Greek nationalists and Keynesians are cynically and reprehensibly sacrificing the people of Greece in a proxy war to try to advance their anti-EU and anti-austerity views.

(B) On the other hand, he says that the nationalists–who complain that the EU is being run for the benefit of German bankers, German bank depositors, and German exporters rather than for the continent as a whole–and the Keynesians–who complain that the austerity and the lack of debt reorganization imposed on Greece is simply insane–are right.

I think Ubide should pull this back, think hard, rewrite it, and try again when he has decided whether he thinks Greece should (A) accept the Troika offer or (B) hold out for, in his words, what it deserves: “massive external assistance… the resources needed–including conditional debt relief… whatever it takes to help the Greek people recover from this tragedy…”

Angel Ubide: A Political and Intellectual Proxy War over Greece: “The conflict is a proxy for two wars—one intellectual and one political…

…in which the Greek people, especially the poor, have been taken hostage. The intellectual war is over the sustainability of the euro project and the economic effects of austerity policies. The political war is over populist and nationalistic policies…. Propaganda has taken over…. The Greek government has taken the country to the brink by calling a referendum on the program at a time when it knew such a step would lead to capital controls and bank closures. Neither the form nor the content of Tsipras’ request was conducive to an extension of the program. The rules were clear to everybody, including the Greek government. Capital controls and bank closures hurt growth….

This proxy war supporting Grexit is being fought to support the cause of Keynesian fiscal policies in the United States and the United Kingdom, of economists and others who want to say ‘I told you so’ about the unfeasibility of the euro, and of activists who want to promote populist policies elsewhere…. American pundits won’t have to live with the consequences of their advice. This proxy war must end. What Greece needs is a government that can provide lasting and credible political stability, liberalize the economy, break down oligopolies, reduce clientelism, and unlock growth…

But also:

There have certainly been mistakes made in the operation of the euro institutions…. Greece has sharply reduced its fiscal deficit—in fact, probably too much…. All parties involved have made mistakes, and Greece has suffered enormously. Regardless of the referendum outcome, the Greek economy is going to need massive external assistance…. After the referendum, Europe must re-engage with Greece, devote all the resources needed—including conditional debt relief—and, paraphrasing Mario Draghi, do whatever it takes to help the Greek people recover from this tragedy.

Must-Read: So when I go back onto the Econ 1 teaching line in the spring of 2016, how do I organize (a) the excellences of markets, and (b) the failures of markets? Reich and Tyson have a nice four-part typology: 1. government creates markets, 2. government corrects markets, 3. government distorts markets, 4. government supplements markets. Is that the way to go?

Mark Thoma: The Problem with Completely Free Markets: “Republicans… believe that markets free of government rules and regulations…

…almost always outperform markets where the government is involved. So it’s a good time to review why this faith in free markets is sometimes misplaced…. But we shouldn’t confuse free markets with competitive markets. When there are significant departures from pure competition, what economists call market failures, markets are ‘free’ to perform very badly, and sometimes a market will collapse entirely…. The conditions for textbook competitive markets are fairly strict… numerous participants… perfect information… weights and measures [that] are accurate… free of externalities… [free of] principal-agent problems… free of moral hazard and adverse selection problems…. If a private firm asked you to pay for national defense, why would you say yes? If everyone else pays, you will still be protected, so why pay yourself?…