Month: July 2015

The current and the greater onrushing disaster that is macroeconomic policy in the eurozone is, in my opinion, the result of two things:

1. Setting up a Single currency in the region much broader than any optimum currency area.

2. Abysmal macroeconomic management by would-be economic hegemons that do not understand that system management needs to keep him employment high and thus make adjustment easy.

Even if dismantling the eurozone is not possible, transferring authority for North Atlantic macroeconomic management as a whole out of Europe is possible.

Ben Bernanke: Greece and Europe: Is Europe holding up its end of the bargain? No: “Is the euro zone’s leadership delivering the broad-based economic recovery that is needed to give stressed countries like Greece…

…a reasonable chance to meet their growth, employment, and fiscal objectives?…. Unfortunately, the answers… are… obvious… (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone…. In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today… the unemployment rate in the euro zone is more than 11 percent… a very large share of… younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe’s longer-term growth potential….

What is a problem… is that Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home… Two concrete proposals. First, negotiations over Greece’s evidently unsustainable debt burden should be based on explicit assumptions about European growth. If European growth turns out to be weaker than projected… Greece should be allowed greater leeway…. Second, it’s time for the leaders of the euro zone to address the problem of large and sustained trade imbalances… which… impose significant costs and risks…

If I were Ben Bernanke, I would put this much more strongly. The ECB, the IMF, and the northern European fiscal authorities have conspicuously failed to do their job to maintain a stable path of nominal demand growth the previously anticipated level in the euro zone. They also have failed to create the preconditions for Greece to grow out of its depression:

Since the primary responsibility for the fact that Greece’s debt is now unsustainable lies with the masters and designers of the current macroeconomic situation–with the ECB, the IMF, and the northern European fiscal authorities–creditors of Greece need to apply to them, And not to Greece, for rep for repayment. Greece’s debt should now be wiped clean.

Perhaps the ECB and the northern European fiscal authorities should be given one more chance to get their institutions of collective macroeconomic management right. And perhaps they can do so: impose responsibility for adjustment on surplus as well as deficit regions, set up the requisite system of fiscal transfers as insurance to make a currency union a win-win, and so forth. I would recommend against it. And if they are given one more chance, there need to be consequences if in five years eurozone economic governance and collective macroeconomic management are still in as great as mess as they are today.

Either then–or, I would prefer, now–Europe needs to cede control over macroeconomic management to more responsible actors. I would suggest a condominium of the U.S. and the IMF to serve as a hegemon for the North Atlantic macroeconomy as far as stabilization policy is concerned. A reallocation of more of the North Atlantic votes in the IMF to the United States and a substantial multiplication of the IMF’s resources could do the job.

Must-Read: Robert Hall says somewhere that the MIT guys ret-conned the name of the first computer he programmed–CADET–to “can’t add: doesn’t even try” because decimal arithmetic was beyond it. And the age of Reagan–the seven fat years 1982-1989 of Robert Bartley–were a glorious time for America’s upper class. But the arithmetic needed to recognize that that was not true for the country as a whole is very elementary indeed…

Matthew Yglesias: The Amazing Persistence of Reagan Derp: “The most telling part… is when [John] Cochrane veers off topic…

…and starts singing the praises of the Reagan Revolution under which ‘malaise ended, we won the cold war, and there was an economic boom.’… The economic policy points here are just not true…. There was a severe recession at the start of his term, a rapid recovery from the severe recession that was well-timed for his landslide reelection, and then several years of fine-but-unremarkable growth…. The boom and the supply-side revolution just didn’t happen. There was no turnaround of the mid-seventies decline in Total Factor Productivity. There was no increase in the growth rate of private business investment. And there was no turnaround of the long-term decline in male labor force participation. This is pretty basic stuff. But it’s ignored not just by conservative politicians or popular writers, but by PhD-wielding academic economists. And it’s just wrong.

Over at Grasping Reality: Today’s Economic History: Alfred and Mary Marshall on The Confidence Fairy: Alfred Marshall and Mary Marshall (1885), Economics of Industry, Book III: Market Value: Chapter 1: Changes in the Purchasing Power of Money http://tinyurl.com/dl20110818j: “If all trades which make goods for direct consumption…

…agreed to work on and to buy each other’s goods as in ordinary times, they would supply one another with the means of earning a moderate rate of profits and of wages. The trades which make fixed capital might have to wait a little longer, but they too would get employment when confidence had revived so far that those who had capital to invest had made up their minds how to invest it.

Confidence by growing would cause itself to grow; credit would give increased means of purchase, and thus prices would recover. Those in trade already would make good profits, new companies would be started, old businesses would be extended; and soon there would be a good demand even for the work of those who make fixed capital. There is of course no formal agreement between the different trades to begin again to work full times and so make a market for each other’s wares. But the revival of industry comes about through the gradual and often simultaneous growth of confidence among many various trades; it begins as soon as traders think that prices will not continue to fall: and with a revival of industry prices rise.

[Note: The most plausible of all the plans that have been suggested by Socialists for the artificial organization or industry is on which aims at the ‘abolition of commercial risk’. They propose that in times of depression government should step forward and, by guaranteeing each separate industry against risk, cause all industries to work, and therefore to earn and therefore to buy each other’s products. Government, by running every risk at once, would, they think, run no risk. But they have not yet shown how government could tell whether a man’s distress was really due to causes beyond his own control, nor how its guarantee could be worked without hindering that freedom on which energy and the progress of invention depend.]

Must-Read: The very thoughtful and sharp Mark Thoma has swung around to thinking that, with the right student body, online education can do 60% of the job of the residential university campus for… 10%? 5%? of the non-student-time-and-effort cost. Of course, the principal cost is still student time and effort…

Mark Thoma: 12 Good and Bad Parts of Online Education: “I was initially very skeptical about the claims being made about online education…

…but after teaching several of these course during the past academic year my own assessment has become much more positive…. I didn’t give online education enough credit for the things that it can do. Here are some of the positives and negatives…. Let me start with the negatives: Can’t ask questions…. Can’t pace the lecture…. Less contact with students…. Loss of the group experience…. Harder to form study groups…. Office hours not as effective online…. Machine graded exams and homework….

Here are the positive aspects, and some of the ways the negatives discussed above can be overcome…. Students… can hit the pause button, rewind…. Self-Pacing…. Language barriers: International students… with video lectures, they can watch the lectures repeatedly until they understand…. Flexible hours…. I am still worried that the development of online courses will lead to a two-tiered education system, but that’s just another way of saying I think traditional ‘brick and mortar’ education is better…

Over at Grasping Reality: Hoisted from Arin Dube’s Archives from Four Years Ago: Where are My Liberal-Neo-Liberal Technocrats?: Mark Thoma (2011): Where are My Liberal-Neo-Liberal Technocrats?: ‘Brad DeLong’s recent post on ‘Left Neoliberals Like Me’ brings a response from Arin Dube:

Arin Dube: Dude, Where are my Liberal-Neo-Liberal technocrats? …or… Where Paul R. Krugman from 1996 argues against J. Bradford DeLong in 2011 regarding the political economy of policy-making:

Brad DeLong has consistently argued for a ‘reality based’ ‘technocracy’ as the way to address our current economic ailments. As far as I am concerned, if we could replace our current corps of politicians and policy intellectuals with clones of one J. Bradford DeLong today, we would be made better off. Our federal government would borrow money when there is a negative real interest rate, and not discuss the merits of different ways to implement drastic austerity.

However, it goes without saying—and I think Brad would agree—that we do not currently have in power people who can be characterized as ‘reality based’ ‘technocrats.’ This, then, begs the question: what are the foundations of a technocratic vision that has been described also as ‘left neo-liberal’ (LNL) ideology – one which Brad espouses while shunning political-economic explanations based on organized economic interests? What is one’s theory of political economy that explains such a disjuncture, especially at such a crucial time as this?

Brad seems to reject the notion that class, or class-based organizations such as unions, plays an important explanatory role in elucidating why bankers have been given a pass by the Obama administration, while the cost of austerity is not being internalized by decision makers. Brad certainly argues against pushing for increased power of unions as a way forward. He said recently that it is neither ‘workable (n)or advisable’ for ‘Big Labor and Big Celebrity to neutralize and offset their Big Business and Big Fundamentalism, so that then the public interest can bubble up via grassroots democracy.’

Generally speaking, I think Brad’s arguments here lack a coherent political-economic framework – which is surprising given Brad’s interest in history. At the minimum, he should provide a sketch of the political economy he has in mind that involves actively shunning ‘Big Labor’ as a way for the ascendance of ‘reality based’ ‘technocrats.’ (Full disclosure: I do not know what the term ‘Big Celebrity’ means – unless the referent is the set of actors-an example would be William Shattner-who have put on a bit of weight since their heyday. I ignore this term hereafter.)

As an example of some arguments about collective action as it relates to the current period, I list a small subset of arguments made by economists who Brad knows, and that should be taken into account when discussing the political economy of organized economic interest and power:

• Johnson and Kwak who specifically argue the power of the banking sector is a critical force explaining the determinants of our recent economic history.
• Krugman circa 2011 who argues about the power of the rentier class.
• And by the way, what do unions actually do? Well, here’s Richard Freeman on that question in an interview this year. (No contemporary economist has done more work on the economics of labor unions than Richard): ‘Of course, not all unions function well. But our evidence, and the evidence people generated twenty years later, demonstrated that, on net, unions are a positive force in the economy.’

Note: none of the works cited above are by the one whose name we dare not pronounce in front of Brad, but whose initials do involve the letters K and M and who did talk about the political economy of organized economic interests.

But let us leave all of this aside. Instead, let us turn the mike over to one Paul R. Krugman circa 1996 discussing how we as citizens should think about the political economy of supporting various ‘interest groups’ such as unions. I think this is at least as relevant today as it was in 1996:

But unions helped keep us a middle-class society — not only because they forced greater equality within companies, but because they provided a counterweight to the power of wealthy individuals and corporations. The loss of that counterweight is clearly bad for society. The point is that a major force that kept America a more or less unified society went into a tailspin. Our whole society is now well into a similar downward spiral, in which growing inequality creates the political and economic conditions that lead to even more inequality … In particular, we also need to apply strategic thinking to the union movement. Union leaders and liberal intellectuals often don’t like each other very much, and union victories are often of dubious value to the economy. Nonetheless, if you are worried about the cycle of polarization in this country, you should support policies that make unions stronger, and vociferously oppose those that weaken them.

I hereby request that Brad respond to Krugman(1996) regarding the political economy of political change when it comes to supporting specific ‘interest groups’ allied to the Democratic Party also known as labor unions when it comes to policies designed to achieve the common good. Not Karl Marx, or Doug Henwood. Or Henry Farrell. Just Paul R. Krugman.

So questions for Brad:

Do you disagree with Krugman (1996)?

If so, why?

If not, why is Krugman (1996) consistent with your statement:

‘It turns out that what he want is for our Big Labor and Big Celebrity to neutralize and offset their Big Business and Big Fundamentalism, so that then the public interest can bubble up via grassroots democracy. And I really don’t think that is workable or advisable. I don’t think that is the way things work…’

I would note that capital a a whole has done significantly worse under the policies of 2007-2015 than it would have done under more aggressively Keynesian reflation policies. Capital with then have a slightly smaller share of a much bigger pie. It is true that equity finance has done well since 2007–but small business has not, and those holding their wealth in safe savings vehicles have not.”

Must-Read: Daniel Davies muses this morning on the problems of *audience* and *intellectual reach*: who are you writing for, and which potential audience will lead to what you right doing the most good? In the end he comes down at what is, I think, the right place: write the way you have the most fun, because that is the kind of writing you will be best at…

Daniel Davies: The Verjus Manifesto: “You get fewer readers this way, but more of them email you…

…And if you do it right, some of the ones that email you are real professionals–people who you never imagined having a conversation with when you started writing stuff on a website. Rather than sifting through a thousand comments section bores, you attract an audience that is more likely to be sufficiently interested in the subject to make an effort to carry on a conversation, and exponentially more likely to have an interesting point when they do so…. So, that’s my manifesto going forward… It’s not so much an intentional decision to make things complicated and appeal to only some vague notion of a cognitive elite. I’ve always believed, like Ezra [Klein], that anything important can be explained in an interesting fashion to any intelligent layman who’s prepared to apply herself. But it’s a reminder to myself that ‘to thine own self be true’ is the only philosophy of writing that is consistent with long term soul preservation. And that there will be times when following this path means that hardly anyone reads your stuff, and that these times are a great opportunity to make the acquaintance of some top fellers.

Must-Read: I become more and more convinced as time passes that there is a deep design flaw in the human brain. We are much much too eager to turn expectations about how people will behave in normal times into obligations that they are morally bound to fulfill, and then much much too eager doing gauge and altruistic punishment of those who we decide have not fulfilled them…

Cathy O’Neil: Greek Debt and German Banks: “Are you fascinated by the ‘debt as moral weight’ arguments you see being tossed around and viciously debated over in Germany and Greece nowadays?…

…It seems like the moral debate has superseded the economic reality of the situation. Even the IMF has declared the current Greek deal untenable, but that hasn’t seemed to interfere with the actual negotiations…. We should look a mere 7 years ago, at the enormous German bailout of their own banks, which had invested quite recklessly in all sorts of the most risky financial instruments and, most relevantly, Greek bonds…. There are two ways to look at this story from a morality standpoint. One is that… it was a mistake of the Greeks to issue too much debt and to spend it unwisely…. The other way to look at it is that… the very reason Greek bonds had yield was because the market was differentiating it from German bonds. From this point of view it was a mistake of the German bankers…. If we’re looking for who deserves blame in this story, we might want to circle back to the German bankers who couldn’t resist subprime mortgages and Greek bonds back in the early 2000’s.

Daniel Davies: What Would the German Export Sector Look Like?: “DeLong: ‘Just consider what the state of Germany’s export sector would be right now if Germany were not part of the euro, and had the real exchange rate of Switzerland.’

I’ve considered it, and I think the answer is actually ‘more or less the same’. Looking at the actual current account of Switzerland suggests that a Germany which had fixed to CHF wouldn’t have necessarily done any worse…. And the story of the 00s in German exporting (the 90s, of course, were when Germany ran quite sizeable deficits) is one of the bilateral trade between Germany and China. German industry makes ‘the thing that makes the thing that makes the thing’, notoriously, which makes its exports very price-insensitive to a country like China, which has a huge export market for things, which ensures a massive domestic market for thing-making things, and a consequent import demand for thing-making-thing-making things.

The view of Ordoliberalism as being based on US demand as an importer of last resort isn’t by any means wrong, but if the Euro was structurally undervalued because of Greece (and Spain, presumably, a country of 11 million people and €240bn GDP can’t really be moving the value of such a large currency on its own), then why didn’t France benefit? Or Italy until about a year ago?

Everyone wants to find a version of history under which all the problems of the Eurozone are Germany’s fault, because everyone knows that all the solutions involve Germany paying. But it’s not really true; Germany spent the early years of ERM/EMU paying far more than anyone else was prepared to in order to smooth the adjustment path for the former Communist states.

And after fifty years of structuring everything in Europe to prevent German hegemony, is it really a big surprise that Germany isn’t well set up to act as a hegemon? Imagine if the USA had lost the war in the Pacific and was today being blamed for its failure to ensure the economic development of the Phillippines.

Robert Waldmann: Daniel Davies and Brad DeLong Debate Deutschland: “As usual, the posts to which I link are more interesting than this post…

…Brad DeLong discusses German economics and totally fairly uses Kevin Baker’s excellent explanation of the origins and nature of Ordoliberalism (please click the link to Baker’s post). Davies discusses one vigorous striking sentence in Brad’s post: “Just consider what the state of Germany’s export sector would be right now if Germany were not part of the euro, and had the real exchange rate of Switzerland.”

Davies writes: “I’ve considered it, and I think the answer is actually ‘more or less the same’…. The story of the 00s in German exporting (the 90s, of course, were when Germany ran quite sizeable deficits) is one of the bilateral trade between Germany and China. German industry makes ‘the thing that makes the thing that makes the thing’, notoriously, which makes its exports very price-insensitive to a country like China, which has a huge export market for things, which ensures a massive domestic market for thing-making things, and a consequent import demand for thing-making-thing-making things.”

The ‘any’ in ‘wouldn’t have necessarily done any worse worse’ is clearly rhetorical hyperbole. Davies convinces me that Brad’s focus on the export sector was unfortunate. I would ask what the state of Germany’s current account would be. Even if German exports were totally price insensitive, Germany can import more. If Germans had spent the money they get from China on Mediterranean goods and services rather than lending it to Mediterraneans, things would be different.

Germany was very good at making things which make things which make things back in the 90s when they had a current account deficit…. Germany’s strength in this sector doesn’t make total German exports insensitive to real exchange rates and has no effect on imports–it is a statement about the level of exports, not the slope of net exports/GDP as a function of exchange rates….

The Eurozone has two huge problems. One is that Greece has debts it can’t and won’t repay. The other is that aggregate demand is too low. One perfectly fine solution to the aggregate demand problem would be for Germany taxpayers to grit their teeth and accept a tax cut…. If Germans were feeling incredibly generous, they might also consider accepting an increase in wages…. What we need is less German self sacrifice not more…. On Greek debt, Germany isn’t the only Euroblock country which won’t get its money back, and they won’t get their money back no matter what (even with flows discounted at an interest rate far below market rates). The debate on debt is over how long the Troika should extend and pretend and how much Greeks should be punished and humiliated.

Finally I think that, while the DeLong Davies debate is brilliant, it is tainted by mixing economics and moralism. German’s huge contributions to smooth the adjustment path for former Communist states were very admirable, but they are not affect the currently optimal German budget deficit.

Must- and Should-Reads:

• Must-Read: Paul Krugman: The Essential Obstfeld
• Christine Lagarde: Press Release: Appoints Maurice Obstfeld as Economic Counsellor and Director of the IMF’s Research Department
• Maurice Obstfeld: Models of currency crises with self-fulfilling features
• Maurice Obstfeld and Kenneth Rogoff: Exchange Rate Dynamics Redux
• Must-Read: Ezra Klein: “It will be normal…
• Must-Read: Henry Farrell: A Brief Theory of Very Serious People
• Paul Blustein: Laid Low: The IMF, the eurozone, and the First Rescue of Greece
• Must-Read: Tim Duy: The Fed Is Closer to Hitting Its Inflation Target Than People Think
• Must-Read: Sutirtha Bagchia and Jan Svejnarb: Does wealth inequality matter for growth? The effect of billionaire wealth, income distribution, and poverty
• Must-Read: Nick Rowe: “Suppose the Bank of Canada targets 2% inflation…
• Must-Read: Brink Lindsey: Low-Hanging Fruit Guarded by Dragons: Reforming Regressive Regulation to Boost U.S. Economic Growth
• Matthew Yglesias: Robots Aren’t Taking Your Jobs–and That’s the Problem
• Dean Baker: Why the Fed’s policy on interest rates is key to fighting poverty
• Must-Read: Nick Bunker: Compensation Inequality and Productivity Growth

Might Like to Be Aware of:

• By the Bonny Bonny Banks of Loch Lomond: Ken MacLeod: Scotland after Socialism
• Manu Saadia: Ted Cruz is right. Captain Kirk is a Republican
• Noreen Malone andAmanda Demme: 35 Bill Cosby Accusers Tell Their Stories