Must-Read: : The Situation in Greece: “The truly baffling thing is the Eurogroup’s unwillingness to give a better deal…
…to former Prime Minister Samaras back before the election…. Outside of the coalition you had the Communists, you had Golden Dawn, and you had Syriza. So either the EU was going to have to make Samaras look like a success, or else they were going to have to deal with Syriza, or else they were going to have to deal with something worse…
Must-Read: : His Latest John Cochrane smackdown: Free-Market Ideology and the Burden of Proof: “John writes: ‘My surprise in reading Noah is that he provided no alternative numbers…
…If you don’t think Free Market Nirvana will have 4% growth, at least for a decade as we remove all the level inefficiencies, how much do you think it will produce, and how solid is that evidence?…
I don’t really feel I need to produce an alternative to a number that was made up as a political talking point. Why 4 percent? Why not 5? Why not 8? Why not 782 percent? Where do we get the number for how good we can expect Free Market Nirvana to be? Is it from the sum of point estimates from a bunch of different meta-analyses of research on various free-market policies? No. It was something Jeb Bush tossed out in a conference call because it was “a nice round number”, after James Glassman had suggested “3 or 3.5”. You want me to give you an alternative number, using the same rigorous methodology? Sure, how about 3.1. Wait, no. 3.3. There we go. 3.3 sounds good. Rolls off the tongue.
Must-Read: : The 2001 Recession Actually Was Really Bad News: “I see that I have to disagree with Brad DeLong again…
…Brad wants to see the 2008 downturn as a uniquely bad event due to the overextension of credit and the ensuing financial collapse. I see it as overwhelmingly a story of a burst housing bubble and the resulting fallout in the real sector…. The collapse in the U.S. may have happened first and triggered the collapse in other countries, but this would only be in the sense that the U.S. collapse might have alerted lenders to the possibility that house prices can fall. Presumably the bankers would have discovered this basic economic fact at some point regardless of what happened in the United States. If we recognize that the collapse in Europe and elsewhere had its own dynamic, then we take away some of the drama from Brad’s story of a small bubble causing a massive downturn. But I want to take away some more. First, the bubble was much larger than Brad implies. Second, we have seen this story before, specifically in 2001….
My take-away is to be wary of situations in which a bubble is driving the economy. This was easy to see in the late 1990s, as consumption soared and spending by dot.nonsense pushed investment to its highest share of GDP in two decades. It was also easy to see in the housing bubble years. It is a good idea to crack down on nonsense promulgated by the financial sector, but the basic story really is a simple one. When an asset bubble is causing large and unusual spending patterns, you’ve got a problem.
I would (and do) say: yes, you have a problem. You need to rebalance, but competent policymakers can balance the economy up, near full employment, rather than balancing the economy down. And from late 2005 to the end of 2007 the balancing-up process was put in motion and, in fact, 3/4 accomplished.
There is no reason why moving three million workers from pounding nails in Nevada and support occupations to making exports, building infrastructure, and serving as home-health aides and barefoot doctors needs to be associated with a lost decade and, apparently, permanently reduced employment. A lower value of the currency can boost exports. Loan guarantees and burden-sharing can get state governments into the infrastructure business. A surtax on the rich can employ a lot of home health aides and barefoot doctors. If these roads were foreclosed, they were foreclosed by the laws of American politics, not the laws of economics.
And the lack of successful and rapid rebalancing–the weak post-2001 recovery–was also, overwhelmingly, a matter of choice: to use tax cuts rather than infrastructure and other social capital-building forms of spending on the government side, and to direct the dollar earnings of foreigners selling us imports into funding house construction rather than buying exports on the private-spending side.
Must- and Should-Reads:
Over at Equitable Growth—The Equitablog
And Over Here:
Might Like to Be Aware of:
(1998): Europe’s Fateful Union: “In just a bit over nine months, the euro will be born…
…and the next stage in the process of European economic and monetary union (EMU) will begin. Of the fifteen countries that make up the European Union (EU), eleven (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain) will begin a three-year process of dissolving their national currencies into a single continental one. Three (Denmark, Sweden, and the UK) are holding off on this step, and one (Greece) just wasn’t tough enough to make the cut this time around.
READ MOAR
: The Fed Is Going to Be Wrong When It Eventually Raises Rates: “What we do know is that inflation is still below target…
…and what we also know from the experience of the last eight years is that it is really really hard to get an economy going if interest rates are at zero and you’ve shot your bolt on that…. If the Fed waits too long to raise rates, then we get a little bit of inflation. If the Fed raises rates too soon, we risk getting caught in another lost decade. So the risks are hugely asymmetric. I really find it quite mysterious that the Fed is eager to raise rates given that, they’re going to be wrong one way or the other, we just don’t know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other.
It is a commonplace among Anglo-Saxon economists that Saxon-Saxon “ordoliberalism” was a post-World War II success only because somebody else–the United States–was both looking after the level of demand in the system as a whole, and also willing to act as an importer of last resort to allow other countries that had insufficient domestic demand to use the United States consumer to rebalance their individual economies at full employment even when domestic demand was grossly insufficient.
And it is a commonplace among Anglo-Saxon economists that the formation of the euro was the German establishment’s most recent move in this game. The point of the euro as a currency union was, to put it in a nutshell, to give Greece the interest rates of Germany and Germany the exchange rate of Greece. With the debt capacity of Germany behind it after it joined the euro, Greek firms and the Greek government would be able to borrow at interest rates previously available only to those in northern Europe, and so Greece would be able to invest, industrialize, develop and grow. But, also, the replacement of the DM by a Greece, Italy, and Spain-including euro would provide Germany with a substantial real devaluation, and allow its manufacturing export powerhouse sector to flourish even more.
It is still unclear to me whether Greece would have needed a bailout in the event that the George W. Bush administration and the Bernanke Federal Reserve had been smart enough to preemptively put Wall Street’s universal banks into receivership at the end of the 2007, and so prevented the collapse of 2008-2009. My back-of-the-envelope calculations suggest that Greece’s private and government debt levels would then have been very sustainable. But maybe not: what the value of the assets underlying those private debts and what the value of the Greek government’s taxing capacity would have been had Europe not fallen into what will soon be called the Greater Depression is not clear to me. But in the world as it is, Greece’s ability to borrow at German interest rates was a trap. Greece has gained nothing out of joining the euro. And it has gotten a Greatest Depression out of it by giving up its ability to adjust via exchange-rate depreciation.
Germany, by contrast, has benefitted enormously from the euro. 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.
And now, as in the 1960s and 1980s, the German ordoliberals attribute all of their prosperity to their virtue–and none of it to the fact that they have a fundamental disequilibrium in the form of an undervalued currency that drives an enormous export surplus.
: Why German Economic Thought Made the Greek Crisis Inevitable:
Yesterday, after months of negotiations, Greece’s Syriza government relented to the demands of its creditors and offered a set of ‘reforms’ in exchange for continued loans. This reform package, which essentially matches the content of the draft plan Greek voters voted down on Sunday’s referendum, will force the country to slash pensions, make further budget cuts, and adopt a series of regulatory changes designed to make the Greek economy more ‘competitive.’
In the lead up to Sunday’s referendum, many observers hoped that a decisive vote against the proposed measures would force the Troika—Greece’s creditor institutions, the European Commission, European Central Bank, and International Monetary Fund—to compromise their hardline stance in favor of continued austerity. The IMF’s announcement last week that Greece would need an additional €60 billion in debt relief and 20-year grace period on debt repayments seemed to add credence to this optimistic assessment. The US Treasury Secretary Jack Lew, fearing the fallout of a potential Grexit, urged the Eurogroup to come to a ‘pragmatic compromise’ on Greece.
But after Sunday’s decisive no vote, Greece’s creditors, led by Germany Chancellor Angela Merkel, were unflinching. Even Sigmar Gabriel, the chairman of the center-left Social Democratic Party of Germany (SPD), who had previously pushed Merkel to adopt a less hardline approach to Greece, has accused Tsipras of pulling down ‘the last bridges over which Europe and Greece could have moved to a compromise.‘
Despite being a party of the far left, Syriza’s official position—that in a time of recession, governments should engage in countercyclical deficit spending—is a fairly conventional Keynesian view. Indeed, in the wake of the 2008 financial crisis, Keynesian stimulus programs were launched in the United States, under George W. Bush and Barack Obama, the UK under the center-left government of Gordon Brown, in France under the center-right administration of Nicolas Sarkozy, and many other countries. So complete was the return to a Keynesian orthodoxy that the (neoclassical) Nobel Memorial Prize winning-economist Robert Lucas famously uttered in 2009, ‘I guess everyone’s a Keynesian in the foxhole.’
Not the Germans. In late 2008, Peer Steinbrück, an SPD member, and Germany’s then-finance minister, denounced Gordon Brown’s stimulus package, saying ‘the switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking.’ Early the next year, under the watch of Steinbrück, Germany launched its own €50 billion stimulus package, amidst much ‘wailing and gnashing of teeth’ in the Bundestag.[1] But this brief encounter with Keynesian fiscal policy was an aberration. Throughout the financial crisis and subsequent Euro crisis—and in fact throughout much of it postwar history—Germany has been obsessively focused on fiscal restraint, lest it lead to inflation.
On the surface, it seems puzzling that Germany should be so united behind calls for continued austerity in Greece and against the more moderate Keynesian proposals recommended by France, the United States, and even the IMF. Germany, after all, is a social democracy with a comparatively robust social welfare system, and these are characteristics normally associated with Keynesian macroeconomic policies. But this isn’t the case in Germany. In fact, aside from a brief period in the late 1960s and early 1970s, Keynesian ideas have never had much traction in Germany, even on the political left. The reasons for this are deeply rooted in Germany’s economic history. This history and the ideology it helped to spawn have shaped the European Union’s economic institutions, and continue to guide Germany’s response to the Greek crisis.
The Peculiarities of German Economic History
In June 1990, Hans Tietmeyer, who was the President of the Deutsche Bundesbank during Germany’s adoption of the Euro, spoke to an audience at the IMF about the reasons for the success of German monetary policy and the strength and independence of Germany’s central bank. The reasons, he argued, were partly historical. ‘The experience gained twice with hyperinflation in the first half of this century,’ he claimed, ‘has helped to develop a special sensitivity to inflation and has caused the wider public to believe in the critical importance of monetary stability in Germany.’[2] This peculiar historical experience, Tietmeyer believed, explained the unusually low inflation rates of the Deutschmark in the postwar period. ‘In light of the success of the Bundesbank,’ he argued, ‘it is only natural that the German public will expect any successor, which could take its place at the European level, should be at least as well equipped as the Bundesbank to defend price stability.’[3]
The Maastricht Treaty, which established the European Union and created the common currency, fulfilled these German expectations. The Maastricht convergence criteria, which determined whether or not EU member states would be allowed to join the Euro, focused heavily on controlling inflation and maintaining a low government budget deficit and debt-to-GDP ratio. Further, the European Central Bank (ECB), which was established in 1998 and manages the monetary policy of the Eurozone, has a single mandate: to maintain price stability. The monetary and fiscal assumptions of Germans have served as the guiding norms of the monetary union since the very beginning: acceptance into the Eurozone would depend on fiscal discipline and the ECB, unlike, for example, the US Federal Reserve which (ostensibly) has a dual mandate to fight unemployment and inflation, the ECB would only be concerned with fighting inflation.
But the experience of hyperinflation doesn’t seem sufficient to explain the single-mindedness with which Germany has approached the Euro crisis. After all, as many have noted, Hungary and Austria also had their own domestic experience with hyperinflation in the interwar period, and Greece’s hyperinflation of 1943-1944 was much more recent than Germany’s, but did not leave the same imprint in national policy. And this historical experience definitely doesn’t explain the severe and often punitive conditions and interest rates on loans to Greece that Germany has insisted on. To understand this, we have to look at the immediate postwar period.
Crowding Out Keynes
After the Second World War and the Great Depression, laissez-faire economics and the notion of an efficient, self-regulating market were on the ropes. In the United States and much of Europe public intellectuals and scholars declared unregulated capitalism obsolete. Some argued that market principles had been useful in the nineteenth century, but that large, complicated twentieth century societies required economic management and planning.[4] Fearful libertarian commentators like Friedrich Hayek, who had spent much of the twenties and thirties suggesting that economic planning was impossible, argued that attempts to manage the economy represented a slippery slope to tyranny and ‘serfdom.’ But, until the 1970s, these perspectives had only limited influence in the English-speaking world. Demand-side, managerial policies seemed triumphant. In the United States, the UK, and much of Western Europe, Keynesian macroeconomic policy held sway, and, through the Bretton Woods institutions, set the guiding norms and assumptions for the international economic order.
In Germany, though, Keynesianism never really took hold. During the years of the so-called Wirtschaftswunder, or ‘economic miracle’ of the postwar years, West Germany only occasionally employed Keynesian policies. Indeed, the only real period of Keynesian influence in the economy was during the Grand Coalition government (1966-1969) and during the early years of Willy Brandt’s government (1969-1974). According to the political scientist Christopher S. Allen, ‘Keynesianism in Germany was effectively preempted by another set of policies, oriented toward the supply side and the social market economy, that was progressively reinforced—both institutionally and ideologically—over succeeding stages in the postwar period.’[5]
This other policy framework—the so-called ‘ordoliberal’ or Freiburg school of economics—took a different lesson from the history of twentieth-century capitalism. The theory was developed by postwar West German economists like Walter Eucken, Franz Böhm, Leonhard Miksch, and Hans Großmann-Doerth as a response to the unregulated markets of the early twentieth century and to the interventionism of the Nazi regime.[6] Like their cousins in the libertarian Austrian school of economics, early ordoliberals feared economic planning and most kinds of government intervention in the economy, which they linked to the tyranny of Nazi economic planning as well as the centralized planning of the allied occupational authorities. But they also took from the interwar Weimar-era an abiding fear of hyperinflation, a concern about the dislocative effects of proletarianization, and a fear of haphazard economic experimentation.
Combined, all of this created a climate in Germany, which was receptive to a strong state and a comparatively extensive system of social provision, paired with extreme skepticism toward any macroeconomic policy, which could potentially be seen as inflationary.
The German Ideology
So what is ordoliberalism? In his book Austerity, the History of a Dangerous Idea, Mark Blyth refers to ordoliberalism as the German twin of neoliberalism.[7] This is true, but the two are fraternal, not identical twins, as they differ in fundamental ways. Unlike for classical liberals in the Anglo-Saxon tradition, for ordoliberals the state is not an impediment to the efficient functioning of markets; for them strong government regulation is a necessary prerequisite for competitive market activity. And unlike in the Austrian or Chicago variants of neoliberal thinking, a strong state is seen as necessary to produce the moral, legal, and social frameworks (the Ordnung) essential for the functioning of markets.
These state-initiated rules were intended to approximate as closely as possible the functioning of a perfectly competitive market. Consequently, ordoliberals place an outsized emphasis on preventing the establishment of cartels and monopolies. By preventing the formation of powerful economic agents which can influence the prices of goods and services, the state can create a situation approximating a state of perfect competition, which will drive economic development without government stimulus or non-regulatory intervention. By controlling the size and power of economic agents, and by encouraging the formation of a strong state, ordoliberals hoped to prevent a situation of regulatory capture, thus protecting the market from subversion by powerful economic actors.
Perhaps unsurprisingly for a philosophical tradition from Germany, a famously rule-obsessed country, the need for a robust system of rules runs throughout the ordoliberal project. For them, economic rules are seen as constitutional, as an inviolable part of the fabric of society. For people in the ordoliberal tradition, as the legal scholar David Gerber put it, any action ‘which does not conform to constitutional economic principles should be overturned by the courts…just as if it had violated the political constitution.’[8] In effect, ordoliberalism ‘constitutionalizes’ the economy and embeds it in a broader normative framework. Consequently, when the former Italian Prime Minister Mario Monti famously said that for Germans ‘economics is a branch of moral philosophy,’ he was on to something. Liberal economic thought in the British tradition often frames the economy as something autonomous from moral and social life. Ordoliberals see economics, law, and social norms as fundamentally linked.
In a sense, they reflect a Polanyian urge to embed the market into society, to adapt it to suit the moral beliefs of a people. This desire for morally embedded market explains their acceptance of the ‘social’ component of Germany’s social market. But on the other hand, ordoliberals seek to adapt social norms and institutions to suit the needs of a competitive market. For ordoliberals, this is a product of human design, as the early ordoliberal Walter Eucken notes:
This problem will not solve itself simply by our letting economic systems grow up spontaneously. The history of the last century has shown this plainly enough. The economic system has to be consciously shaped. The detailed problems of economic policy, trade policy, credit, monopoly, or tax policy, or of company or bankruptcy law, are part of the great problem of how the whole economy, national and international, and its rules, are to be shaped.[9]
But beyond the mere construction of rules and institutions, ordoliberalism also calls for a reengineering of the social framework in which markets are embedded. This requires, as Gerber puts it in his sympathetic account, ‘a broadening and deepening of economic knowledge throughout society.’[10] For thinkers in this tradition, the social logic of ordoliberalism needs to be broadly defused and continuously maintained by an uncompromising enforcement of economic rules. This means that the state needs to protect against the subversion of the economic constitution by powerful firms, but also against democratic demands.
Discipline and Punish
This mentality goes some way towards explaining the German reaction to the Euro crisis and the demands it has forced upon Greece. Ordoliberal ideas undergird the competitive ‘reforms’ that Greece will have to undergo as well as the continued budget cuts. It also explains the punitive terms Germans have attached to Greek loans and the uncompromising stance with which they’ve approached negotiations. By violating the rules of the ‘economic constitution,’ the Greeks risk not only generating ‘moral hazard,’ but they, in German eyes, also challenge the logic on which the common currency rests. If, as an ordoliberal sees it, rules are the foundation on which an economy rests, any failure to enforce the rules puts the whole system into a state of jeopardy. In a market based on ordoliberal principles, Greece has been forced to choose one of two unappealing options: an ordoliberal diet of austerity, budget cuts, and continued economic hardship or Grexit.
Kevin T. Baker is a Ph.D. candidate in History and Science Studies at Northwestern University. His research focuses on the influence computer science and systems thinking has had on economic and ecological thought. He has written about East German attempts to reform their economy along cybernetic principles and on an American project to create a simulation model of Nigeria’s economy in the 1970s. His dissertation looks at the global simulation modeling and the historical legacy of the Club of Rome’s Limits to Growth report.
Notes
[1] Silvia, Stephen J. ‘Why do German and US Reactions to the Financial Crisis differ?’ German Politics and Society 29, no. 4 (2011): 68-77. p. 72
[2] Tietmeyer, Hans. ‘The role of an independent central bank in Europe.’ The Evolving Role of Central Banks, IMF, Washington (1991): 176-89. p. 182
[3] Tietmeyer, 183
[4] Immerwahr, Daniel. ‘Polanyi in the United States: Peter Drucker, Karl Polanyi, and the Midcentury Critique of Economic Society.’ Journal of the History of Ideas 70, no. 3 (2009): 445-466.
[5] Allen, Christopher S. ‘The underdevelopment of Keynesianism in the Federal Republic of Germany.’ The Political Power of Economic Ideas: Keynesianism Across Nations (1989): 263-290. p.264
[6] Dullien, Sebastian, and Ulrike Guérot. ‘The long shadow of ordoliberalism: Germany’s approach to the euro crisis.’ European Council on Foreign Relations Policy Brief 22 (2012).
[7] Blyth, Mark. Austerity: the History of a Dangerous Idea. Oxford University Press, 2013.
[8] Gerber, David J. 1994. ‘Constitutionalizing the Economy: German Neo-liberalism, Competition Law and the ‘New’ Europe’. American Journal of Comparative Law. 42 (1): 25-84. p. 76-77
[9] Eucken, Walter. The Foundations of Economics: History and Theory in the Analysis of Economic Reality. Springer Science & Business Media, 2012. p.314
[10] Gerber, 76″
Must-Read: : Greece and Europe: Is Europe holding up its end of the bargain?: “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…. The failure of European economic policy has two, closely related, aspects: (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 United States is 5.3 percent, while the unemployment rate in the euro zone is more than 11 percent. Not incidentally, a very large share of euro area unemployment consists of younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe’s longer-term growth potential….
The promise of the euro was both to increase prosperity and to foster closer European integration. But current economic conditions are hardly building public confidence in European economic policymakers or providing an environment conducive to fiscal stabilization and economic reform; and European solidarity will not flower under a system which produces such disparate outcomes among countries….
Nobody is suggesting that the well-known efficiency and quality of German production are anything other than good things, or that German firms should not strive to compete in export markets. What is a problem, however, is that Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home, as shown in its extraordinarily large and persistent trade surplus… [which] puts all the burden of adjustment on countries with trade deficits, who must undergo painful deflation of wages and other costs to become more competitive….
I’ll end with 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 (either surpluses or deficits), which, in a fixed-exchange-rate system like the euro zone, impose significant costs and risks…
Must-Read: : The Non-Independent ECB: “The real explanation for the ECB’s actions is much simpler…
…Limiting funding on 28th June was the Greek government’s punishment for failing to agree to the Troika’s terms and calling a referendum the day before. The ECB was not, and never has been, a neutral actor just following the rules of a good central bank. It has always been part of the Troika, and right now it is the Troika’s enforcer…. This is not the first time the ECB has chosen to bow to political pressure…. Just as I do not think it was inevitable that the Eurozone committed itself to austerity, I also think it was possible that the ECB could have been a more independent central bank. The really interesting question is why it has turned out not to be such a bank.
Must-Read: : Systemic Risk: A New Trade-off for Monetary Policy?: “We introduce time-varying systemic risk in an otherwise standard New-Keynesian model…
…to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.