Category: Equitablog

Must-Read: Tim Worstall: Whatever Is Happening To Greece, It’s Simply Not Neoliberalism: “So, back to our misguided character [Patrick L. Smith] in Salon…

…When I look at the E.U. now I marvel at the power of neoliberal ideology.

Just because you don’t like what’s going on doesn’t make it all neoliberalism matey. The neoliberals of both flavours, Anglo and American, have been screaming that the entire euro system is in error all along. The phrase you’re actually looking for to describe monetary and fiscal policy within the eurozone is [von Mises-Schumpeter-Hayek] ‘ordomonetarism’… people still stuck on the… gold standard… nothing neo- let alone -liberal about any of them. They’ve not even managed to catch up with the marginalist revolution of the 1880s, let alone Keynes and the reworking of monetarism as a result of the failures of the Federal Reserve in the 1930s. What’s happening in Greece is a tragedy, no doubt about it, and a tragedy that could easily have been avoided…. There’s blame aplenty to throw around here but don’t start pointing it my way: nor at Friedman, Krugman, or the myriad of other respected economists who insisted that this would all end in tears, in very much the manner that it has…. “Neoliberalism” does actually have a meaning over and above “all those things you disapprove of”. Markets work, technocracy not so much. And the Greek and eurozone failure is a denial of markets and an affirmation of the incompetence of technocrats. The neoliberals have actually been right all along here.

Must-Read: Citing Marc Weisbrot, Paul Krugman argues that the very sharp Carmen Reinhart’s fears of the damaging consequences of a rapid Greek exit from the eurozone are overblown:

Paul Krugman: Argentine Lessons For Greece: “Carmen Reinhart tells us… we should expect very bad things…

…And maybe we should. But her data analysis here is, I think, misleading…. Carmen looks at annual averages, and finds that in 2002 Argentine real GDP per capita was 8.2 percent lower than in 2001… suggest[ing] that the end of convertibility delivered a terrible blow to the economy. But as Mark Weisbrot has been saying… Argentina’s economy was in free fall over the course of 2001… thanks in large part to banking collapse and public panic (sound familiar?). But the free fall ended quite soon after the peso was devalued…. On a quarterly basis, GDP was rising by mid-2002, and the economy was growing rapidly by 2003…. That big decline from 2001 to 2002 is mainly telling us about the effects of the pre-devaluation panic, not the effects of devaluation itself…. You can’t use Argentina as a reason to fear Grexit at this point, given that once again the financial panic has already happened.

**Must-Read: It does seem obvious that an unaccountable government is certain to be bad for those excluded from the franchise–those outside the political nation. But in the case of the American South we have more: A government that has been unaccountable to some–Blacks, poor whites whose grandfathers did not themselves vote–has been bad for nearly all. Thus Yglesias’s take is much too simple…

Matthew Yglesias: What about the South?: “I would have an easier time trusting American conservatives…

…if they had a clearer theory for why the US South is so poor and… fares very badly in public health and other non-economic indicators…. It’s not… just… right-of-center… but the meta-political context in which those policies are made. The over-arching theme of Southern political economy throughout American history has been massive resistance to the principle of widespread participation in democracy… [that] continues to be the case to the present day that voting access is at its worst in the south. The disenfranchisors tell themselves that the people they are stopping from voting are ‘dumb’ or ‘lazy’ or have ‘bad ideas’ and that excluding them is improving policy outcomes. But the reality is that democratically-accountable government is a good idea, and the US South’s longtime obsession with trying to avoid it leaves the region in a backwards state.

Must-Read: Given the extraordinary number of potentially macro economically significant market failures for which there is evidence–both casual-observational and statistical–why would anyone ever have imagined that taking the representative-agent Ramsey model and adding one (or two, or three) frictions would not produce a degenerate research program?

Robert Solow: On the Irrelevance of the Ramsey Model: “Research focuses on the implications of wage and price stickiness, gaps and…

…asymmetries of information, long-term contracts, imperfect competition, search, bargaining and other forms of strategic behavior, and so on…. This diversity only intensifies my uncomfortable feeling that something is being put over on us, by ourselves. Why do so many of those research papers begin with a bow to the Ramsey model and cling to the basic outline?… Attaching a realistic or behavioral deviation to the Ramsey model does not confer microfoundational legitimacy on the combination. Quite the contrary: a story loses legitimacy and credibility when it is spliced to a simple, extreme, and on the face of it, irrelevant special case…. It could… be true that the bow to the Ramsey model is… a harmless way of providing some apparent intellectual unity…. That seems hardly worthy of grown-ups, especially because there is always a danger that some of the in-group come to believe the slogans, and it distorts their work…. The theory is neat, learnable, not terribly difficult, but just technical enough to feel like ‘science.’

Consider Olivier Blanchard and Daniel Leigh: Growth Forecast Errors and Fiscal Multipliers:

This strongly suggests to me that of the 7%-points by which Greek growth fell below IMF estimates in 2010-2011, 5%-points of that were due to the fiscal consolidation that the IMF had forecast would be imposed on Greece. Consider that the IMF had already expected the Greek economy under baseline to shrink by 4%-points, and for fiscal consolidation to shrink the Greek economy by 3%-points, and we have 8/14 of the damage to the Greek economy relative to a counterfactual forecast under some zero-spending-austerity baseline was due to austerity.

I find this hard to square with the very-sharp Olivier Blanchard’s contribution of today:

Olivier Blanchard: Greece: Past Critiques and the Path Forward: “The decrease in output was indeed much larger than had been forecast…

…Multipliers were larger than initially assumed.  But fiscal consolidation explains only a fraction of the output decline.  Output above potential to start, political crises, inconsistent policies, insufficient reforms, Grexit fears, low business confidence, weak banks, all contributed to the outcome…

That is, this statement seems to me to be true if and only if “only a fraction” is replaced by “more than half”.

Let us back up: In 1829 economist John Stuart Mill pointed out that “Say’s Law”–Jean-Baptiste Say’s claim that potential supply in the form of workers eager to work at the prevailing wage necessarily called forth the demand in the form of the desire to spend backed up by income to employ them, that there could be an excess supply of some currently-produced goods and services only if there was an offsetting excess demand for others–was wrong. In a monetary economy there can–and often is–be a large excess demand for safe liquid cash money that can only be produced by a credit-worthy government, and a counterbalancing excess supply of all currently-produced goods and services: a “general glut” of commodities.

It is the job of a government conducting stabilization policy–and of an international agency located, cough, cough, near Pennsylvania Avenue in Washington DC–to make Say’s Law true in practice even though it is false in theory. How are governments and international agencies supposed to do this? By creating the safe liquid cash money that the private sector wants to hold in order to induce it to spend its full-employment income on currently-produced goods and services, and to fill in remaining gaps by itself serving as a liquidity-provider, a credit-guarantor, a lender, a buyer, and an employer of last resort when necessary.

In the case of Greece in 2009-2010 the New York financial crisis meant that spending in Greece by the private sector was going to go way down. The three components of aggregate demand for work done in Greece were: (i) private spending in Greece; (ii) public spending in Greece; (iii) exports. It was the job of the ECB and of the Greek government–and of the EU and the IMF that stood behind them–to do some combination of:

1. making Greeks feel rich and safe so that they would be willing to spend their full-employment incomes on useful consumption and productive capital goods;
2. filling in holes in private domestic demand by boosting public spending; plus
3. boosting Greek exports–boosting outside demand for work done in Greece.

Now comes Olivier Blanchard to say that since 2009 the ECB, the EU, and the IMF:

• couldn’t do (3) because the Greek drachma is pegged irrevocably to the German deutschmark, and
• couldn’t help the Greek government do (2) because Greek government finances were already unsustainable.

That would seem to leave (1). To some extent, you can achieve (1) by lowering interest rates and promising to keep them low enough for long enough to make more investment projects in Greece profitable, and to make the Greeks feel richer and thus be more eager to spend. And some, like Ben Bernanke, think that this is–or ought–to be enough:

Ben Bernanke: Why are interest rates so low, part 2: “As Larry [Summers]’s uncle Paul Samuelson taught me…

…in graduate school at MIT… at a negative (or even zero) interest rate, it would pay to level the Rocky Mountains to save even the small amount of fuel expended by trains and cars that currently must climb steep grades…

But the ECB appears to be unwilling or unable to pursue (1) a la Bernanke to the limit…

And that then leaves the Texas 1991 solution:

Paul Krugman: What A Real External Bank Bailout Looks Like: “Texas after the savings and loan crisis of the 1980s…

…The cleanup from that crisis cost [U.S.] taxpayers about $125 billion… around 60 percent… in Texas (pdf)… $75 billion in… outright transfer. Texas [annual] GDP was about $300 billion in 1987… giving… [it] 25 percent of its [annual] GDP… And in the US it wasn’t even treated as an interstate political issue…. If Texas had been an independent country in 1986-87 it would have experienced a huge financial and fiscal crisis…

Why was the United States government willing to do this? Because Texas is part of the United States, and also part of our civilization. Indeed, the “part of the United States” is not crucial to the expenditure of the resources of U.S. taxpayers, as everybody who remembers the Marshall Plan–or, indeed, remembers the much larger amount of resources spent on destroying a Nazi Germany that was not in any sense an imminent threat to the U.S. in the 1940s–knows.

There is no fundamental real flaw in the real economy that is our societal division of labor and our system of production, distribution, and consumption that requires that a quarter of Greeks eager to work at the prevailing wage be unemployed for a decade. It is only a flaw in the monetary system we have collectively constructed to help manage this real economy that is trying to enforce that result. And if one rules out other ways–cough, cough, devaluation–and finds that the only way to avoid that result is by truly massive fiscal transfers to Greece, than it is the obligation and duty of the ECB, the EU, and the IMF to make such transfers. As the U.S. government did to Texas in 1991.

“But that will leave the Greeks too rich and the Germans too poor!” the masters of the Eurozone say:

Jared Bernstein: Greece’s Electorate Punches Back Hard at Austerity: “As one German economist put it to me…

How do you think the people of Manhattan would like bailing out Texas?…

And the German government has the power to block fiscal transfers–even if they are the only remaining way to make Say’s Law true in practice–if it thinks they make Germans and Germany too poor.

And it is at this point that I note that at the left edge of my desk I have the brand-new biography A Complex Fate of mid-century American journalist William Shirer, and beneath it is William Shirer’s masterwork: The Rise and Fall of the Third Reich. And in that bottom-most book, there is a quote from one Hans Frank:

A thousand years shall pass and the guilt of Germany will not be erased…

Until 2934, every politician speaking for anything calling itself “Germany” needs to believe that they are in an open-hearted and open-handed gift-exchange relationship with all the other peoples of Europe in which they do not count the cost and do not stint their share if they can be of assistance. And if the politicians of anything calling itself “Germany” do not believe that, they need to at least have the decency to pretend to believe that. Until 2934.

Must-Read: Paul Krugman: Policy Lessons From The Eurodebacle: “Greece I tell you. What we learn… is that fiscal austerity plus hard money is a deeply toxic mix…

…For comparison, look at everyone’s favorite example of successful austerity, Canada in the 1990s… gross debt of roughly 100 percent of GDP… a pretty big fiscal adjustment–6 percent of GDP according to the IMF’s measure of the structural balance, which is about a third of what Greece has done…But unemployment fell steadily. What was Canada’s secret?… Easy money and a large currency depreciation…. So, how does this play into U.S. policy debates?… The policy mix that is now de facto GOP orthodoxy: sharp cuts in government spending (maybe offset by tax cuts for the rich, but these won’t provide much stimulus), combined with a monetary policy obsessed with fears of dollar ‘debasement’. That is, the conservative side of the US political spectrum, while holding up Greece as a cautionary tale, is actually demanding that we emulate the policy mix that turned Greek debt into a complete disaster.

Must-Read: Robert Pindyck: The Use and Misuse of Models for Climate Policy: “Integrated assessment models (IAMs) have flaws that make them close to useless…

…as tools for policy analysis… create a perception of knowledge and precision that is illusory, and can fool policy-makers into thinking that the forecasts the models generate have some kind of scientific legitimacy…. A simpler and more transparent approach to the design of climate change policy is preferable…. What really matters for the SCC is the likelihood and possible impact of a catastrophic climate outcome: a much larger-than-expected temperature increase and/or a much larger-than-expected reduction in GDP caused by even a moderate temperature increase. IAMs, however, simply cannot account for catastrophic outcomes. Unless we are ready to accept a discount rate that is very small, the “most likely” scenarios for climate change simply don’t generate enough damages–in present value terms–to matter. That is why the Interagency Working Group, which used a 3 percent discount rate, obtained the rather low estimate of $33 per ton for the SCC…

Must-Read: Luigi Zingales: Who is the legitimate leader on the European side? That is the real question: “Tsipras was not part of the Brussels’ elite…

…was challenging the legitimacy of the Brussels’ elite. You can be a crook, you can be an unelected leader and – if you are one of them – your legitimacy will never be questioned in Brussels or Frankfurt. But if you are not… you will be openly undermined even if you had democratically won a clear mandate. As a result, from day one – everybody from Junker to the Eurogroup – was trying to make this government fall…. This was extremely antidemocratic and underhanded. Now it cannot continue…. The Institutions do not need to accept Tsipras’s conditions, but they have to negotiate with him in good faith. The no vote does not necessarily mean Grexit, unless the Institutions want so…. The Institutions will also have to avoid at all costs to let Mario Draghi be the de facto killer of Greece…. Greece’s future in the euro cannot depend on a technicality. It is a political decision that should be taken by legitimately elected leaders. On Greece side, there is Tsipras. Who is there on the European side?…