Must-Read: The very sharp Ken Rogoff calls for Europe to undertake The Acceptable Year of the Lord–cancel the debts, and redistribute the land:

Kenneth Rogoff: A New Deal for Debt Overhangs?: “The International Monetary Fund’s acknowledgement that Greece’s debt is unsustainable could prove to be a watershed moment…

…There have been basically three schools of thought…. The… troika… holds that the eurozone’s debt-distressed periphery… requires strong policy discipline to prevent a short-term liquidity crisis from morphing into a long-term insolvency problem… bridge loans… giving them time to fix their budget problems and undertake structural reforms…. A second school of thought also portrays the crisis as a pure liquidity problem, but views long-term insolvency as an outside risk…. The problem is not that the debt of countries on the eurozone’s periphery is too high, but that it has not been allowed to rise nearly high enough…. Northern Europe could easily have solved the problem by co-signing periphery debt…. The periphery countries should then have been permitted not only to roll over their debt, but also to engage in full-on countercyclical fiscal policy for as long as their national governments deemed necessary…. The eurozone suffered a crisis of competence, not a crisis of confidence…. In fact, piling loans atop already-high debt burdens in the eurozone’s periphery entailed a significant gamble, particularly as the crisis erupted….

A third point of view is that, given the massive financial crisis, Europe’s debt problem should have been diagnosed as an insolvency problem from the start, and treated with debt restructuring and forgiveness, aided by moderately elevated inflation and structural reform…. National governments would have had to use taxpayer funds to recapitalize northern European banks–especially in France and Germany–that lent too much to the periphery. And transfers would have been needed to recapitalize the periphery banks. But at least then the public would have understood… reality…. Debt restructuring would have given Europe the reset it needed. Yes, there would have been risks, as IMF chief economist Olivier Blanchard has pointed out, but running those risks would have been well worth it….

Europe’s experience ought to spur a full rethink of the global system for administering sovereign bankruptcies. That could mean bringing back older IMF proposals for a sovereign bankruptcy mechanism, or finding ways to institutionalize the Fund’s recent stance on Greek debt. There is no free lunch in Europe, and there never was; but there are much better ways to deal with unsustainable debt.

I must say I do not really see why Rogoff insists that there has to be a choice between position (2) which he scorns and position (3) which he embraces. When the world returns–if it ever does–to a regime in which the safe interest rate is greater than the growth rate of the economy, there may well have to be hard decisions made about the necessity for debt writedowns and financial repression to deal with genuine insolvency problems. But as long as the interest rate r is and is expected to be less than the growth rate g, there is no such necessity. Better (as the Syriza government of Greece found) to focus on flows and restoring full employment now than on writing down debt stocks that have little impact in the short run.

The way I like to put it is that it looks to me like the last time Robert Lucas of University of Chicago did his homework was back in the fall of 1979. It was then that Paul Volcker shifted Federal Reserve policy and made disinflation job number one. Yet the models that tracked how expensive in terms of elevated unemployment and idle capacity that policy was were not the rational-expectations models of Chicago-Rochester-Minneapolis. They were, rather, the adaptive-expectations models of the Federal Reserve-MIT-Princeton. And Lucas’s response was to put his fingers in his ears and say: “I CAN’T HEAR YOU!”

We are thinking about this, again, now because Lucas’s “methodological” commitment to modeling economies by assuming that businesses never have any idea that if they cut the quantity they produce they will be able to charge a higher price has annoyed Paul Romer–that Lucas and company are clinging to intellectually-destructive “Stigler conviction” rather than scientific “Feynman integrity”.

In my view, having strong views and being an aggressive advocate for them is not a bad thing. Failing to understand that the point of the enterprise requires that you be willing to mark your beliefs to market is.

Apropos of all this, M.G. Ziegler:

M.G. Ziegler: Wrong Positions, Strongly Held: “It is often said that many of the best thinkers/doers/leaders in history have one thing in common…

…strong positions… weakly held… feel strongly about the ‘right’ way… yet they’re malleable… if persuaded otherwise… a weird yet powerful trait. You need to… convince everyone… you believe 100 percent… while also having a history of changing the stance you’re so forcefully stating…. It’s a great trait… And it’s one that few people can pull off. Most people seem to be on the polar ends of it: they hold weak positions loosely, or they hold strong positions firmly. So, they can’t make up their minds or they never change their minds. Hard to know which is worse….

But there’s actually a type of person who is far worse than either of these. Someone who has the wrong position, strongly held…. The person who always very matter-of-factly states something, when they’re often talking out of their ass. They have absolutely no idea what they’re talking about, but because they’re saying it so forcefully, people believe them…. Who would spout bullshit as fact? Well, a lot of people, actually. But again, most of the time people tend to do this in a meek manner…. Bullshit sensors immediately go berserk. But the ‘wrong position, strongly held’ folks often evade these detectors…. Which is why this is so dangerous.

I would advise you the obvious: to avoid these people. But it’s so hard to know who they are–at least at first. It’s easier to trust no one. But again, human nature will get in the way here. So I guess the only thing to do is to always do your homework on something someone tells you. Hold their position, but hold it weakly.”

Must-Read: The very sharp Zeynep Tufekci mourns the loss of the thick connectedness that was part of the bloggy web that she sees as having been lost in the move to the social web. A great deal of this is simply that back a decade ago when we were homesteading the noosphere settlement was just not that dense, and that the pioneer Little-Weblog-on-the-Prairie culture was bound to die. (How much bigger is the audience for the three things Ezra Klein has written in the past week then for the six things he wrote on August 3, 2005? Ezra? And both writing for a bigger audience and reading less deeply and much more broadly in individual writers will diminish connection.) But is there something more that is important?

Zeynep Tufekci: The Web of Relationships We Have to Save: “Here’s the good: Unlike a blogger, it’s very hard to isolate and ban Facebook or Twitter…

…Here’s the bad: these platforms have their own censorship mechanisms…. What happens when an anti-Dove (or insert your product) user-generated content goes viral (or tries to) in a platform in which that product is a key advertiser? Are we back to television which can never cover climate change while so dependent on car ads?

Here’s the ugly…. I have no way to tell my friends on Facebook that I ‘like’ their efforts for charity, or their babies, without Facebook also interpreting that to mean that it should show more and more of that type of content, the opposite of what I actually want…. Facebook will not prioritize a dark update from a friend whose husband is in an Egyptian jail, but will show me a cheery one she posts, simply because we all click on ‘like’ when we see a moment of happiness from her….

We were discussing the need to preserve links, and have them under our control…. A link… is a connection between people. The current attention economy and its obsession with numbers–and virality–obscures this core fact about what is beautiful about the web…. When we write, and link to each other, we are connecting to each other, not merely to content…. I don’t want to go back to a web of political blogs, read mostly by political people that is easily targeted and banned. But I do want to go forward to a web based on relationships, the flow of which is not manipulated on behalf of advertisers…. I don’t fear commercial platforms, per se, nor am I opposed to the intelligent use of appropriate and robust algorithms that can help enrich our experience. (I’m actually for it). The web we need to save is not this or that format, but our relationships, expressed in our links, our updates, our connections and more. There is much at stake.

Must-Read: this remarkable tendency to abandon policies that a party has been committed to that have worked well… In my view, the Republican Party could be taking two will-deserved victory laps (and one not so well-deserved right now):

• The monetary policies of Republican Ben Bernanke gave the United States the best recovery from 2009 in the North Atlantic.
• The RomneyCare health care policies of Republican Mitt Romney have been successfully implemented and driven extraordinary increases in access to health insurance.
• The Republican Party’s drawing of a line in the sand in 2010–NO MORE MEDICARE CUTS!–Has strengthened and important 50-year-old part of America’s social fabric that works well.

Perhaps it is what the very sharp Rick Perlstein calls the “penumbras and emanations from Citizen’s United”. Never mind that the technocrats who staff Republican administrations and the voters like these policies, the billionaire moneybags do not–and it is the billionaire moneybags who count…

Paul Krugman: Zombies Against Medicare: “Medicare turns 50 this week…

…Before the program went into effect, Ronald Reagan warned that it would destroy American freedom; it didn’t, as far as anyone can tell. What it did do was provide a huge improvement in financial security for seniors and their families, and in many cases it has literally been a lifesaver as well. But the right has never abandoned its dream of killing the program. So it’s really no surprise that… ‘We need to figure out a way to phase out this program’….

What is somewhat surprising, however, is the argument he chose to use, which might have sounded plausible five years ago, but now looks completely out of touch. In this, as in other spheres, Mr. Bush often seems like a Rip Van Winkle…. While raising the Medicare age has long been a favorite idea of Washington’s Very Serious People, a couple of years ago the Congressional Budget Office did a careful study and discovered that it would hardly save any money…. Raising the Medicare age is a zombie idea, which should have been killed by analysis and evidence, but is still out there eating some people’s brains….

Conservatives want to do away with Medicare… [because] it’s the very idea of the government providing a universal safety net that they hate, and they hate it even more when such programs are successful…. What Medicare’s would-be killers usually argue… is that the program as we know it is unaffordable… that Medicare as we know it is incapable of controlling costs…. Now, this was always a dubious claim…. Medicare costs per beneficiary have consistently grown more slowly than private insurance premiums….

And then a funny thing happened… [ObamaCare’s] passage was immediately followed by an unprecedented pause in Medicare cost growth…. Right now is, in other words, a very odd time to be going on about the impossibility of preserving Medicare…. One can only guess that Mr. Bush is unaware of all this, that he’s living inside the conservative information bubble…. Meanwhile, what the rest of us need to know is that Medicare at 50 still looks very good…. The only real threat it faces is that of attack by right-wing zombies.

Must-Read: Marshall Auerbach was, of course, 100% right. The turn to severe austerity in 2010 by the then-newly elected Conservative-Liberal Democratic government looks to have cost Britain 4% of GDP in a slowing-down of recovery. It was not quite enough to knock the UK back into recession–in large part because the government in the end did less to cut spending than its manifesto had committed it to. But it was very damaging.

British Conservatives tell me to this day that this was all Melvyn King’s fault: that he could have eased monetary policy to offset the effect on spending, but did not do so, probably, they say, because he is a crypto-Labourite…

Marshall Auerback (2010): The United Kingdom Draws the Wrong Lessons from Canada: “The standard narrative of the Canadian experience in the 1990s is…

…in 1993, Canada’s budget deficit and debt-to-GDP ratios were the second highest amongst the G7 countries, after Italy’s, and the US financial press was unfavorably comparing Canada to Mexico. That year, with the IMF supposedly lurking at the door, the Liberal Government of Prime Minister Jean Chretien, and his Finance Minister, Paul Martin, laid out a goal to halve the budget deficit to three percent by 1998…. By 1998, the deficit was eliminated and overall debt was dropping quickly, amidst a rapidly growing economy….

Professor Mario Seccareccia… noted the real reasons for the “success” of the Chretien/Martin austerity programs: 1. High growth in the US, Canada’s largest trading partner, a sharply declining Canadian dollar… the implementation of the North American Free Trade Agreement… [and] an expansionary monetary policy…. Canada’s export boom of the 1990s is a miracle that could certainly not be repeated today, given the decline in global economic growth, and the extent to which the ailing manufacturing exports sector is now being hammered by the so-called “Dutch disease” as a consequence of the Canadian dollar’s relative strength…. The United Kingdom would hardly do any better today, given global recessionary pressures and the corresponding implosion of its largest export markets in Europe and the US.

If Prime Minister David Cameron is indeed preparing Britons for a Canadian-style attack on the deficit, he is acting on the basis of profoundly misguided historical information…

Must-Read: Paul Krugman notes how the “laziness dogma” that American is now dominated by the moocher class–that America is now “a nation of takers” has become yet another dogma impervious to evidence on the right, even the center-right, of America’s political spectrum:

Paul Krugman: The Laziness Dogma: “Americans work longer hours than their counterparts in just about every other wealthy country…

…we are known, among those who study such things, as the ‘no-vacation nation’… full-time U.S. workers… 30 percent more hours… than their German counterparts…. But Jeb Bush… says that Americans ‘need to work longer hours and through their productivity gain more income for their families.’… The real source of his remark was the ‘nation of takers’ dogma that has taken over conservative circles in recent years–the insistence that a large number of Americans, white as well as black, are choosing not to work, because they can live lives of leisure thanks to government programs….

This laziness dogma [is] everywhere on the right… tMitt Romney’s… 47 percent… furious attacks on unemployment benefits… claims that many, if not most, workers receiving disability… are malingerers… a vision of the world in which the biggest problem facing America is that we’re too nice to fellow citizens facing hardship….

Over the past few decades working-class white families have been changing in much the same way that African-American families changed in the 1950s and 1960s, with declining rates of marriage and labor force participation. Some of us… see them as consequences of an economy… no longer offer[ing] good jobs to ordinary workers. This happened to African-Americans first… but has now become a much wider phenomenon…. Bush’s clumsy call for longer work hours was… an indication that he stands firmly… believ[ing] that American workers just aren’t trying hard enough… and that the way to change that is to strip away the safety net… in line with the party consensus. If he makes it to the White House, the laziness dogma will rule public policy…

Back in 2007 I used to have an applause line: that because the North Atlantic had lived through the Great Depression, we would not make the same mistakes in dealing with our current crisis that the policymakers of the 1930s had made. Instead, I said, we would make our own, different mistakes.

Boy, was I wrong with respect to Europe!

Barry Eichengreen: Saving Greece, Saving Europe: “The Eurosystem has been rendered more fragile and subject to destabilization…

…Other European finance ministers will have to answer for agreeing to forward to their leaders a provisional draft containing Schäuble’s destructive language…. The new program is perverse… will plunge Greece deeper into depression… provides no basis for recovery or growth. The Greek economy is already in free-fall, and structural reforms alone will not reverse the downward spiral…. As the depression deepens, the deficit targets will be missed, triggering further spending cuts and accelerating the economy’s contraction. Eventually, the agreement will trigger Grexit, either because the creditors withdraw their support after fiscal targets are missed, or because the Greek people rebel. Triggering that exit is transparently Germany’s intent.

Finally… privatization at fire-sale prices, with most of the proceeds used to pay down debt, will not put Greek parliamentarians or the public in a mood to press ahead enthusiastically with structural reform. Greece deserves better…. Other European countries should not in good conscience accede to this politically destructive, economically perverse program… should not allow the European project to be sacrificed on the altar of German public opinion or German leaders’ insistence on “rules.”… Franco-German solidarity would be irreparably damaged, but Franco-German solidarity is worth nothing if the best it can produce is this agreement. Last but not least, the German public deserve better…. They deserve their fellow Europeans’ admiration and respect, not renewed resentment and suspicion.

Eight years after 1929, even France had exited from the hold-strong-to-fixed-currency-parities-and-“structural-reform”-and-pray-for-the-confidence-fairy-to-rescue-us policies. Now, all of the eurozone is still in the trap. The fact that the depression came on more slowly than 1929-1933 has played a role.

But the principal cause is I think, Germany’s role as effective European hegemon plus the fact that distress in southern Europe is good for the German economy: every time a policy car is torched on the streets of Athens, the value of the euro drops and another container full of washing machines departs from Hamburg. Couple that with the agreement of the eurozone’s great and good that “structural reform” is both necessary and also impossible in periods of full employment, and they reassure themselves that everything is going to plan. The fact that the eurozone has broken the promise of economic prosperity and convergence that used to underpin it is not a major concern.

And, on the other side, we have the strange and mysterious attachment of southern Europeans to the euro. It is part–maybe all–of being a “prima liga” country. It is part–maybe all–of being a real part of Europe.

Economic reality is that a prosperous business sets the price of what it sells neither too high to attract demand nor too low to attract revenue, and sticking to a high price when demand ebbs is disastrous. Economic reality is, similarly, a prosperous country needs to behave like a business and set the value of its currency–the price of what it sells–neither too high to attract demand for its exports nor too low to create unattractive terms-of-trade, and sticking to an overvalued currency when demand ebbs is disastrous.

Economic reality is nowhere here.

If Europe’s political masters were intelligent right now, I think they would abandon the euro and their freedom of action in monetary and macroeconomic policy, and bind themselves to obey a joint U.S.-IMF hegemon in international finance, monetary, and macroeconomic policy affairs.

But there is little in their reaction to this crisis–to what we need to now start calling: “Europe’s Greater Depression”–would lead anyone to think that they are intelligent.

Must-Read: Paul Romer: Stigler Conviction vs. Feynman Integrity: “I’ll start with the smallest quote…

New economic theories are introduced by the technique of the huckster… [but not] mere hucksters…. The successful inventor is a one-sided man… utterly persuaded of the significance and correctness of his ideas and he subordinates all other truths…. He is more a warrior against ignorance than a scholar among ideas http://www.jstor.org/stable/2551184…

I would restate Krugman’s account… [as:] “the path that led Lucas and his followers to increasingly implausible positions… starts with Stigler conviction and a commitment to an initial conjecture that turned out to be false… [that] the aggregate economy can be… model[ed]… [with] imperfect information and… signal extraction… [with] market clearing as a maintained auxiliary hypothesis.’ To me, this gives a plausible description… but it leaves the fundamental cause unexplained…. Market clearing did not have to evolve from auxiliary hypothesis to dogma that could not be questioned. My conjecture is economists let small accidents of intellectual history matter too much…. I suspect that it was personal friction and a misunderstanding….

They circled the wagons because they thought that this was the only way to keep the rational expectations revolution alive. The misunderstanding is that Lucas and his colleagues interpreted the hostile reaction they received from such economists as Robert Solow to mean that they were facing implacable, unreasoning resistance from such departments as MIT. In fact, in a remarkably short period of time, rational expectations completely conquered the PhD program at MIT…. The self-imposed isolation, together with Lucas’s return to the intellectual environment at the University of Chicago, may in turn have fostered the switch to Stigler conviction as the default habit of mind…. When Lucas came back from Carnegie Mellon, he pulled off a coup that displaced Friedman. But Stigler stayed. Perhaps the right way to think of what happened is that he captured Lucas.

Here is the context of the quote from Stigler…. I think it is fair to read this as saying that to alter a science’s work, an idea has to tell the truth, but not the whole truth….

The techniques of persuasion also in the realm of ideas are generally repetition, inflated claims, and disproportionate emphases, and they have preceded and accompanied the adoption on a large scale of almost every new idea in economic theory. Almost, but not quite, every new idea. A few men have such unusual powers that their contemporaries recognize their claims without the usual exaggerations: Smith and Marshall are the only economists who seem to me indisputably to belong in this supreme class.

The rest have employed in varying degrees the techniques of the huckster. Consider Jevons. Writing a Theory of Political Economy, he devoted the first 197 pages of a book of 267 pages to his ideas on utility! Or consider Bohm-Bawerk. Not content with writing two volumes, and dozens of articles, in presenting and defending his capital theory, he added a third volume (to the third edition of his Positive Theoriedes Kapitals) devoted exclusively to refuting, at least to his own satisfaction, every criticism that had arisen during the preceding decades.

Although the new economic theories are introduced by the technique of the huckster, I should add that they are not the work of mere hucksters. The sincerity of Jevons, for example, is printed on every page. Indeed I do not believe that any important economist has ever deliberately contrived ideas in which he did not believe in order to achieve prominence: men of the requisite intellectual power and morality can get bigger prizes elsewhere. Instead, the successful inventor is a one-sided man. He is utterly persuaded of the significance and correctness of his ideas and he subordinates all other truths because they seem to him less important than the general acceptance of his truth. He is more a warrior against ignorance than a scholar among ideas.

Nor do I argue that a strong conviction of the validity of one’s ideas and energetic dissemination are sufficient to alter significantly a science’s work. It is possible by mere skill of presentation to create a fad, but a deep and lasting impression on the science will be achieved only if the idea meets the more durable standards of the science. Among these standards is truth, but of course it is not the only one.