Must-Read: Matthew Yglesias: Financial markets are begging the US, Europe, and Japan to run bigger deficits

Must-Read: Matthew Yglesias: Financial markets are begging the US, Europe, and Japan to run bigger deficits: “The international financial community wants to lend money this cheaply…

… [so] governments should borrow money and put it to good use. Ideally that would mean spending it on infrastructure projects that are large, expensive, and useful–the kind of thing that will pay dividends for decades to come…. But if you don’t believe there are any useful projects or if your country’s political system is simply too gridlocked to find them, there are easy alternatives. Do a broad-based tax cut…. The opportunity to borrow this cheaply (probably) won’t last forever, and countries that boost their deficits will (probably) have to reverse course, but while it lasts everyone could be enjoying a better life instead of pointless austerity.

Must-Read: Simon Wren-Lewis: Brexit and Democracy

Must-Read: Some nice backup from the wise Simon Wren-Lewis. The frame of eurocrats vs. democrats is much, much, much too simple to be more than misleading. We want democracy where democracy belongs, with technocracy where it is needed–always acknowledging that circumstances alter cases, mechanism design is complex, and that democracy’s key benefits are as a legitimacy machine and an anti rent-seeking machine, not as a wise leader or wise policy selection machine:

Simon Wren-Lewis: Brexit and Democracy: “Germany… believed a union-wide demonstration of austerity was required…

…I strongly disagree…have thought a lot about why it happened, but a lack of democracy is not high on my list of culprits…. Democracy was overridden in Greece so cruelly… not [as] the result of actions of unelected bureaucrats, but of elected finance ministers… because of pressure from their own electorates. This exercise in raw political power worked because the Greek people wanted to stay in the Euro. The ‘bad equilibrium’ Evans-Pritchard talks about happens in part because of democracy…. Union governments should not lend money directly to other union governments, precisely because governments are democratic and so find it hard to accept write-offs…

Must-Read: Dani Rodrik: Brexit and the Globalization Trilemma

Must-Read: Time to fly my Neoliberal Freak Flag again!

I see this very differently than the extremely-sharp leader of the Seventh Social-Democratic International Dani Rodrik does. The Greek and the Spanish electorates vote loudly that they want to stay in the EU and even in the Eurozone at all costs, rather than threaten to exercise their exit option. The German electorate votes loudly that they want fiscal austerity at all costs. The policies are a result of those–democratic–decisions. The problem is not that Europe has too little democracy. The problem is that it has the wrong kind. Issues of fiscal stance are technocratic issues of economic governance in order to balance aggregate demand with potential output–to make the demand for safe, liquid, stores of value at full employment equal to the supply of such assets provided by governments with the exorbitant privilege of issuing reserve currencies and whatever other actors (if any) maintain credibility as safe borrowers. They are not properly what Angela Merkel and company have turned them into: things for the Germany electorate to vote on as it participates in what Dani Rodrik rightly calls a morality play about prudence and fecklessness. The monetary issue of whether to stay in the Eurozone or to pursue adjustment-through-depreciation is also a technocratic issue of economic governance in order to maximize speed and minimize the pain of structural adjustment. It is not properly what it has become: a thing for the Greek and Spanish electorates to vote on in a different morality play, one of whether the Mediterranean is or is not a full part of “Europe”.

Harry Dexter White and John Maynard Keynes were good democrats. Neither would say that Europe’s economic problems now are the result of a deficiency of democracy. They would say that it is the fault of their IMF–that their IMF should have blown the whistle, declared a fundamental disequilibrium, and required one of:

  1. the shrinkage of the eurozone and the depreciation of the peso and the drachma back in 2010
  2. a wipeout of Greek and Spanish external debts, and a fiscal transfer program from the German government to Greece and Spain and to German banks if German authorities wished to avoid such a shrinking of the eurozone.

We did not have such an IMF back in 2010. But that we did not have such an IMF is not the result of a deficiency of democracy in Europe.

Or so I think: I could be wrong here.


Dani Rodrik: Brexit and the Globalization Trilemma: “My personal hope is that Britain will choose to remain in the EU…

…without Britain the EU will likely become less democratic and more wrong-headed…. Exit poses significant economic risk to Britain…. But there are also serious questions posed about the nature of democracy and self-government in the EU as presently constituted. Ambrose Evans-Pritchard (AEP) has now written a remarkable piece that… has little in common with the jingoistic and nativist tone of the Brexit campaign….

Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error…. We are deciding whether to be guided by a Commission with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service; and whether to submit to a European Court (ECJ) that claims sweeping supremacy, with no right of appeal….

The trouble is that the EU is more of a technocracy than a democracy (AEP calls it a nomenklatura). An obvious alternative to Brexit would be to construct a full-fledged European democracy…. But as AEP says,

I do not think this is remotely possible, or would be desirable if it were, but it is not on offer anyway. Six years into the eurozone crisis there is no a flicker of fiscal union: no eurobonds, no Hamiltonian redemption fund, no pooling of debt, and no budget transfers. The banking union belies its name. Germany and the creditor states have dug in their heels….

Democracy is compatible with deep economic integration only if democracy is appropriately transnationalized as well…. The tension that arises between democracy and globalization is not straightforwardly a consequence of the fact that the latter constrains national sovereignty…. External constraints… can enhance rather than limit democracy. But there are also many circumstances under which external rules do not satisfy the conditions of democratic delegation…. It is clear that the EU rules needed to underpin a single European market have extended significantly beyond what can be supported by democratic legitimacy. Whether Britain’s opt out remains effective or not, the political trilemma is at work….

When I was asked to contribute to a special millennial issue of the Journal of Economic Perspectives… I viewed the EU as the only part of the world economy that could successfully combine hyperglobalization (‘the single market’) with democracy through the creation of a European demos and polity…. I now have to admit that I was wrong in this view (or hope, perhaps). The manner in which Germany and Angela Merkel, in particular, reacted to the crisis in Greece and other indebted countries buried any chance of a democratic Europe…. She treated it as a morality play, pitting responsible northerners against lazy, profligate southerners, and to be dealt with by European technocrats accountable to no one serving up disastrous economic remedies…. My generation of Turks looked at the European Union as an example to emulate and a beacon of democracy. It saddens me greatly that it has now come to stand for a style of rule-making and governance so antithetical to democracy that even informed and reasonable observers like AEP view departure from it as the only option for repairing democracy.

Must-Read: Maury Obstfeld: Evolution Not Revolution: Rethinking Policy at the IMF

Must-Read: Maurice Obstfeld: Evolution Not Revolution: Rethinking Policy at the IMF: “I would describe the process as evolution, not revolution…

…The Fund has long tried to build on its experiences in the field and on new research to improve its effectiveness in economic surveillance, technical assistance, and crisis response. It’s fair to say that the shock of the global financial crisis led to a broad rethink of macroeconomic and financial policy in the global academic and policy community. The Fund has been part of that, but, given the impacts of our decisions on member countries and the global economic system, we view it as especially important for us constantly to re-evaluate our thinking in light of new evidence. That process has not fundamentally changed the core of our approach, which is based on open and competitive markets, robust macro policy frameworks, financial stability, and strong institutions. But it has added important insights about how best to achieve those results in a sustainable way….

We are in favor of fiscal policies that support growth and equity over the long term. What those policies will be can differ from country to country and from situation to situation. Governments simply have to live within their means on a long-term basis, or face some form of debt default, which normally is quite costly for citizens, and especially the poorest. This is a fact, not an ideological position. Our job is to advise how governments can best manage their fiscal policies so as to avoid bad outcomes. Sometimes, this requires us to recognize situations in which excessive budget cutting can be counterproductive to growth, equity, and even fiscal sustainability goals….

Countries need credible medium-term fiscal frameworks that leave markets confident the public debt can be repaid without very high inflation. Countries with such frameworks will typically have room to soften economic slumps through fiscal means, including automatic stabilizers…. There are limits to the pain economies can or should sustain, so in especially difficult cases we recommend debt re-profiling or debt reduction, which require creditors to bear part of the cost of adjustment. That is the approach we are currently recommending for Greece…

Must-Read: Paul Krugman: Germany Austerity Policy

Must-Read: Paul Krugman: Germany Austerity Policy: “Once the bubble burst, there was going to be a difficult time for the Euro, regardless…

…But it’s been far worse than it needed to be and Germany bears some of the responsibility because of turning what should have been viewed as essentially a technical economic problem into a morality play. That has been a very unfortunate story…. Austerity policies have taken what was fundamentally a story about excessive private capital flows and housing bubbles and turned it into lectures of fiscal responsibility that have ended up doing a lot of damage….

Greece was going to have to do a fair amount of austerity but not this much. In the end it would still have been ugly, but not on this level. What could have mitigated the damage? The thing is that what has actually happened has not worked. Greece is still in the Euro. There’s a little bit of economic growth but at the cost of an incredible slump. The ratio of debt to GDP is higher than ever. All of this austerity has not only not resolved the fiscal problem, it hasn’t even moved it in the right direction…

Must-Read: Thomas Piketty: Change Europe, Now

Must-Read: Thomas Piketty (2015): Change Europe, Now: “The extreme right has risen from 15% to 30% of the votes in France…

…unemployment and xenophobia, extreme disappointment with the left in power, the feeling that everything has been tried and that something else must be experimented… disastrous management of the financial crisis…. Only a democratic and social re-founding of the Euro zone, based on growth and employment, round a small core of countries prepared to move forward and provide themselves with appropriate political institutions, would enable us to counter the temptation to revert to nationalism and hatred which today threatens the whole of Europe….

It is important that the European leaders—in particular the French and the German—acknowledge their mistakes. We can discuss endlessly all sorts of reforms, both big and small, to be carried out in the various Euro zone countries: shop-opening hours, bus lanes, labour markets, retirement pensions, etc. Some are useful, others less so. But… this is not the reason for the sudden fall in GDP in the Euro zone in 2011-2013…. Recovery was stifled by the over-rapid endeavour to reduce the deficits in 2011-2013—with in particular rises in taxation in France which were much too heavy…. The application of blind fiscal rules… explains why in 2015 the GDP of the Euro zone has still not recovered its 2007 level….

As a first step, all the debts of more than 60% of GDP could be placed in a common fund, with a moratorium on repayments until each country has recovered a strong growth trajectory since 2007. All historical experiences show that above a certain level, it makes no sense to repay debts for decades. It is better to ease the burden clearly so as to invest in growth, including from the creditors’ point of view…. New democratic governance… the setting up of a Euro-zone parliament comprising members from the national parliaments in proportion to the population of each country. This Euro-zone Parliamentary Chamber should also be entrusted with the voting of a common corporate tax… [to] enable the financing of an investment plan in infrastructures and universities…. Europe has all the assets required to offer the best social model in the world. Let’s stop squandering our opportunities…. Before coming to plan B, proposed by the extreme Right and which the extreme Left is increasingly tempted to invoke, let’s start by giving a fully-fledged plan A a genuine chance.

Must-Read: Paul Krugman: Friedman and the Austrians

Must-Read: Paul Krugman (2013): Friedman and the Austrians: “Still thinking about the Bloomberg Businessweek interview with Rand Paul…

…in which he nominated Milton Friedman’s corpse for Fed chairman. Before learning that Friedman was dead, Paul did concede that he wasn’t an Austrian. But I’ll bet he had no idea about the extent to which Friedman really, really wasn’t an Austrian. In his ‘Comments on the critics’ (of his Monetary Framework) Friedman described the ‘London School (really Austrian) view’

that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by ‘easy money’ policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.

and dubbed this view an ‘atrophied and rigid caricature’ of the quantity theory. [His version of the] Chicago School, he claimed, never believed in such nonsense. I have, incidentally, seen attempts [by Larry White and company] to claim that nobody believed this, or at any rate that Hayek never believed this, and that characterizing Hayek as a liquidationist is some kind of liberal libel. This is really a case of who are you gonna believe, me or your lying eyes. Let’s go to the text (pdf), p. 275:

And, if we pass from the moment of actual crisis to the situation in the following depression, it is still more difficult to see what lasting good effects can come from credit expansion. The thing which is needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production to the proportion between the demand for consumers’ goods and the demand for producers’ goods as determined by voluntary saving and spending.

If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into a wrong direction and a definite and lasting adjustment is again postponed. And, even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises. The only way permanently to ‘mobilize’ all available resources is, therefore, not to use artificial stimulants—whether during a crisis or thereafter—but to leave it to time to effect a permanent cure by the slow process of adapting the structure of production to the means available for capital purposes.

And so, at the end of our analysis, we arrive at results which only confirm the old truth that we may perhaps prevent a crisis by checking expansion in time, but that we can do nothing to get out of it before its natural end, once it has come…

If that’s not liquidationism, I’ll eat my structure of production…

Must-Read: Simon Wren-Lewis: Greece Under Troika Rule

Must-Read: Simon Wren-Lewis: Greece Under Troika Rule: “‘The repayment of foreign loans and the return to stable currencies…

…were recognized as the touchstones of rationality in politics; and no private suffering, no infringement of sovereignty was considered too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfilment of the requirements of sound budgets and sound currencies, these a priori of economic liberalism. — Karl Polanyi (1944), ‘The Great Transformation’ (p142)

This quote (HT Jeremy Smith) could almost be written today about Greece. I had once thought that the lessons of the interwar period and Great Depression had been well learnt, but 2010 austerity showed that was wrong…. The Greek government borrowed too much… the scale… meant default was pretty inevitable. But Eurozone leaders, worried about their banking system (which held a lot of Greek debt), first postponed default and then made it partial. The real ‘bailing out’ was for the European banks and others who had lent to the Greek government…. Nothing… obliged Eurozone leaders to lend their voters money to bail out these creditors…. If European leaders felt their banking systems needed support, they could have done this directly….

They convinced themselves that Greece could pay them back. It was a mistake they will do anything to avoid admitting. To try and ensure they got their money back, they along with the IMF effectively took over the running of the Greek economy. The result has been a complete disaster. The amount of austerity imposed caused great hardship, and crashed the economy…. The Troika wants 3.5% primary surpluses by 2018… to start getting their money back sooner… an absurd demand…. Right now Greece needs more aggregate demand not structural reform, yet the Troika insists on taking more demand out of the economy….

Despite Martin Sandbu’s optimism, the recent deal is essentially more of the same. The IMF, which knows it makes no sense to ‘extend and pretend’, has again capitulated. The reaction to the IMF’s paper on neoliberalism has generally missed the key point. It is not fanciful to believe that the paper is directed at those within the IMF like Poul Thomsen, the head of their European department. Falling GDP will continue to be blamed on the Greek government, even without its former finance minister. Of course one day the Greek economy will recover, just as the Irish famine came to an end. But history, as taught in Britain as well as Ireland, does not remember the British troops guarding the shipments of grain leaving Ireland during the famine as heroic upholders of the rules of law and contract. Nor will it do the same for the members of the Troika that keep Greece in poverty.

Must-Read: Simon Wren-Lewis: A General Theory of Austerity

Must-Read: Simon Wren-Lewis: A General Theory of Austerity: “I start by making a distinction… between fiscal consolidation, which is a policy decision, and austerity, which is an outcome where that fiscal consolidation leads to an increase in aggregate unemployment…

…Monetary policy can normally stop fiscal consolidation leading to austerity, but cannot when interest rates are stuck near zero…. I say that austerity is nearly always unnecessary… has nothing to do with markets: the Eurozone crisis from 2010 to 2012 was a result of mistakes by the ECB. If a union member’s government debt is not sustainable, there needs to be some form of default (Greece). If it is sustainable, then the central bank should back that government, as the ECB ended up doing with OMT in 2012…. None of this theory is at all new….

That makes the question of why policy makers made the mistake all the more pertinent. One set of arguments point to… austerity as an accident… Greece happened at a time when German orthodoxy was dominant…. [But this] does not explain what happened in the US and UK…. The set of arguments that I think have more force… reflect political opportunism on the political right which is dominated by a ‘small state’ ideology…. [But] how was the economics known since Keynes lost to simplistic household analogies[?]…. [And why] in this recession, but not in earlier economic downturns?… It does not have to be this way…. We cannot be complacent that when the next liquidity trap recession hits the austerity mistake will not be made again…