LARS P. SYLL

The Greek vote — No No No

The euro has taken away the possibility for national governments to manage their economies in a meaningful way — and in Greece the people has had to pay the true costs of its concomitant misguided austerity policies.

The unfolding of the Greek tragedy during the last couple of months has shown beyond any doubts that the euro is not only an economic project, but just as much a political one. What the neoliberal revolution during the 1980s and 1990s didn’t manage to accomplish, the euro shall now force on us.

But do the peoples of Europe really want to deprive themselves of economic autonomy, enforce lower wages and slash social welfare at the slightest sign of economic distress? Is inreasing income inequality and a federal überstate really the stuff that our dreams are made of? I doubt it.

History ought to act as a deterrent. During the 1930s our economies didn’t come out of the depression until the folly of that time — the gold standard — was thrown on the dustbin of history. The euro will hopefully soon join it.

The euro sucks

So, having pushed us hard to accept substantial new austerity, in the form of absurdly large primary surpluses (3.5% of GDP over the medium term) … we ended up having to make recessionary trade-offs between, on the one hand, higher taxes/charges in an economy where those who pay their dues pay through the nose and, on the other, reductions in pensions/benefits in a society already devastated by massive cuts in basic income support for the multiplying needy …

Unfortunately, the institutions’ response was to insist on even more recessionary measures … and, worse still, on shifting the burden massively from business to the weakest members of society (e.g. to reduce the lowest of pensions, to remove support for farmers, to postpone ad infinitum legislation that offers some protection to badly exploited workers).

The institutions new proposals … would make a politically problematic package – from the perspective of our Parliament – into a package that would extremely difficult to push through our Parliamentary caucus. But this is not all. It gets worse much worse than that once we take a look at the proposed financing package.

What makes it impossible to pass the institutions’ proposal through Parliament is the lack of an answer to the question: Will these painful measures at least give us a period of tranquillity during which to carry out the agreed reforms and measures? Will a shock of optimism counter the recessionary effect of the extra fiscal consolidation that is being imposed on a country that has been in recession for 21 consecutive quarters? The answer is clear: No, the institutions’ proposal is offering no such prospect.

Yanis Varoufakis

The Troika threatens European democracy

On the 5th of July one of two things will end: either Greek democracy as regards economic policy or Greece’s Euro membership. Not a pleasant choice. Negotiations between the left-wing Greek government and the Troika had made little progress over the last months. When prime minister Alexis Tsipras announced a referendum on the Troika’s final offer, the reaction was swift. Democratic decision-making is not part of economic policy making in Europe. Fiscal policy has to follow the rules and debt has to be serviced.

According to the European Commission the Greek government has unilaterally left the negotiating table. The German finance minister, Wolfgang Schäuble, and the head of the Eurogroup and Dutch finance minister Jeroen Dijsselbloem, thus concluded that the Greek rescue plan ends on Tuesday. The ECB is pulling the plug and has announced that it will not increase the size of the Emergency Liquidity Assistance (ELA). Less technically: no further short-term money for Greek banks. Greek banks are in intensive care. The ECB’s doctors haven’t switched off life support, but they have powered it down. Greece’s Euro membership has effectively been suspended. As a consequence Greek banks have been shut down and cash withdrawals have been rationed. The Greek people should experience, before the referendum, what life is like without the Euro.

This a disaster for Europe, both in terms of democracy and its economics. The message to the Greek people, and indeed to all Europeans, is that they have to accept the German finance ministry’s right to guide national policies and that austerity and deregulation is the only way to conceive of economics. This is a distinctly Germanic kind of neoliberalism and it is brutal. Syriza is a challenge to European elites and it has to be silenced. The ongoing depression in Greece and the desperation of the Greek population are just collateral damage in a Holy War of economic orthodoxy against a left-wing alternative. For the German government and European elites these negotiations have always been about regime change as much as they were about economics.

Engelbert Stockhammer

We are Greece!

The Eurogroup Meeting of 27th June 2015 will not go down as a proud moment in Europe’s history. Ministers turned down the Greek government’s request that the Greek people should be granted a single week during which to deliver a Yes or No answer to the institutions’ proposals – proposals crucial for Greece’s future in the Eurozone. The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt. I was even asked: “How do you expect common people to understand such complex issues?”. Indeed, democracy did not have a good day in yesterday’s Eurogroup meeting! But nor did European institutions. After our request was rejected, the Eurogroup President broke with the convention of unanimity (issuing a statement without my consent) and even took the dubious decision to convene a follow up meeting without the Greek minister, ostensibly to discuss the “next steps”.

Can democracy and a monetary union coexist? Or must one give way? This is the pivotal question that the Eurogroup has decided to answer by placing democracy in the too-hard basket. So far, one hopes.

Yanis Varoufakis

Greece and the true purpose of the euro

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell’s research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

“They won’t even let me have a toilet. They’ve got rules that tell me I can’t have a toilet in this room! Can you imagine?”

As it happens, I can’t. But I don’t have an Italian villa, so I can’t imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

“It’s very hard to fire workers in Europe,” he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.”

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as “optimum currency area”. This was a rule devised by Bob Mundell.

That doesn’t bother Mundell. For him, the euro wasn’t about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

“Ronald Reagan would not have been elected president without Mundell’s influence,” once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greg Palast/The Guardian

Keynes was not a Keynesian. He was a Post Keynesian!

But these more recent writers like their predecessors were still dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out. But at any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, tho admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability, tho mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself …

Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory.

John Maynard Keynes QJE 1937

And this emphasis on the importance of uncertainty is not even mentioned in IS-LM Keynesianism …

Minimum wage myths

 

 
Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory — have increased relative to Pennsylvania. However, when economists Alan Krueger and David Card gathered information on fast food restaurants in the two states, it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to neoclassical demand theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …
 

The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.

James M. Buchanan in Wall Street Journal (April 25, 1996)

The end of comparative advantage

The classical theory of comparative advantage has driven US trade policy for the past fifty years. That policy, in combination with technical innovations that have lowered costs of transportation and communication, has opened the global economy. Yet paradoxically, this opening has rendered classical trade theory obsolete. That in turn has left the US economically vulnerable because its trade policy remains stuck in the past and based on ideas that no longer hold.

The logic behind classical free trade is that all can benefit when countries specialize in producing those things in which they have comparative advantage. The necessary requirement is that the means of production (capital and technology) are internationally immobile and stuck in each country. That is what globalization has undone.

Several years ago Jack Welch, former CEO of General Electric, captured the new reality when he talked of ideally having every plant you own on a barge. The economic logic was that factories should float between countries to take advantage of lowest costs, be they due to under-valued exchange rates, low taxes, subsidies, or a surfeit of cheap labor …

The U.S. and European response to Welch’s barge has been competitiveness policy that advocates measures such as increased education spending to improve skills; lower corporate tax rates; and investment and R&D incentives. The thinking is increased competitiveness can make Europe and the US more attractive to businesses.

Unfortunately, competitiveness policy is not up to the task of anchoring the barge, and it can even be counter-productive. The core problem is corporations are globally mobile. Thus, government can subsidize R&D spending, but the resulting innovations may simply end up in new offshore factories …

A critical consequence of Welch’s barge is the creation of a corporation versus country divide. Previously, when corporations were nationally based, profit maximization by business contributed to national economic success by ensuring efficient resource use. Today, corporations still maximize profits, but they do so from the standpoint of their global operations. Consequently, what is good for corporations may not be good for country …

Thomas Palley

 

As always with Palley — thought-provoking and interesting.
Re comparative advantage yours truly has argued in a similar vein in The Dialectics of Globalization (in Swedish).

Solow on the irrelevance of the Ramsey model

So in what sense is this “dynamic stochastic general equilibrium” model firmly grounded in the principles of economic theory? I do not want to be misunderstood. Friends have reminded me that much of the effort of “modern macro” goes into the incorporation of important deviations from the Panglossian assumptions that underlie the simplistic application of the Ramsey model to positive macroeconomics. 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. That is indeed so, and it is how progress is made.

But 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? Every one of the deviations that I just mentioned was being studied by macroeconomists before the “modern” approach took over. That research was dismissed as “lacking microfoundations.” My point is precisely that 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. This is the core of my objection: adding some realistic frictions does not make it any more plausible that an observed economy is acting out the desires of a single, consistent, forward-looking intelligence …

For completeness, I suppose it could also be true that the bow to the Ramsey model is like wearing the school colors or singing the Notre Dame fight song: a harmless way of providing some apparent intellectual unity, and maybe even a minimal commonality of approach. 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 …

There has always been a purist streak in economics that wants everything to follow neatly from greed, rationality, and equilibrium, with no ifs, ands, or buts. Most of us have felt that tug. Here is a theory that gives you just that, and this
time “everything” means everything: macro, not micro. The theory is neat, learnable, not terribly difficult, but just technical enough to feel like “science.”

Robert Solow

Urn arguing

In my judgment, the practical usefulness of those modes of inference, here termed Universal and Statistical Induction, on the validity of which the boasted knowledge of modern science depends, can only exist—and I do not now pause to inquire again whether such an argument must be circular—if the universe of phenomena does in fact present those peculiar characteristics of atomism and limited variety which appear more and more clearly as the ultimate result to which material science is tending …

The physicists of the nineteenth century have reduced matter to the collisions and arrangements of particles, between which the ultimate qualitative differences are very few …

The validity of some current modes of inference may depend on the assumption that it is to material of this kind that we are applying them … Professors of probability have been often and justly derided for arguing as if nature were an urn containing black and white balls in fixed proportions. Quetelet once declared in so many words—“l’urne que nous interrogeons, c’est la nature.” But again in the history of science the methods of astrology may prove useful to the astronomer; and it may turn out to be true—reversing Quetelet’s expression—that “La nature que nous interrogeons, c’est une urne”.

Professors of probability and statistics, yes. And more or less every neoclassical economist!

The Troika and the euro — the epitome of neoliberal stupidity

According to the dominant German narrative there is no alternative to the policies that the Troika imposes upon Greece. In this view, the Greek population wants to change course when only about half of the work required by the Troika has been done. Why this “impatience”? The German public and its leading politicians are not willing to realise the extent of the damage that austerity policies has caused in Greece up to now. To put it succinctly: Greece has gone through a Great Depression. Since the start of the crisis in 2008, real gross domestic product (GDP) fell by exactly as much as the United States GDP fell during the Great Depression in the 1930s. As a reminder, even today still, many economists are trying to work out how it was possible for such a blatant failure of economic policy to occur.

Greece lost a full 25 per cent of its GDP since 2009. No other European country ever faced such a manmade catastrophe in peacetime. Six years after adjustment policies came into place, the unemployment rate in Greece is 26 per cent and poverty has taken grip of large parts of the population. Unemployment has recently started to decrease somewhat, but not because growth prospects improve, but because many give up on the search for employment. At this moment of time there is no perspective for a recovery in the near future. Adjustment policies are necessarily painful, opined the German Finance minister in Davos. But what is their plan? Do they want Greece to go through another great depressions in the name of competitiveness? In view of what we heard after the election in the German media and from German politicians, it is not clear what the worst attribute of German politics at the moment might be, sheer stupidity or cold callousness …

Germany makes a grave mistake if it believes that Germany and some other Northern European countries will be able to prescribe neoliberal policies to the new Greek government as easily as they did in 2010. There will be a standoff. The result will be even more destruction and more resentment towards Germany. German politicians would prove intelligence and vision if they would hold back instead of pouring yet more oil onto the fire.

Heiner Flassbeck