Some simple public choice observations about the periphery

by on April 25, 2012 at 9:43 am in Economics, Political Science | Permalink

1. Their governments have been obsessed with protecting insider interests for decades.

2. They use “make work” jobs as macroeconomic automatic stabilizers.  A “pro growth” plan would eliminate these jobs, but of course in the short run and possibly medium run too, that would lower the rate of growth for Keynesian reasons.  They are stuck.

3. There does not exist any coherent, workable, political incentive-compatible plan whereby these governments borrow more, spend more, and “invest for growth.”

4. There does not exist any coherent plan whereby Germany invests in the periphery at a level which will boost growth.

5. Their governments are in various stages of “clinging to power,” and that makes true pro-growth policies, and tackling major interest groups, more difficult.

6. As Angus has pointed out, “they’re tired of austerity” really means something more like “they want a greater backstop from the Germans.”  Of course they do.

7. A boost to AD will not bring them back to where they were five years ago or anything close.  Their competitiveness has been revealed to be weaker, their institutions have been revealed to be weaker, EU institutions have been revealed to be weaker, their financial systems have been revealed to be weaker, and there is the possibility of macroeconomic multiple equilibria with no flip switch to get back to where they were.  AD is obviously a problem, but the notion that this is a nearly exclusively AD-based phenomenon is an idea which is held by many academics and bloggers but hardly anyone in those countries themselves.

8. Probably he was joking, but in this post Paul Krugman seems to suggest that France needs higher taxes.

Bill April 25, 2012 at 10:03 am

Austerity seems to be having some effect. You could argue that fiscal austerity is designed to make room so that the government can back up banks, thereby protecting insider interests as you described, or at least depositers and bondholders, and wealthholders. True, The government is clinging to power, arguing that lower interest rates reflect the benefits of austerity, and not the lack of aggregate demand.

I assume you talking about England which just entered another recession?

PatrickA April 25, 2012 at 10:40 am

Hi Bill

The UK looks in trouble doesnt it? I have followed an economist who had an article recommended on here and he has some interesting thoughts on what has happened there.

“The NIESR also has an interesting view on whether the UK is in a depression which it defines as ” a period when output is depressed below its previous peak”. On such a definition it feels this.

the period of depression is likely to continue for some time. We do not expect output to pass its peak in early 2008 until 2014.

An interesting view is it not? By their measure we are not in recession but we are in a depression! What is particularly interesting from their chart is that this period of depression is different from past ones. They would all be showing clear signs of recovery by now but this one is not,in medical terms we are flat-lining. By now even the 1930-34 depression had a level of economic output which had exceeded the previous peak whereas we remain just over 4% below it.

Since then we have discovered that the Office for National Statistics thinks that the UK is in a recession. Not much of a double-act is it? One putting us in recession and the other in a depression…”

A link to the full post is here. http://www.mindfulmoney.co.uk/wp/shaun-richards/now-we-are-told-that-the-uk-is-back-in-recession-the-real-question-is-are-we-in-a-depression-too/

It certainly poses more than a few questions I think..

Frederic Mari April 25, 2012 at 10:06 am

The question is not ‘higher taxes’ but higher taxes on whom?

That said, while there are obvious commonalities (lack of AD, lack of purchasing power for the lower tier of workers), French macro problems are meaningfully different from “anglo-saxons” macro problems. Not least because, the French reaction to the last 30 years of crippling of the working class purchasing power was to get the state into debt, rather than individuals going into debt on their own…

FE April 25, 2012 at 10:16 am

Europe is playing out like Star Trek’s Kobayashi Maru training exercise, the no-win scenario. You can picture the cadets at the bridge arguing over strategy: “Try Keynes! No, try austerity! We’ve gotta go back to Keynes!”

Andrew' April 25, 2012 at 11:57 am

Have they really tried austerity or have they simply tried being totally buggered?

8 April 25, 2012 at 12:11 pm

I suggest throwing a bar of gold through the bridge screen.

8 April 25, 2012 at 12:15 pm

If you crash land in the ocean and wash up on a deserted island, you can try your mobile phone, but there’s no signal. Then your friend argues that you’re wasting the battery: that is the crux of the austerity debate.

Lou April 25, 2012 at 12:26 pm

You can use the battery to start a fire if you have steel wool and kindling.

MD April 25, 2012 at 12:40 pm

+1

Bill April 25, 2012 at 1:44 pm

+1 You know where this is going when Tyler’s next speech in Italiy is entitled “The Great GLOBAL Stagnation and the Future of the Euro”–we’ve gone from US stagnation now to a Global Stagnation. Is there no low hanging fruit anywhere.

Hang on to your seatbelt, Scotty, we’re entering a force field.

“Austerity, Austerity, More Austerity” They were heard shouting, never more to be seen again.

TA April 25, 2012 at 10:42 am

As things now stand in Europe:
Without austerity, deficits the periphery can’t fund on its own.
With austerity, recession (and, probably, still deficits the periphery can’t fund on its own)
Without inflation, periphery can’t get costs in line.
With inflation, periphery still (probably) can’t get its economies in shape. (Cowen’s view)

From the standpoint of Northern Europe (if realistic):
Either the ECB conducts massive QE, and (probably) Northern Europe guarantees the periphery’s debts indefinitely into the future (essentially, the the North ships goods and services to the South, with vague prospects of repayment — East Germany redux, on a massive scale.)
Or,
The Eurozone has to break up.

If I were the North, I think I’d get on with it.

JWatts April 25, 2012 at 2:27 pm

“If I were the North, I think I’d get on with it.”
+1

Montgomery Scott April 26, 2012 at 5:30 am

I’m givin’ ya all the austerity I can captain. She canna take much more…

Guesto April 25, 2012 at 10:48 am

The notion that complaints about austerity just means they want a greater backstop from Germany seems incomplete. I think the complaint is that they want a monetary and fiscal policy built for their present situation, not for that of the Germans. If they weren’t tied to Germany’s hip with the Euro, they’d plainly devalue and / or default. They realize they can’t do that. However, they’d like policies that at least don’t destroy them, long-term, for being in that relationship.

Put differently, if they would exit the Euro and / or default, Germany and the Netherlands, through their banks, would be hit as hard as anybody. However, the Germans are behaving as if they are not exposed, and they can hold the debtor countries under the lash until they come around. This is not surprising given who they are, but a bit more humility and cooperation would help things a lot.

Anon. April 25, 2012 at 12:25 pm

How does devaluation fix anything? It just pushes the problems back by 5 or 10 years.

Literally every single underlying problem will still be there. Austerity is their one chance to actually reform and introduce northern European governance.

Anon. 2 April 25, 2012 at 6:47 pm

It won’t push the problem back. It will allow the countries the stability to undertake reforms.

Guesto April 26, 2012 at 12:35 am

So it’s about Germans who think they are superior forcing their superior ways on others by force, or at least by duress. Awesome. No historical reason other European countries would be resentful of that at all.

Relatedly, where were you in the winter of 1945?

Luis Pedro Coelho April 25, 2012 at 10:51 am

The insider interest theory would predict that public worker friendly groups would be pro-hard money. In fact the opposite is happening.

Bernard Guerrero April 25, 2012 at 6:30 pm

Is getting a bigger German backstop not “hard money” as compared to exiting the Euro?

schtevie April 25, 2012 at 10:53 am

3. There does not exist any coherent, workable, political incentive-compatible plan whereby these governments borrow more, spend more, and “invest for growth.”

That there does not exist any such plan does not mean that one couldn’t arise relatively quickly (with the acquiescence of the monetary authorities, of course). It is only austerian dogma still holding sway that prevents the obvious steps being taken. A bit more economic pain, broadly felt, and a clearer view of and general agreement about the depth and contours of the abyss, and a plan will shortly follow. Perhaps it’s not too late. The growth from bouncing back to trend alone would be impressive.

Keynes ἀνέστη! Ἀληθῶς ανέστη!

Jeff April 25, 2012 at 11:07 am

“It is only austerian dogma still holding sway that prevents the obvious steps being taken.”

LOL!!11

Steven Kopits April 25, 2012 at 11:23 am

On an entirely unrelated note, I was thinking about how to position egalitarianism in the ideological spectrum. As I have earlier commented, liberals (classical liberals) represent the principal in principal agent theory; conservatives (social conservatives) represent agency. And if you take a little time to think about it (and strip down conservativism to its game-theoretic essentials), then this makes great sense. It’s a very useful framework for thinking about these issues, I find.

But what to do with egalitarians? Where do they fit in the scheme of things? I had earlier thought that they were ideologically co-equal with the principal-agent approach. Thus, P-A theory is about property rights; for the principal, it’s about property rights of the individual; and for the agent, about the property rights of the group and the allocation of effort, reward and risk within the group. But in both cases, there are property rights. By contrast, egalitarians are about the negation of all property rights for both the group and the individual. And so, one might immediately think it’s property rights versus no property rights when thinking about egalitarianism versus other ideologies.

But, somehow, this is less than satisfying, because of course, egalitarianism also requires property rights (someone has to be able to control and dispose of assets, labor and personal property rights). And then there’s the Hayek problem that egalitarianism and conservatism are virtually indistinguishable for many policy prescriptions. (Try to explain to your mother the difference between paternalistic and egalitarian policies for the poor. Basically, it comes down to a question of motivation, rather than policy presciption.)

This morning, on the train ride in, it struck me that egalitarianism is better thought of as a subset of conservatism. In a conservative structure, there are two competing motivations: the desire to maximize the benefit to the group, on the one hand, and the allocation of the earnings of the group, on the other. In this structure, the liberal (libertarian) will seek to earn the benefit created by his effort–everything is contractually customized and reward is as directly linked to effort and risk as possible. Think of a securities trader. The conservative will seek to use affiliative skills to influence the allocation mechanism. Thus, reward for the conservative is not primarily linked to effort, but to controlling the allocation of rewards, effort and risk within the group.

In this framework, the egalitarians are thus those without the functional skills of the liberals (libertarians) and the political connections of the conservatives or for whom accepted agency roles are unfavorable. These are the down-trodden. Now, what would be the egalitarians’ game theoretic strategy? They would call for effort and risk to be assumed by the liberals and conservatives, with the rewards split equally among all. So egalitarians will emphasize distribution of benefits and minimize discussion of costs and the bearing of risk, which is what I think I see in practice.

I have to admit, this gives me some sympathy for egalitarians (because the model suggests they are indeed subject to victimization by conservatives). It also provides a handy way of looking at society using a game theorectic approach. But I find it interesting that the approach suggests that egalitarianism is in fact a sub-ideology of conservatism.

Philo April 25, 2012 at 11:26 am

“. . . the notion that this is a nearly exclusively AD-based phenomenon is an idea which is held by many academics and bloggers . . . .” You’re setting up a straw man here. There *are* academics and bloggers who think that boosting AD would *improve the situation immensely*; none of them think that boosting AD would make *everything perfectly wonderful*.

tt April 25, 2012 at 11:39 am

most of your points can also apply to the US

TheophileEscargot April 25, 2012 at 11:50 am

As Angus has pointed out, “they’re tired of austerity” really means something more like “they want a greater backstop from the Germans.”

Or, a debt default.

TallDave April 25, 2012 at 12:29 pm

1. A good and underappreciated point. These “national industries” are not good economics.

2. Pain now for growth later is the fundamental choice that the Krugmans are unwilling to even acknowledge the existence of, let alone make.

3. Gov’t’s don’t invest, they spend. Pet peeve of mine.

4. Yep, the only way this would happen is if the Greeks had some advantage, like a cheap currency that drove down labor costs… oops.

5. Solvency isn’t voluntary. If you want to borrow, you need to be solvent. If you don’t want to collapse the bond markets, you can’t have mass defaults.

6. Demosclerosis at its finest.

7. I think people are tending to forget that AD rests on the productivity of a country, to the extent the two diverge you are going to have problems — Zimbabwe can not consume at the rate of the U.S. and we all saw what happened when they tried.

8. The statists are always going to believe the ultimate answer lies in more and better state actions. They have never been correct and there’s no reason to think they ever will be.

The Other Jim April 25, 2012 at 1:04 pm

“The statists are always going to believe the ultimate answer lies in more and better state actions.”

Well, that’s true. But their Ultimate Question is: “How can I take the absolute most amount of money from these chumps before I get kicked out of office and onto the lavish pension plan?”

Megan April 25, 2012 at 1:06 pm

What does AD stand for in this context? It’s a hard term to Google.

Meegs April 25, 2012 at 1:18 pm

Aggregate demand.

Bill April 25, 2012 at 1:30 pm

Ah Dunno, when used in the context of economics,

TallDave April 25, 2012 at 2:12 pm

Austrians Denied

dearieme April 25, 2012 at 1:52 pm

Surely only the construction industry demands aggregates?

Floccina April 25, 2012 at 4:05 pm

They need austerity and inflation with no more cost of living raises but the voters are rationally ignorant and so no go.

Ray April 25, 2012 at 4:32 pm

I wish someone could explain a few points to me about the Eurozone mess:

1. How and when did the Eurozone become uncompetitive to begin with?

2. When economists talk about restoring competitiveness does that assume wages grow more slowly than GDP per capita?

3. Have wages over the last 20 years grown faster, slower or at the same rate as GDP per capita?

4. Could the Eurozone emulate Scandinavia which has managed high levels of growth, a welfare state, low income inequality, relatively low levels of market regulation and a lack of protection of ‘insider interests’?

5. What about allowing the European central bank to become the lender of last resort directly to governments until a recovery kicks in?

Millian April 25, 2012 at 6:32 pm

1. It didn’t, some member states did. Prosperity in the last decade led to large wage increases.
2. Wage cuts, compared to competitors, will suffice.
3. Faster.
4. The Nordic states haven’t grown all that quickly since the introduction of the welfare state. They started out at a much higher level than Spain/Portugal/Greece in the post-war, pre-welfare state period. Furthermore, of course the Nordics protect “insider interests”. It’s trivially true to say that governments protect insider interests. That is the definition of an insider.
5. Germany fears liabilities.

Tom April 25, 2012 at 6:45 pm

Re: #1: The Eurozone as a whole isn’t uncompetitive. Over the past decade the national economies within the eurozone diverged in terms of labor costs, productivity, etc. Partly due to poor governance. Partly due to misused/pernicious/squandered financial flows generated by the creation of the eurozone, in which irresponsible lending on the part of northern banks went into unproductive purchases on the part of irresponsible southern borrowers. Note that both northern institutions and southern institutions are at fault here, Germans and Spaniards. Besides irresponsible investors treating all eurozone bonds as equivalent in risk for the first 8 years or so of the zone, the zone’s single monetary policy was never quite right for all countries. The single rate would depress some national economies while it was relatively overheating others: over the course of a decade, these economies diverged, rather than converged in a way that would have helped the zone function better.

Martin April 25, 2012 at 6:18 pm

“1. Their governments have been obsessed with protecting insider interests for decades.”

Reminds me of Prescott & Parente ‘Barriers to Riches’ and why any convergence without reform could be nothing else but a speculative bubble.

Was it rational then to expect that those countries would reform and converge via a higher rate of growth? Yes, it seemed not entirely unlikely. They didn’t which is what makes it so much harder now to convince us. It seems now very unlikely that they will, which is why no one expects that they will.

Tarrou April 25, 2012 at 11:55 pm

Just a question for the Keynesians from a non-economist. I understand the argument that spending fat wads of cash borrowed at steep interest rates can buy you time to reform, kickstart the economy so you can afford the debt you’re taking on. But I have to ask, is that actually what happens? Do countries that spend heavily in “stimulus” then enact austerity reforms once the economy turns positive? Or is this the old ratchet, whereby during good times, we can afford anything, and in bad times, we must afford even more? In this context, do people actually think the Greeks will gut their massive bureaucracy after the Germans theoretically shovel them money until they are in the black?

JVM April 26, 2012 at 2:55 am

It’s kind of like being on parole, they mostly take to stealing:
http://www.economist.com/node/21553031

Sesh April 26, 2012 at 8:48 am

It seems to me your question is whether the Eurozone should enact stimulus policies now, if they don’t know whether, if and when the crisis is resolved, they can rely on future governments to curb deficits. Phrased differently, this question amounts to “should we do the right thing in today’s economic situation, even if we don’t have any guarantee that we will continue doing the right thing in tomorrow’s situation?” Of course the answer to that is yes.

If you’ve got a problem with what a hypothetical future government might or might not do about deficits, say 10 years from now, take it up with that future government. It can’t have any bearing on the question of what the current Eurozone governments should do.

Tarrou April 26, 2012 at 10:35 am

Sesh, that wasn’t my question, and it’s not my assumption. Here’s the thing, I don’t actually know that much about international economics. I personally don’t agree with the all of the assumptions of the Keynesians, but I am accepting them for the sake of argument. As I said, I think I understand the stimulus concept, but it is predicated on something else being done which I have never seen done. I am asking for data or examples of stimulus programs being successfully used to right economies in recession, followed by governmental austerity to pay down the debt when the economy recovers. If countries are not doing this, then it isn’t the “right” thing to do, and Keynesians are arguing in bad faith. You can’t argue that the offset of your policy (which makes it affordable) is something that will never be enacted, so work with me here.

Sesh April 28, 2012 at 4:25 am

First of all, with interest rates at record historical lows, I find it hard to understand any argument that any government borrowing to fund a stimulus is not affordable.

Secondly, you are asking for evidence of a particular type of response to a particular type of economic problem, which does not occur very often. Government deficits were indeed decreased in the US and most European countries in the years following their various levels of intervention to end the Great Depression. But your standard recessions are not the same as this recession because non-zero interest rates normally leave a greater window for monetary policy to be used, so fiscal stimulus is not often required.

On the other hand, you could ask: is there evidence that sometimes responsible governments reduce deficits or run surpluses in the good times (irrespective of whether they had needed to use fiscal stimulus beforehand). Yes, of course, the Clinton administration is a good example. There’s also evidence of governments increasing deficits when they don’t need to, such as the Bush Jr. administration. It all depends on who people vote for.

Tarrou April 28, 2012 at 9:45 am

Thanks for the response. We’re not talking about the US, and interest rates for the periphery of Europe are most assuredly not close to zero. I had thought of the 90′s, but is that practice widespread, and did it follow stimulus? What I’m asking is if there is much precedent to trust that if, say, Greece gets fifty bajillion euros and Germany states publicly that the Bundesbank will 100% back any move they make, Greece will then reform their system once the crisis of confidence passes and they are on firmer footing? It’s all well and good to say that the what the greeks need now is cash, sweet cash, but what assurances to the people who are shelling out this cash have that it won’t be used to merely plug the holes in a gaping safety net tear and push the problem fifteen years down the road? Put another way, If we grant that austerity is 100% always directly harmful in a recession, might it not still be the only time when political will exists to enact serious, painful reform?

Sesh April 28, 2012 at 12:49 pm

Yes, the European periphery can’t raise money cheaply though of course Germany or the ECB could – it is kind of ridiculous that they straitjacket themselves like that by insisting on one monetary policy for everyone but no centralised mechanism for raising money for individual members, but that’s a separate story.

Giving Greece 50 bajillion Euros wouldn’t help it much anyway, as it basically needs to be out of the Euro to ever be competitive, so let’s ignore Greece for now. Spain is far more important and requires saving. Has Spain been running surpluses in the past? Yes, of course, all they way up to the financial crisis. How does it matter whether that followed a previous stimulus – surely if in the past they ran surpluses without even having the incentive of a previous stimulus to make up for, that makes the case even stronger?

If Spain is saved now, I don’t see why there should be any problem with applying budgetary conditions on them in the future. On the other hand if Spain doesn’t even have a future …

Simon Wren-Lewis has discussed this in some more detail: http://mainlymacro.blogspot.de/2012/03/austerity-and-not-wasting-crisis.html

Tarrou April 28, 2012 at 5:52 pm

The article you linked actually had some of what I was asking for originally, this time in the case of Sweden. So we can establish that at least some governments are capable of stimulating and then cutting (assuming the analysis from Calmfors is correct). Follow on, if I may take up your earlier statement about current and future governments, assuming austerity measures are unpopular politically, is there any dissonance for your construct in different governments paying different prices while following the program? For instance, today Gray Party stimulates the economy and takes credit for turning it around. Come five years, the Chartreuse Party are in power and it’s time to enact austerity, is there a mechanism for ensuring they do so? I don’t know whether Sweden’s swing in policy was enacted under one government or not, I’ll have to look into it.

TallDave April 26, 2012 at 6:54 pm

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

Comments on this entry are closed.

Previous post:

Next post: