Some simple public choice observations about the periphery

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.


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