Two tweets from Dani Rodrik

The first is:

Josef Joffe is precisely wrong: Europe’s crisis IS about macroeconomics — not microeconomics: http://mobile.bloomberg.com/news/2012-04-16/germany-reformed-its-social-model-europe-can-too.html

I would say it is about the connection between microeconomics and macroeconomics.  I understand full well that Sweden is doing fine (despite a very recent slowdown), but I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery.  Stronger nominal aggregate demand is called for but it cannot make everything there fine.

The second is:

Unfortunately Argentina’s government has been giving unorthodox policy a bad name by associating thuggish behavior with it.

I would say this correlation is no accident, and that there are credibility reasons why many economically small countries are so reluctant to break with consensus approaches and international agreements.  An Ireland trying to mimic Iceland would have had a very tough time of it, and it remains to be seen which country has the stronger long-run prospects.  Moisés Naim put it well:

Argentina suffers from high inflation, slowing economic growth, ballooning subsidies, price controls, capital flight, decaying infrastructure and a less than welcoming environment for foreign investors.

Perhaps the good news is this:

It has had limited access to the international financial system since defaulting on its debts in 2001.

We should expect unorthodox approaches and thuggish behavior to be correlated, even if there is no causal connection between the two.  If you then think of the choice variable as “political culture,” rather than “policy today,” that suggests unorthodox approaches are not nearly as good as they may seem upon first glance.

Comments

Hmm. Possibly true - the Mahathir government of Malaysia (which quite possibly pioneered the last decade of political practice of non-orthodox policy) was also rather rhetorically thuggish during the period, albeit (curiously) at alleged Jewish conspiracies and George Soros. Since it is thousands of kilometers away from Israel, this had no real domestic effect and the Malaysia govt was in any case careful not to aggravate its actual trade partners (most notably the United States).

I suppose Argentina suffers in that the enemies which its government uses as a political football are closer to home.

What do you mean "alleged"? Have you no eyes?

Why are you wasting time here? Have you no swastikas that need spray-painting?

I was surprised to read this non-Tyleresque statement: "I would say it is about the connection between microeconomics and macroeconomics"

"About"?

I know what journalists and other careless individuals mean when they say X is "about" Y. They mean "I wish I could reduce this to a single cause as that would reduce the number of possible solutions and spare me from complexity".

But I wonder what Tyler means when he says "about".

The problems are quiet simple, Hoover.
Getting people to actually abandon the bad behavior that caused them is not.
Acemoglu points this out in "why nations fail." The problem isn't that elites don't know what is better, its that they purposefully create a bad system for their own aggrandizement.

The Tyleresque contrarianism is implicit rather than explicit here, I think. Read instead "if you think the explanation is wholly microeconomic or wholly macroeconomic, you are wrong, instead it is in one of the poorly-studied areas where prevailing orthodox intuitions of both fields clash and work badly".

"but I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery."

... because politics takes precedence over economics in the field of economics. As Acemoglu reminds us, elites try to use politics to control economics and prevent the market from "overthrowing" them. Keynesians are just the current european elites.

+1

"Keynesians are just the current european elites." And also the current American elites.

Keynesians are just the current european elites.

What?? Is this the argument that if you run a deficit you're a keynesian? This isn't some kind of spectrum where you get to define a center and anyone on one side is 'keynesian'. If unemployment is over 10% (having spiked from your structural normal of 7-8%) and you have very little inflation, a keynesian is very likely to say: "we need more fiscal stimulus or looser monetary policy". And basically none of the Euro elites are saying this. They almost universally advocate tightening, especially fiscal tightening. The Euro elites are in love with their market regulations because they are popular with the voters. That does not make them keynesian, as if you can blame all the things you don't like in economics on a macro theory you disapprove of.

I am delighted to see Prof. Cowen mention rent-seeking, because I'm inclined to think that rent-seeking is a major drag on economic performance all around the world. The thuggish rent-seeking of various vested interests in Greece -- notably the wealthy and also high-earning professionals who simply fraudulently avoided the taxes, but also the rent-seeking seen in some public union contracts -- were egregious, and every good Keynsian should condemn them, as should every monetarist, libertarian, and everyone else. Condemning rent-seeking is at the heart of liberal (in the broad/traditional sense) project that includes almost all current political economy theories.

Rent-seeking in the European and US cases are clearly less thuggish, but scarcely less pernicious. But what's shared in the Greek/peripheral and core cases is a common problem: what are the best means to constrain rent seeking of all kinds.

Prof. Cowen and others of the libertarian persuasion have trouble with this problem I think, because it is difficult to envision ways of constraining rent-seeking that do not involve state action. Arguing for complete state non-intervention in economic matters, just to note the obvious, allows the formation of private monopolies, one of the oldest forms through rents can be sought (to be distinguished from state-licensed monopolies, which can also be major sources of rent-seeking, but which in other cases, e.g. copyright and patent law, can actually be beneficial economically). The classic liberal/libertarian argument is for market transparency and information symmetry, but it's hard to see how these can be enforced by anyone but a state.

I don't know why Iceland is unorthodox. Letting private banks go backrupt when there liabilities exceed their assets ought to be orthodox.

Spot on, Jim. And I also don't understand why TC is betting his money on Ireland. Ah, I see he is hedging...

"I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies"

Europe's periphery has had microeconomic problems for a long time. These may be exacerbating macroeconomic problems, and fixing them is a good idea, but focusing on that now rather than blaming macroeconomic policy makers would be to detract from the main short term problem.

This is exactly the point I intended to make. Thanks.

Between 1994 and July 2007, the Spoanish labor market did very well. HIgh job growth, an impressive increase in the participation rate, high immigration and despite this steadily declining unemployment. This was fuelled by (private) debts - but that does not matter. It shows that the supply side of the labor market did not inhibit growth.

http://rwer.wordpress.com/2011/11/22/the-great-spanish-job-machine-charts/After

Does it actually show that? How could you know?

The structural problems of the Spanish labor market are one of the longest running stories of economics.

“but I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery.”

Because they are irrelevant to the question! Every country in the world, to some extend, suffer from ill-advised or growth-hampering "legal and regulatory policies, and rent-seeking practices." If you were to simply draw up a list of such practices in the United States, you would find a terribly long list, and the US is probably among the best nations in the world on this score. Yet nobody is terribly worried about the United States, or indeed many other more dysfunctional countries, defaulting on their debt in the immediate future, because all these nations have monetary sovereignty. Before the crisis Spain was running a budget surplus; then the economy cratered and they began running a deficit. Under normal conditions almost nobody would judge such a swing as anything but a well-advised maintenance of current levels of government spending in the face of increased demand for unemployment insurance and shrinking revenues. But because Spain does not have control over it's own money, nor the last resort of printing more of it, such deficits caused terror in the markets. Israel is a good example of a nation that had outstanding debt of up to 100% of GDP during the boom years and managed to continue growing while simultaneously reducing debt during the bust years. They did this by tolerating a higher level of inflation and allowing their currency to devalue relative to trade partners. Since Spain had neither option they are suffering.

I don't think Keynesians are "reluctant" to condemn bad labor market policy in the periphery; I think they are reluctant to focus on such policies when they are neither the cause nor the solution to Europe's crisis. It is the equivalent of condemning a family for leaving the air conditioning on when they are out of the house while the house is burning to the ground.

Denmark saw the interest rate on its government debt nearly double from just over 2% to nearly 4% between mid-2010 and mid-2011. Was this because of Denmark's irresponsible spending? Their debt-to-GDP ratio climbed a small amount and remained well under 50%. Was this because of their misguided European labor policies? That would bely the fact that Denmark (while having a large minimum wage, large taxes, and large unemployment benefits) has the most flexible and loosely-regulated labor market in Europe.

Perhaps it is because, now that the ECB has demonstrated itself blithely unconcerned with any problem or concern other than German price stability, even at the extent of the solvency or fundamental political stability of the other nations in its charge, investors were fearful of loaning to any nation who had surrendered its money to the ECB.

But that is exactly what's under dispute. It's not just leaving the airconditioning. It's doing things that are not only harmful but increase the chances of more house fires in the future and more difficult to put out fires. IT is part of Keynesian rhetoric to treat transactions costs, rent seeking, and micro distortions as second order. Compared to the crisis at any point in time it may be small but over time the aggregate problems are bigger than any Keynesian problem.

wiki, I a) don't consider myself a "Keynesian," exactly, and b) don't disagree at all with the proposition that poor labor market and regulatory policy in Europe is a drag on current and future growth. But that is simply a wholly seperate conversation. If the question being asked is "why is Europe being seized by successive crises of soveriegn near-default" the answer has exactly nothing to do with labor market flexibility and exactly everything to do with the myriad failures of the ECB. In fact, those who are legitimately interested in helping these nations reform should be doing everything in their power to resolve the immediate crisis. You may, in theory, be right in proposing to Greece and Spain that they should make it easier for employers to fire workers but when unemployment is 20%+ you are going to find very little receptivity to that point and are more likely going to find rocks moving at high velocity. Even if you are able to leverage the current monetary recession into labor market reforms those reforms will have no legitimacy and no political will within the countries in question and thus will have very little chance of sticking over the medium term. The best, and probably only, solution is to solve the current crisis (either with inflation and some sort of debt guarantee or exit from the Eurozone) and try and propose reforms when people are feeling relatively secure and prosperous. Remember that we passed "welfare reform" in the United States not during the stagflation of the 1970s or the double-digit unemployment of the early 80s under Reagan but the prosperous and optimistic mid-1990s.

The comments in this thread are extremely helpful. And they make me wonder whether Prof. Cowen is in fact conceding that the European crisis is about neither microeconomics alone nor macroeconomics alone, but about both together, which in short, is to say, about the political economy. After all, the issue of 'stones flying' is non-irrelevant, or to put it more broadly, the key to understanding much of what's happening in Europe is to see that the particular form of mixed sovereignty that defines the Eurozone has some structural problems. Sovereignty belongs neither to macro nor microeconomics, after all.

Uhmmm... and orthodox neo-liberal policies are not thuggish?? I guess shock therapy has been a joy inducing cake walk!

"so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery"

This reluctant-to-condemn sort of statement is the sort of bullshit claptrappery used to obfuscate on fundamental issues. The people who wanted to invade Iraq spent a lot of time asking why so many who opposed the war were "reluctant to condemn Saddam Hussein", even though of course most anti-war types did not "support" Saddam and I very much doubt Krugman supports Italian labor regulations. Tyler, you usually do better.

The essential Keynesian position is that macroeconomic policy-making needs to focus on ensuring a low rate of unemployment, to avoid political instability, and to ignore those who say (as there are always some who do, even in the middle of the Great Depression) that there are lots of regulatory problems / rents in the microeconomy.

No, he never does better.

"The essential Keynesian position is that macroeconomic policy-making needs to focus on ensuring a low rate of unemployment, to avoid political instability, and to ignore those who say (as there are always some who do, even in the middle of the Great Depression) that there are lots of regulatory problems / rents in the microeconomy."
_______________________________________________

Political instability is how bad leadership and bad government is led out the door. They're the ones that create the regulatory problems/rents by setting up bureaucracies that are paid with the confiscated earnings of the proles, who resent paying the salaries of the guys who make their lives miserable. Political instability is GOOD. Politicians should always be just a few steps away from the guillotine. Then maybe they'd quit making decisions that mess up other people's lives.

@ chuck martel, who claims: "Political instability is how bad leadership and bad government is led out the door.":

I have to say that the historical records does not support this assertion, if only because one could say with much more plausibility, "Political instability is often how bad leadership and bad government gets in through the door."

Governments arising out of extreme instability really can't be called "good" in most historical cases! I shall forbear from naming names...

I wonder how you got into such bad debt if the problem is you aren't buying enough stuff.

+1

In 2007, Spain had a budget surplus and a lower level of debt as a percentage of GDP than Switzerland, Sweden, the U.S. and the U.K.

"I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery."

I'll bite. Having visited Greece this summer I think it's insane that more Keynesians aren't condemning the legal and regulatory policies, and rent-seeking practices, in the Eurozone periphery!

Because, sweet mother of pearl do the Greeks need some kind of Tea Party over there!

To the extent they're still suffering from low aggregate demand, high unemployment, and low capacity utilization they'd still benefit from Keynesian spending, because topologically there's little difference between digging holes and filling them up and having police or street sweepers patrolling safe, clean neighborhoods in squads of six or more. But to be a Keynesian economist is to recognize that when aggregate demand is not in the toilet it's important to not have structural, governmental, often deficit-financed employment just for the fun of it. And so, yeah, Greece needs to reform Government infrastructure such that the same amount of public service is provided (hey, streets should be patrolled) with only about 1/2 to 1/6th the standing Government workforce.

Similarly everything the Tea Party (pretty much) falsely says about American bureaucracy is actually pretty much true in Greece. Entrenched bureaucracy makes it almost impossible to start any kind of business there at all. The difficulty of navigating bureaucracy evidently basically makes impossible to export anything at all! Getting a work permit, resolving a traffic ticket, getting a marriage license, getting a zoning variance, putting up a sign, hiring or firing anybody, you name it, it evidently takes anywhere from days to years. And not because there are, say, environmental or safety concerns, as is more often the case in the U.S. And not even because, as in the U.S., bureaucratic impediments are most frequently created as a result of NIMBY-like citizen or lobbyist activism. In Greece it's mostly because a quarter of the population are employed in the civil service and they all want to look busy and all of them want to feel important.

Going one final step forward, given that austerity programs like the ones imposed on Greece and other "peripheral" eurozone countries (though it's odd to think of Italy and France as "peripheral") have the catastrophically perverse result of disproportionately disadvantaging the private sector vs. the public one, with the result that with an ever increasing proportion of turf-guarding workers in the public sector vs. economy-growing workers in the private sector it will eventually become effectively impossible for the public sector to resume productive growth, period, at all.

So. Bottom line. I agree 100% that eurozone peripheries really do need major, even radical, even "supply-side" driven reform in order to get off their long-term collective behinds.

That has nothing at all to do with the fact that, in Keynesian terms the periphery also needs increases in aggregate demands under present macro circumstances.

If it were me (or, the actual Keynes, or, say, Yglesias) a better question would be how to most efficiently distribute aggregate-demand-building spending. In my opinion? Use it on a massive system of across the board grants to private enterprise stipulating hiring and training for productive work anyone who's just graduated from college and everyone who's applied for but has not yet received a civil service job. With the anticipation that when growth increases (and growth stifling decreases) and aggregate demand drops relative to actual productive supply and demand you do the rest of Keynesianism and #%!#% stop deficit spending.

Bottom line: peripheral countries still can benefit from classic Keynesian infrastructure spending, but the infrastructure that most needs modernization to even 19th Century standards (let alone 21st!) is the #%!#% bureaucracy itself. And not to put too fine a point on it for social-darwin austerity fetishists is that pretty much by definition the demographic most likely to survive any austerity measure in a national economy will always be the hardest-core civil-servants.

Anyway, excellent point, Tyler. Keynesians more than anyone else should be the first rather than last to condemn legal and regulatory policies, and rent-seeking practices, of the eurozone periphery.

figleaf

Keynesians are evil, even though Tyler hasn't identified a single one that is against these policy changes.

I would think, before accepting something uncritically, you would ask for evidentiary support.

Or, maybe it's just team sports.

And just to be clear, I'm an unabashed Keynesian and I'll be delighted if my comment condemning legal and regulatory policies, and rent-seeking practices, of the eurozone periphery helps get the ball rolling... further. Because as you say, Bill, I'm pretty sure a lot of Keynesians feel the same way.

I think a simpler way to look at the problem Tyler and a bunch of other people have is that it's too easy to mistake Keynesian deficit spending, which is both appropriate and sometimes necessary under very particular economic conditions, with old-school patronage spending which in and of itself is never necessary and is almost never appropriate. (The only time it could be deemed even remotely appropriate is when aggregate demand is so low that even patronage spending is better than nothing.)

At times when the economy is running surpluses, meanwhile, the Keynsian policy recommendations of reducing deficits, maybe building rainy-day funds, and otherwise leaving spending to the private sector also leaves no justification for patronage spending.

figleaf

Great post, figleaf. Well done.

"I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery. Stronger nominal aggregate demand is called for but it cannot make everything there fine."

Invoking my inner Scott Sumner here a bit, but on the contrary, nominal AD is arguably all you need. The peripheral sov debts are denominated in nominal currency, and the gov'ts ability to pay them has everything to do with nominal GDP and almost nothing to do with the P/Y split that you get for a given increase in NGDP. Regulatory reform, while great at shifting the P/Y split in favor of Y, doesn't help solve the debt problem in any meaningful way. Unfortunately, for institutional reasons (ie the Euro) the only way to get enough AD in Greece would involve a politically unacceptable level of inflation in the Eurozone core.

No wonder the Keynesians view the reforms as a red herring.

What support do you have for this statement: "I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery." What specific Keynesian economists are you talking about?

On the other hand, I think what you may find is that the austerity to prosperity crowd will have some splainin to do next year. I plan to buy European stock next January during their cold winter.

Could be wrong, but I don't recall seeing Krugman in his many discussions of Europe noting the need to clear such impediments to business. I've read a number of news articles about the hell of conducting business in Greece -- a recent NYTimes article about a Greek guy trying to start a business comes to mind -- but not so much on the part of Keynesian economists. But maybe I'm looking in the wrong places and you can direct me to commentary by prominent Keynesians that are critical of the Greek regulatory state.

It's your burden to support the claim, or rather Tyler's.

Identify the Keynesians Tyler claims are against deregulatory efforts and the other matters he identified.

As to macro policy, sometime you use a hammer when a hammer works, and not a screwdriver; in other words, some tools work better for one problem than another, and some tools actually exacerbate your underlying problem by causing even greater unemployment in the short run.

"Identify the Keynesians Tyler claims are against deregulatory efforts and the other matters he identified."

But that's not what Tyler said. He didn't say that they are actively opposed to deregulatory efforts, he said that they are "reluctant to condemn" them. It's the silence regarding deregulation, not active opposition, that he is highlighting.

Not even the Catholic Church condemns you for sins of ommission.

If you have a fire, do you begin weeding the garden?

The ECB saved Europe recently. When you have a crisis which is really based on a financial crisis (see banks in Ireland, Iceland, England, Spain and France), you can, I suppose, look at the Greeks, but you will ignore the fire around you.

Largely, Krugman and co's point is more that we need to stabilise the markets now and take advantage of growth coming from the output gap, and once that stage has been reached, we then begin the process of sorting out more micro changes to an economy.

Put another way, lots of the people (but probably not you, Tyler) who say things like " I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery" are using it as the 2012 equivalent of "let them eat cake".

The problems are clearly macro; Friedman pointed out that easy credit is a sign of tight money. Never understood why 'die BuBa' had the reputation they did. The high levels of debt suggests the monetary base wasn't large enough from the beginning, not just when the Greek deficit true numbers were discovered.
Ironically, the Germans themselves have destroyed das Projekt.

The reasons that the Keynesians don't condemn rent seeking and other gubment interventions is that they are all in favor of them; indeed most of them make their living via rent seeking, particularly academics (eg., the fattest pseudo-economist alive, who rips off the taxpayers of California).

"I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery"

Because that goes without saying?

They are also reluctant to condemn slavery. At least, I haven't heard them condemn it recently. Make what you will of that.

Actually, the corresponding (and, I should note, equally absurd) observation would be: "I do not get why so many libertarian economists are so reluctant condemn the widespread enslavement or indentured servitude of workers of the developing market countries."

I am quite clear that libertarians are against indentured servitude -- but again, I don't recall hearing many of them railing against the company-dorm-company-store models of Chinese manufacturers, or the various methods of not paying workers in factories in other rapidly developing nations.

Actually I would guess some of the hardest-core libertarians might not have a problem with Chinese labor conditions. In their minds, the workers freely choose to sign up for the servitude. Disallowing them to do so is an unforgivable curb on their liberty. Telling the employers how to run their shops is equally anathema. Workers that don't like it can find something else to do. So, not corresponding really.

One problem concerning the approach to solving economic problems is the imposition of political philosophy on economic theory.

It doesn't matter what label one uses to describe a particular economy, because it will be wrong. The reason it will be wrong is that an honest discussion of economics must begin with the reality that the wealthy and influential determine the rules and from there choose which rules to obey or ignore.

"ballooning subsidies, price controls"

This is unfounded on any fact. Argentina has been removing subsidies, particularly to consumers, over the past 3 years. Price controls are less than what they were 5 years ago. Just throw some mud, make it sound like something the country would do because 'we all know what they're like!', and hey presto, you can rationalise your theories into anything. God forbid you spend a few hours to research the details.

As to Keynesian economists' supposed tilting at windmills, influence and attention are scarce resources. Economists with influence are generally better off talking about issues where their advice might actually be listened to. If enough economists tell the European Central Bank to ease money and tell European finance ministers to stop pushing for austerity, they might actually have an impact. Monetary and fiscal policy both have clear importance in alleviating unemployment and preventing a financial crisis.

On the other hand, how exactly are a bunch of non-Greek-speaking economists supposed to convince Greece to ease "legal and regulatory policies, and rent-seeking practices" in the country? How many even know enough about the legal and regulatory framework in the country to offer constructive views as opposed to talking points on the subject? What reforms are actually likely to be enacted by the Greek government and what sort of measurable macroeconomic impact will they make?

This is what I was thinking as well. Another point is that there is no magical 'economics reform' button that you can press to get improvement unless you are a foolish ideologue. Each European country has their own set of regulations with specific regulatory reform needs. They aren't all the same! It makes it a lot harder to give informed, broadly useful advice. But fixing the macro situation, that is something these folks can give very informed advice on.

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