Paul Krugman’s post on the topic was revealing, compared especially to the analytic and rhetorical flourish which he applies to criticizing austerity. You can’t fault his IQ or his knowledge of the situation, there simply isn’t much convincing to put forward. Here is Ryan Avent, in a good post but I think it also fails to put forward a workable solution:
What, then, are the alternatives to austerity? Well, first up would be an integration that would help break the diabolical loop now gutting the periphery. Creating a euro-zone-wide safe asset and a euro-zone-wide set of institutions to stand behind damaged banks would help accomplish that. America doesn’t expect Delaware to shoulder the costs of failures of banks headquartered in Delaware. That’s an important contributor to the stability of the American federal system. The euro-zone must recognise that it is the failure to build appropriate euro-zone-wide institutions—equal in scope to the considerations and resources of the central bank—that is contributing to soaring yields around the periphery and creating the illusion of the need for dramatic austerity in places that could do without it.
I call this the “Germany pays for everything and accepts all the risk of moral hazard” approach. Potential German liabilities could run in the trillions of euros and the “ball and chain” lasts forever. I know all about Connecticut and Mississippi, but without a common electorate, not to mention a common national identity, I don’t see how this is possible. Keep in mind that Eurozone-wide deposit insurance in essence serves as an implicit guarantee to the parent national governments as well, for Modigliani-Miller-like reasons.
It is like doing African development policy by suggesting that America send one-third of its gross national product to Mozambique. Maybe it is moral to do so (though I doubt that), but in any case it is not really a policy proposal. Lack of a common identity is a constraint, not a policy choice, except at fairly small margins or at moments of extraordinary cultural transformation (hint: this is not one of them , especially when there are seventeen nations involved).
By the way, will the periphery nations give much (any?) control over their finances to Germany? Clearly not, and thus we are back to the idea being dead as a doornail.
There is no common fiscal policy without a common electorate, not for long at least.
Ryan Avent also supports looser monetary policy for the eurozone, as do I. It’s worth trying. But keep in mind, the further along is a financial crisis, the more emergency monetary policy takes on a more purely redistributive element. You end up having to stick the money somewhere quite specific and forget about ever getting it back. Nominal reflation helps with some problems when done well in advance of crunch time, but right now it is a question of solvency for many of the parties involved. It’s already ineffective for the ECB to be doing three-year loans to rotten banks at one percent, against very low value collateral, how much more of a boost are we to expect?
Just how much monetary policy needs to be done? At this point, we’re not talking about a move from price stability to say four percent eurozone inflation (which I would nonetheless favor, and favored all the more a year or two ago), rather much more would be required. We’re running up against the same constraints which prevent the de facto Eurobonds from taking off. Revisit the well-known point that in a financial crisis fiscal and monetary policy blur together, and we return to the notion that solutions are based on massive cross-border redistribution. On top of all that, arguably the deflationary pressures in Greece, and possibly Spain, are already past the point of control from the ECB side, given the ongoing collapse in private lending.
Employers [under ACA] save $422 billion if they dump health coverage. Will they?
From Sarah Kliff, here is an argument that the answer will be no. I am less convinced. I believe national effects will be larger than single-state effects (Massachusetts), and that employers will offer their employees some compensation for taking their chances on the subsidized exchanges. I suppose we will see, or then again maybe not.
Hey Tyler, possible blog post topic: I’m wondering how you would explain the situation in South Africa (or other similar countries) with stupendous persistent unemployment–SA has been above 20% since 2000: http://www.tradingeconomics.com/south-africa/unemployment-rate
A few factors I imagine are important:
1) The education system is totally broken in a lot of places. As in, 12th graders can neither read nor write in any language nor figure out 3×3 in their heads.
2) Unions are crazy strong, and have been driving up wages like gangbusters, particularly in the public sector.
3) Minimum wage laws are stringent and have actually led to worker protests: http://www.nytimes.com/2010/09/27/world/africa/27safrica.html?pagewanted=all
4) Inflation hasn’t been TOO bad recently (~6%), but has seen spikes to almost 14 percent not long ago: http://www.tradingeconomics.com/south-africa/inflation-cpi
5) There’s a highly developed sector. On average, whites are far richer than blacks.
6) Crime and inequality are incredibly bad.
7) The ANC has won every election in a landslide and is strongly allied with the unions.
So how does it tie together? Lots of poorly-educated ZMP layabouts? Wages too high to start sweatshop-style development? Razor wire + electric fence + security guard costs deterring investment? The results of generations of systematic oppression and denial of education? All of the above, plus some?
Just trying to iron out a coherent story. I was a Peace Corps volunteer for two years there and I’m slowly building up my economics knowledge; this question has always fascinated me.
Eurozone M3 vs loans to the private sector (source: GS)
From SoberLook, here is more. One possible lesson is that the real enemy of monetary policy is collapsing credit markets, not zero short-term rates per se.
1. One constructive suggestion for the eurozone; there should be more of this. This is an actual situation requiring actual solutions, not a pond for fighting ideological battles.
ROME — Giuseppe Toniolo, a renowned late 19th and early 20th century lay Italian economist and political theorist, was beatified on Sunday in Rome’s Basilica of St. Paul Outside the Walls, the final step before a formal declaration of sainthood. Among other claims to fame, Toniolo is now the first economist ever beatified by the Catholic church.
Of course many of the early Church fathers, some of whom have become saints, also can be considered to have been economists. In any case, here is the story, and this piece sets him in the context of the German economists of the late 19th century.
That’s Ron Paul vs. Paul Krugman, the video and transcript is here, here are a few comments under the fold…
1. RP: I don’t understand RP’s claim “I want a natural rate of interest.” Even gold standards allow for monetary influences (distortions? …depends on your point of view) on interest rates. RP has not fully absorbed Myrdal (1930) and Sraffa (1932).
2. K’s response to RP: Numerous good points, but Christie Romer (!) has shown that economic volatility was not higher before WWII. (Somehow that’s one Romer paper which isn’t discussed so much anymore.) That’s a major hole in K’s argument. Relative to the evidence, he is overreaching when a more modest point would suffice.
3. RP: The transcript may be garbled here. In any case, the Fisher effect is imperfect and so inflation does to some extent tax savings, also through interaction effects with the tax system. That said, I don’t see that two to four percent inflation has unacceptable costs, especially when AD is otherwise weak. On Diocletian, via Matt, here is a good recent paper.
4. K’s response: Modern liberals have a bad and selective case of 1950s nostalgia. Krugman is significantly overrating the role of policy here. More overreaching. He should stick to analyzing the “no bailout in 2008-2009” scenario, and how much worse it would have been, including for RP’s preferred ends. On earlier time periods, he should reread his own writings from around the time of The Age of Diminished Expectations. There is very little in The Conscience of a Liberal which actually trumps or overturns the earlier book and its focus on productivity rather than politics.
5. RP: I don’t understand his discussion of the liquidation of debt. Perhaps the transcript is garbled again. He is correct that the massive spending cuts which followed WWII brought no depression but rather the economy boomed. Keynesians have a hard time explaining that episode without recourse to Ptolemaic epicycles, etc., or without admitting the importance of real shocks.
6. K’s response: On Friedman, correct and on target. That said, K’s blogged claim today — that Friedman misrepresented his own views — lacks a quotation or citation altogether; furthermore it is contradicted by this excerpt from Free to Choose, which was Milton at his most popular but still he represented the truth correctly (ignore the heading, which is not from Friedman). K won’t address the WWII point, although he could if he revisited his earlier writings on changing rates of productivity growth.
7. RP’s response: The decline in the value of the dollar since 1913, or whenever, has not been a major economic cost. No one has had such a long planning horizon, for one thing. We don’t see much indexation, for another.
8. RP on the Fed: If we had “real monetary competition,” dollars still would reign supreme. Who now is opening up U.S. bank accounts in other currencies? Or using gold indexing? It is allowed.
9. K’s response: Mostly I agree, though it is odd to think of shadow banking as “currency competition.” It is more akin to “not explicitly regulated banking, with stochastic under-capitalization, and with bailouts in the background and largely driven by regulatory arbitrage.” That makes it less of a counter to RP than PK is suggesting.
10. RP: Equating inflation with “fraud” is an excessive moralization of the issue. The point remains that gentle inflation is usually a good thing, and that the money supply under free banking, or a gold standard, would be excessively pro-cyclical. The best shot is to hope that a natural monopoly private clearinghouse would institute nominal gdp targeting in terms of levels and perhaps “targeting the forecast” too.
11. The exchange about Bernanke: I don’t know whether Krugman literally has “printing money” in mind, so this is hard to interpret. They are stuck in the vernacular, when a more precise economic language would allow for more targeted commentary.
12. PK: Demographics, plus government gridlock and lower productivity growth, make a higher debt-gdp ratio more problematic than Krugman admits.
13. RP: Polemics from RP.
14. K’s response. Very short. But if he likes the market so much, why does he so often seem to be pushing for much higher taxation and higher government revenue? I understand why he wants single payer, but he also seems to favor direct government provision of health care itself.
15. RP: The discussion of debt doesn’t make sense, though it is correct to argue that eight percent measured unemployment underestimates the depth of our labor market problems. I fear, though, that he may be holding an exaggerated version of this point. U6 matters, but it should not be taken as the correct measure of unemployment.
16. RP: Seigniorage isn’t a major source of government revenue, and in general it is worth thinking about why corporate profits are so high and why the stock market, at least in recent times, has done OK. Is it really all about policy uncertainty? Lots of polemic here. Still, RP raises the point that Fed purchases of T-Bills may be helping to keep rates artificially low. This remains unproven, but it is also unrebutted.
17. RP (again): There is no credible alternative to the dollar as reserve currency today. On Spain, it is nonetheless a good point that spending cuts in a dysfunctional economy don’t help very much if at all.
More RP: Doesn’t PK get to speak again? Did Austerians suddenly cut the funding for his part of the transcript? (Had I watched the video, I wouldn’t have had time to write this post.) In any case, pegging the dollar to gold in an era of commodity price inflation would be a disaster and lead to massive deflationary pressures or more likely a complete abandonment of the gold peg rather quickly.
In sum: There were too many times when RP simply piled polemic points on top of each other and stopped making a sequential argument. He overrates the costs of inflation, including in the long term, and for a believer in the market finds it remarkably non-robust in response to bad monetary policy. Still, given that Krugman is a Nobel Laureate in economics, and Paul a gynecologist, the score could have been more lopsided than in fact it was.
Exceeding all expectations, Paul Romer convinced the Honduran government to authorize a charter city. Now Romer is encouraging Canada to export its institutions. Here is Romer and Octavio Sanchez, chief of staff to the President of Honduras, writing in Canada’s most important newspaper, The Globe and Mail:
http://www.crossed-flag-pins.com
With the near unanimous support of its Congress, Honduras recently defined a new legal entity: la Región Especial de Desarrollo. A RED is an independent reform zone intended to offer jobs and safety to families who lack a good alternative; officials in the RED will be able to partner with foreign governments in critical areas such as policing, jurisprudence and transparency. By participating, Canada can lead an innovative approach to development assistance, an approach that tackles the primary roadblock to prosperity in the developing world: weak governance.
…According to Gallup, the number of adults worldwide who would move permanently to Canada if given the chance is about 45 million. Although Canada can’t accommodate everyone who’d like to move here, it can help to bring stronger governance to many new places that could accept millions of new residents. The RED in Honduras is the place to start.
…By participating in RED governance, Canada can make the new city a more attractive place for would-be residents and investors.
…The courts in the RED will be independent from those in the rest of Honduras. The Mauritian Supreme Court [!, AT] has agreed in principle to serve as a court of final appeal for the RED, but Canada can play a strong complementary role. Because the RED can appoint judges from foreign jurisdictions, Canadian justices could hear RED cases from Canada and help train local jurists.
Oversight, policing and jurisprudence are just a few of the ways in which Canada can help.
…The world does not need more aid. As the Gallup numbers show, it needs more Canada – more of the norms and know-how that lead to the rule of law, true inclusion and real opportunity for all.
Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before?
…If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the EU. The Athens metro is excellent. The AVE fast-trains in Spain are a marvel. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain – in particular, youth unemployment.
Worse, in some ways, EU funding for infrastructure has created problems. In Greece, milking the EU for subsidies became an industry in itself: and political connections were a surer route to wealth than entrepreneurial flair.
…Even in France, the centre of the revolt against austerity, it is hard to argue that the problem is that the state is not doing enough. This is a country where the state already consumes 56 per cent of gross domestic product, which has not balanced a budget since the mid-1970s, and which has some of the highest taxes in the world.
Mr Hollande, who is not an idiot, knows all this. That is why, behind all the feel-good rhetoric about ending austerity, the small print is less exciting. In fact, all the Socialist candidate is promising to do is to take a year longer than President Nicolas Sarkozy to balance France’s budget. In Europe, even the left cannot pretend that deficit-spending can continue for ever. So they are reduced to arguing that governments are cutting, “too far and too fast”, in the words of Ed Balls, Britain’s shadow chancellor. This is small-scale quibbling – masquerading as a major doctrinal dispute.
Eurozone M3 vs loans to the private sector (source: GS)
