Thoughts this morning

There isn’t a proper policy response for every need.

That is from Bob Samuelson.  His stance on monetary policy is not mine, but still these are neglected words.

I also see just how much economists are doing macroeconomic analysis without using the concept of trust.  Following yesterday’s elections, including in France, trust among the eurozone nations went down.  That makes the chance of a good outcome less likely, not more likely.  It is painful to admit this, but things still could get much worse and now they are likely to do so.  A seventeen-member currency zone (scary just to type those words) has to be based on trust and this one isn’t, least of all now.  There is little reason to think that Hollande can browbeat the Germans into picking up more of the bill, and if the Germans perceive their former French partner as an unreliable ally, this becomes all the less likely .

Comments

"Following yesterday’s elections, including in France, trust among the eurozone nations went down."

If we're only talking France I'm not entirely sure it did. Hollande will be able to bring the center-left along in a way Merkozy couldnt. I dont think he will change much in terms of actual policy (maybe he'll be able to deliver labour market reforms), but he will make it more of a consensus.

I don't know the politics of France at all, but perhaps this is a Nixon goes to China opportunity?

That's a funny way to put it. There are quite a few people out there who apparently think that for the eurozone to work it's a good idea to replace the will of unreliable nations by the cooperation of reliable governments. A reliable government, I guess, is one that ressembles Germany's closest (hey, let's call it "the Germans") - and by extension, any other government is measured against this ideal. So, when the French government ("the French") makes deals with "the Germans" and those other government-nations, and willfully ignore that the real French disapprove of them and then, when those real French actually have their say, they surprisingly say what they conceivably thought all the way long... well, haha, then "the Germans" sure have to perceive "the French" as not reliable, really! And what counts for "the French" also counts for "the Greek", who are conveniently ruled by tecnocrats who have never been presented to the actual Greeks for election. Boy, and then those real non-government unreliable Greeks dare to vote in a way that again has to make "the Germans" conclude that "the Greeks" are unreliable. After all the effort "the Germans" have put into making "the Greeks" sign commitments to stick to what those unreliable real Greeks disapprove of, regardless of what those unreliable real Greeks might say in any election! That the whole project willfully ignores those actual nations' wills to begin with might be part of the problem, you say? That "the Germans" are in the first row of pushing a political agenda that makes goverments ignore their nations' wills for the sake of some concept of reliability devoid of any democratic spirit, might be part of the problem of lacking reliability and trust (and, for that matter, democratic spirit), you say? Oh, no, sorry, you didn't say that...

Recognition of national will and democratic spirit are all that's really needed to straighten out a mess created by unelected technocrats. Pretty simple when you think about it.

Well, I don't know if it is that easy at this point and the mess has been building up for some time now. But then, if Merkel and Sarkozy have really thought that they could work out a reliable plan that is rejected in almost every country that has had a vote so far (and not surpisingly so), they were incredibly stupid: basically, they have been assuming that the political landscape would stay as it was for the next, I don't know, five years? Ten years? I have no idea what they were thinking...

But what really strikes me as a bad development ist the extreme aggressivity the German government shows when it comes to this "reliability" question. They have literally forced the Greek state (exemplary, they are not the only ones) to hand over large chunks of its souvereignity and to effectively block off the Greek people from voting for a path differing from what the German government is willing to accept - by demanding signed commitments from the part of the parties in the Greek parliament to do what amounts to ignoring the voter. (Unrelated to the issue at hand, but telling with regard to actual Germany I'd also throw in the extreme policy of the German government toward the Switzerlands when it comes to German tax evaders.) I understand the problems the German government (and, for that matter, the Germans themselves) have with further concessions, especially given the problem that they do not have any guarantee that the others meet the obligations they have committed themselves to in the course of the process.

But if you read Tyler Cowen, you have the impression as if Germany was the good guy, but just can't work with those other unreliable countries in the eurozone. The German government shows a behavior I would have thought impossible some years ago: they are politically aggressive, and they don't give a sh*t if they kill off democracy in a country when it comes to the question of "reliability". I don't know what exactly Cowen means when he says that "the French" could now been perceived as a unreliable ally - I mean, WTF? The only reason why "the French" are now "unreliable" is that they voted yesterday, contrary to Germany. Whereas CDU/CSU have a comfortable relative majority according to polls, nobody can imagine how they would form any coalition ressembling the status quo (given that the FDP will probably be crushed and all the others are left-of-center and whatever is the Piratenpartei). Cowen's "trust" and "reliability" is a phenonenom that exists purely on a governmental level and has (and very obviously never had) no grounding whatsoever in any country's voters' will (if we trust polls and the results from countries that have had elections so far). And for a reason that escapes me, he seems to think that the voters' expression is the untrustworthy thing and greatest danger, not governments accepting or actively pushing the corrosion of the very insitutions that make up modern Western societies for the sake of reliable financial commitments.

Yes, it seems like the way to build trust within the eurozone and the EU is for leaders to make sure they negotiate intergovernmental accords that can withstand, receive, and *sustain* democratic legitimation from domestic populaces. The fact that the fiscal pact may not be doing this doesn't mean the fiscal pact has been betrayed (broken trust of some sort); it means its parameters probably weren't sufficiently well negotiated with enough foresight. All sides deserve some blame for this, and I'm not sure why Merkel doesn't deserve some blame for not foreseeing where austerity might lead and how it was a gamble leaning so hard on that one element in the fiscal pact.

Tongue was firmly planted in cheek. The "national will" of the Greeks or Spaniards is, at this point, unrelated to their huge but economically disastrous individual governments. "Democratic spirit" has never been an answer to any problem, 51% of the voting public doesn't have a franchise on truth or reality. It doesn't matter if they stand "austerity" in front of a firing squad, they can't continue to operate as they have, even if they want to do so. That's the problem.

'The only reason why “the French” are now “unreliable” is that they voted yesterday, contrary to Germany.'
You do know that an election was held in Germany, one with direct effects at a federal level (hint - Merkel just lost another part of her Bundesrat non-majority), and that the socialists/Greens were the winner, right? In other words, the last election in Germany has the 'Germans' voting pretty much the same way as the 'French.'

It is almost as if Americans have no interest in how a democratic society functions - with new parties arising to reflect what voters wish, and with parties changing power within a government on a regular basis. For example, Germany had a 'socialist' running things more recently than the French. The joke of the apostophes being that 'conservative' Merkel looks positively radical in terms of today's American politic spectrum, where Obama is referred to as a 'socialist' without anyone hearing that doubling over in laughter at anyone silly enough to say something so utterly ignorant.

@ prior_approval

Well, I guess I am too late on this. Actually, I was talking about national elections - but true, I didn't think about the impact on the federal government. Perhaps the result will put some pressure on the federal government, but for the moment I don't see them changing course on any central topic. But if the result in the next federal elections mirrors the result from yesterday Merkel will have a hard time. And for what it's worth, I am German, I just didn't follow these elections, as Schleswig-Holstein not my Land and I am living in France...

I think it's fairly difficult to disentangle the impact of local and national topics in this kind of elections on the Länder level. In some cases it's obvious, but, as I said, I didn't follow these elections, so I don't know. If you're still reading this and have more informations I'd be grateful if you could post them (as far as Cowen allows that kind of off-topic disucssion, of course).

@ chuck martel

I don't know what you mean. Do you think it's OK to abandon democracy once you think that the voters won't vote "correctly" and therefore it's OK if Germany or the ECB take over? What's the conclusion? My point, as far as it concerns you post, was that it's incredibly stupid if you try to implement policies that would have to last for several election periods that are obviously against what voters are ready to accept, regardless of the question if that "will" is very intelligent or not. And that it's fairly anti-democratic if you try to account for the voters' obvious unwillingness to accept by simply ignoring them. Germany required both from the Greek government (and by implication, from everybody else except those, like France, that are too powerful to be commanded that way - there, Sarkozy tried it himself...), and yet some people are able to be astonished that all these countries, once they have their say, are "unreliable". Stupid democracy, I guess.

The point is that 51% of the voting public isn't any more qualified to make economic decisions for the rest of the folks than cuff-link wearing technocrats are. As an individual, I don't care what the majority thinks is the best way to spend my money or sign me on to an increasing sovereign debt to pay the wages, health benefits and retirement of government employees whose job description is to make my life more difficult and expensive. No matter how you cut it, private wealth has to be confiscated to keep the parasite governments afloat. A popular vote can't change that.

Additionally, socialist states like Greece and Wisconsin have such a high percentage of government employees and contractors that public sector reform has become politically impossible. What government apparatchik is going to vote against his own income? An even more important question is, "Why should government employees be allowed to vote at all?"

@ chuck

Reading you is like reading "balloon juice" on the advantages of welfare and the viles of free market. You don't engage in an argument but repeat fairly cheap libertarian talking points. Nothing against libertarianism, but I have seen much better arguments than "socialst states like [enter anything that passes as socialist at Fox News]".

And who said democracy is the way to go because the majority always decides for what is best? There are a lot of arguments in favor of democracy, that's not one of them and never was (in the short run, anyway...).

If you just wanted to tell me that big gubmint socialism as taught by Glenn Beck is evil and the unwashed masses having an opinion other than yours are stupid... well, I got it. Have a nice day.

Putting forth the proposition that a democratic vote on what particular politician gets to implement the theories of some economic guru isn't the answer for an individual's own particular economic problems is "a fairly cheap libertarian talking point"? You're right, no graph, no formulae, no references to mid-twentieth century faculty or their papers, simply no validity at all.

Eurogeddon countdown reactivated - repeat, Eurogeddon countdown reactivated. As soon as we can figure out how to restart the Eurogeddon clock which last ended sometime last fall.

I trust that this time, our trust in an inevitable Eurogeddon (which has just become a lot more likely, unlike last fall, right? or was that more than a year ago?) will finally be rewarded.

Because at it stands now, my trust in Eurogeddon as proclaimed here is starting to wear a bit thinner. One could even say that trusting proclamations of Eurogeddon in the short term does not even need to be voted on. The euro, like every single currency in human history, and most definitely including the U.S. dollar, will eventually and inevitably fail - though why this basic fact needs to be pointed out is always a bit strange. Hollande has experienced at least two, or possibly three, currencies in his life - the franc, (post war and new - debatable whether they were separate currencies), and the euro. Though Merkel still has him solidly beat there - she has used the DM, the Ostmark, and the euro.

And why no mention that Merkel is next on the chopping block? - basicaly, her coalition just lost another German federal state election, to the SPD and Greens. With the Pirates breathing down everyone's necks with their reckless talk of transparency and stopping the growth of police state policies in the middle of democracies.

The Euro is unworkable. It always was, and most likely always will be. There is no central fiscal authority, and without a common language there is limited labor mobility. Without those, it is really just a dressed-up system of fixed exchange rates, and we should have learned by now that fixed exchange rate regimes never last very long.

So a "good" outcome is one that recognizes reality. The Euro is going to fail. Better that it does so sooner rather than later. The eventual costs to the taxpayers only goes up with delay.

I admit that I actually love this. I love watching these systems crash completely, I squeal with delight whenever the next "unexpected" catastrophic news is aired. I want to see Rome burn and play the lute.

It is painful to admit this, but things still could get much worse.

How's the crisis-evolution so far? If you were the median {Greek, Italian, German} were things much better six months ago than they are right now?

For the average German, things are at least as good now as six months ago - unemployment is at 15 year lows (around 7%, by the German standard - anyone working 15 hours or less and who wants full time employment is considered unemployed, and part of that 7%), and various unions have been able to force pay to at least keep up with inflation, or a bit more (strikes work, it seems).

Not to mention that the Pirate Party is making significant inroads into a system which so many people seem to decry- that is, the Pirates are showing that a significant part of the electorate wants change, starting with greater transparency into how the various structures are governing citizens - at regional, national, and supranational. The EU Pirates were a major part of sending ACTA to Davy Jones locker in the EU - and as they keep winning votes at a rate that might make one think that the Pirates understand the importance of the network effect, no politician in Germany can afford to ignore the fact that their job just might not be the sinecure they had thought. Amusingly, the CDU 'winner' in Schleswig-Holstein, who is currently braying about how the CDU has the right to form a government, didn't even win a seat in the Landrat - that's right, someone not currently elected to a government body is demanding the right to lead that government body. No wonder the Pirates are having such an easy time - and why they are attracting surprisingly broad support, in part to renew a system that was drifting off course in the eyes of many voters.

The only solution to the Euro crisis is for the weaker indebted nations to leave (Greece, Ireland, Portugal, Spain, Italy, and possibly France) or for the stronger nations to pick up more of the bill. Yesterday's elections will hasten the day of reckoning. That's a good outcome.

There isn’t a proper policy response for every need.

Sententious as a general principle and pernicious in its particular application. Which is substantively what you said, only with a different tone.

Isn't the only question, is France willing to leave the Euro?

If the answer is no, the socialist is just an Obama getting progressives to support war.

If the answer is yes, France will fall to merde, and socialism will be blamed and hated for a long time to come. No one is going to loan France money.

In France, every merde is blamed on capitalism.

The French intellectual class is incredibly hostile to capitalism, for untold generations, and it will not go away. I don't even think that there is any significant classicaly liberal think tank there.

Think about the Dolchstosslegende (the post-WWI German lie that civilian pacifists and social democrats caused the capitulation of Germany) in economic context.

The old "trust"-based dispensation was clearly not going to work. Doing something different may not work either, but it isn't obviously worse.

Contrary to Samuelson's *bon mot*: There is always a "proper policy response" to any change in the situation; there is always an *optimal* policy (perhaps several that are tied for best). There may not be any policy that will *completely satisfy* the "need"--that will produce *heaven on earth*; but there is always a policy that is *at least as good as any alternative policy*.

This is a statement of faith that ignores the substantial influence of chaos in all large complex systems. While there may be a "perfect policy response" in the abstract, it is unknowable in advance.

The economy is not that complex of a system, or all that chaotic long term ... See graph:

http://research.stlouisfed.org/fredgraph.png?g=74h

To very good approximation, the economy is linear in log space. Some slope is optimal given some policy objective.

This is a chaotic system:

http://ars.els-cdn.com/content/image/1-s2.0-S0960077902005854-gr1.gif

I consider Samuelson’s attempt to employ the active/passive distinction usefully in assessing the conduct of the Fed to be misguided. Compare: this morning I averted a potential slide into starvation by *eating breakfast*. What a “heroic exertion” (to borrow a phrase from Samuelson) on my part! I wasn’t merely *passive*!

But maybe the fact that I always, *routinely*, eat breakfast makes my doing so this morning passive, not active after all; maybe for Samuelson ‘active’ means the same as ‘extraordinary’. Unfortunately, there are different ways to describe any action: under some descriptions it will be ordinary, under others extraordinary. For example, my breakfast this morning consisted almost entirely of molecules that *I had never eaten before*; it was in a way quite unprecedented.

The Fed is responsible for stability in the macro-economy, and its policies should be judged by how well they achieve that goal. Whether they can be described in a way that makes them seem “active” is quite irrelevant.

You're overreacting, Germany and France had a little tiff in 1914 but the trust has been there since then.

One would hope this was brilliant sarcasm.

I mean we should remember formal macroeconomics has not been using trust to interpret economic swings, but people like Eichengreen and Kindleberger have used it for historical analysis of the Great Depression for years now. Eichengreen emphasized what really caused current accounts instability was lack of cooperation emanating from the terrible post WWI reparations regime. The requirement of cooperation, according to Kindleberger, was the lack of central decision-making, due to the decline of the BOE. I see parallels in the current situation. With the decline of the Merkozy pact we are losing the central decision-making force. Simultaneously, increased multilateral cooperation is harder because the post-crisis austerity regime caused outbursts of political resistance and fumed nationalistic biases. One more reason economic history should be a requirement of any graduate student.

The reason for the existence of money is to facilitate transactions between entities that don't trust one another. The only reason to have e.g. Greece pay hefty interest on its debt is because you don't trust it to pay it back. A lack of trust isn't making the problem worse ... it has been the problem from the inception.

Let's see. Merkel trusts Hollande less than she trusted Sarkozy. Therefore, she will no longer be willing to bail the banks out of the mess they created. The banks will lose trillions because Merkel is in a snit. Hmmm...makes sense to me.

Except that the European banking system still controls how much they get and from whom it comes.

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