Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 7 March 2014

The sharp but effectual remedy

This is about the Eurozone, and it needs to be rather long to be provocative. You do not need any prior knowledge to understand the message.

Mario Draghi, head of the ECB, declared the Eurozone as an “island of stability” yesterday as he announced no change in policy. He was referring to the impact of the Ukrainian crisis, but I think it serves for macroeconomic policy as a whole. Inflation is well below target, and there is a negative output gap of nearly 4% according to the OECD. Unemployment remains at 12%. There is a recovery from recession, but as Reza Moghadam from the IMF points out, it is weak and fragile.

So the Eurozone is stable, stuck in a bad place. As the IMF again warns, this place looks a lot like Japan in the 1990s. I have my misgivings (technical discussion here) about the ‘two equilibria’ idea that Gavin Davis among others have used, but where it might apply is when a central bank’s inflation target is either unclear or one-sided, and that is much more true for the ECB than for the Fed or the Bank of England. What is clear is that the ECB should not wait until there is deflation before doing more than sitting on its hands.

Yet complacency is not confined to the ECB. We had a second Eurozone recession because fiscal austerity has been acute in some member countries, and it has not been offset elsewhere. (For the numbers, see here.) If you think that is because the Eurozone is a monetary union and not a fiscal union, ask yourself this. If overall fiscal policy was being determined in Brussels rather than by individual national governments, would it be so very different today? I suspect we would be seeing similar overall austerity as the ‘Eurozone government’ obsessed with reducing debt. Given their relative competitive positions, that would mean ‘stability’ in parts of the Eurozone and severe recessions elsewhere, much as we have now.

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“drastic reductions to municipality budgets have led to a scaling back of several activities (eg, mosquito spraying programmes), which, in combination with other factors, has allowed the re-emergence of locally transmitted malaria for the first time in 40 years”

“a 21% rise in stillbirths between 2008 and 2011 …. attributed to reduced access to prenatal health services for pregnant women.”

These are statements not about some poor African nation, but about Greece, from a recent paper in the Lancet. (HT Francesco Saraceno. Quotes above and below exclude footnotes giving references.) The title of the paper is  ‘Greece's health crisis: from austerity to denialism’. By denialism they mean the following:

“Greek citizens ... are subject to one of the most radical programmes of welfare-state retrenchment in recent times, which in turn affects population health. Yet despite this clear evidence, there has been little agreement about the causal role of austerity. There is a
broad consensus that the social sector in Greece was in grave need of reform, with widespread corruption, misuse of patronage, and inefficiencies, and many commentators have noted that the crisis presented an opportunity to introduce long-overdue changes. Greek Government officials, and several sympathetic commentators, have argued that the introduction of the wide ranging changes and deep public-spending cuts have not damaged health and, indeed, might lead to long-term improvements. However, the scientific literature presents a different picture. In view of this detailed body of evidence for the harmful effects of austerity on health, the failure of public recognition of the issue by successive Greek Governments and international agencies is remarkable.”

This paper focuses on Greece, but here I talked more generally about the work of one of the co-authors, David Stuckler, who finds a general association between austerity and deteriorating public health.

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Between 1846 and 1851 about a million died of starvation and epidemic disease in the Irish potato famine. The general consensus today is that although this famine began as an extraordinary natural catastrophe, its impact was made much worse by the actions (or lack of action) of the British government, headed by the Whig Lord John Russell. As Jim Donnelly describes here, there seem to be three ideologies that held the “British political √©lite and the middle classes in their grip, and largely determined the decisions not to adopt the possible relief measures.” These were “the economic doctrines of laissez-faire, the Protestant evangelical belief in divine Providence, and the deep-dyed ethnic prejudice against the Catholic Irish.” The system of agriculture in Ireland was perceived in Britain to be riddled with inefficiency and abuse. The British civil servant Charles Trevelyan, chiefly responsible for administering Irish relief policy, wrote that the famine was “the sharp but effectual remedy by which the cure is likely to be effected.”

There is a debate about the humanity and personal responsibility of Charles Trevelyan. Yet his actions were hardly idiosyncratic. The Lord Lieutenant of Ireland, the Earl of Clarendon wrote a letter to Prime Minister Russell on April 26th, 1849, expressing his feelings about lack of aid from the British House of Commons: "I do not think there is another legislature in Europe that would disregard such suffering as now exists in the west of Ireland, or coldly persist in a policy of extermination." Henry Farrell notes that the Economist magazine strongly supported the laissez-faire line pursued by Trevelyan and Russell. Were the governing elite collectively evil, as they provided armed guards for the shipping of huge quantities of grain away from the same areas affected by the blight? We could just say people act in their own interests, but as Dani Rodrik argues, this underestimates the power of ideas and ideologies.

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Of course the Irish famine is different in degree and form to the difficulties being faced by many in some Eurozone economies. But the similarities should worry us. There is the widespread view that the inefficiencies and corruption that exist in these economies are a key factor in explaining the difficulties these countries are in. Worse still is the idea that severe austerity is necessary to ensure ‘structural reform’ takes place to reduce these inefficiencies. There is also a common belief today that various economic processes cannot be interfered with and contracts have to be upheld, which are not very different from beliefs held by the British government in the 1840s. When the ‘effectual remedy’ leads directly to suffering, the evidence that it does so is ignored, as the Lancet paper argues is happening in Greece today.

If you think that the problems in Greece and elsewhere are clearly self-inflicted, rather than the result of an act of God like potato blight, consider this. The Greek government borrowed way too much and concealed that fact, but this was hidden from the Greek people as much as anyone else. Just because politicians are elected, does that make the people as a whole responsible for everything they do? Are they more responsible than those who lent the government this money, or in the case of other Eurozone countries lent money to banks that were subsequently bailed out with no public discussion? 

In Victorian times there was a belief that the debtor must be made to repay their debts whatever the hardship that this entails, and with minimal cost to the creditor. We think we live in more enlightened times today, but at least the individuals in debtor prisons normally signed the contracts they were being held to. In the case of Greece and elsewhere their leaders signed on their population’s behalf.

If you say that the law must be followed, well the British government was also protecting the rule of law when it ensured that those shipments of grain left famine stricken Ireland. Are those shipments of grain so very different from the flows of money now leaving Greece and elsewhere to pay the interest on government debt? Our attitude to famines is a little more enlightened than it was in the 1840s, but perhaps some of that enlightenment is needed elsewhere.



20 comments:

  1. Well said. What is being done to Greece is a crime.

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  2. I believe it to be the case that the scientific discovery of the virus that caused the potato blight in Ireland was found in the 1880s.

    Whereas the means of mollifying the economic crisis of 2008 has been known since the 1930s.

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    1. In Oliver Rackham's Collins New Naturalist (p544) he writes that he was told in Ireland (in 2004) that Ireland can't regulate the potato blight virus due to WTO rules.

      Shiller's column at Project Syndicate, 'Bubbles without Markets' sees Shiller say that "China’s Great Leap Forward in 1958-61 was a market-less investment bubble", and in that article he compares bubble-thinking to these pseudo-scientific new era political movements that have caused terrible famines through political neglect.

      (I've looked for that 1880s date and I can't find it, but I'm pretty sure its right).

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  3. And you didn't even have to bring the treaty of Versailles into the discussion.

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  4. "We think we live in more enlightened times today"

    In the age of DSGE I wonder.

    What micro-foundations are they based on? Something straight out of Victorian era economics, whose views of individual and social behaviour are very counter-Enlightenment.



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  5. Those who made the laws have apparently supposed, that every deficiency of payment is the crime of the debtor. But the truth is, that the creditor always shares the act, and often more than shares the guilt, of improper trust. It seldom happens that any man imprisons another but for debts which he suffered to be contracted in hope of advantage to himself, and for bargains in which proportioned his own profit to his own opinion of the hazard; and there is no reason, why one should punish the other for a contract in which both concurred."
    Johnson: Idler #22 (September 16, 1758)

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  6. I wonder, does savage cuts really improve governance? Does underfunding infrastructure for years on end improve the competitive environment? Does inflicting poverty decrease or encourage corruption? I hear stories about Greek bureaucracy taking longer and longer to process paper work. I hear stories about civil servants not receiving production-enhancing technologies. I hear stories about jumping queues or outright cutting red tape with bribes.

    It would be nice to see some statistics on this (though surely harder to measure than health impacts). This salutary belief in cutting away the fat might perhaps not be such a great success when applied in excess.

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  7. Ridiculously simplistic and sentimental. Remember Amartya Sen: Famines are usually not caused by lack of food, but by faulty distribution. The Greek government would have no difficulties in finding an agreement with Euro governments about financial help help for their hospital and health system if it could be trusted to use the money there and not to reduce its own expenditures (a classical problem in development aid). The difference with the Irish famine is that Ireland had an English government that took wrongheaded dec isions. Greece has its own government; it is not governed in its day to day decisions by the Euro nations.

    To impute Greece's difficulties to austerity simply ignores the important details. Before austerity, the Greek taxpayers had to support something like a quarter of the working population who were public do-nothing servants. No wonder nobody wanted to be a taxpayer.What would stopping austerity in Greece mean? That tax-evading dentists can continue to buy BMWs (power to the Bavarian firm!)? Should the Euro nations pay Greek debts so that the former health system can continue (including"fakelaki" or bustarellas, envelopes with money, for doctors? The lack of details and practical recommendations in this post and in the 7 comments I have seen so far is truly staggering.

    Think it over

    Hanno Achenbach

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    1. It is sentimental to lament this catastrophe? We should behave like adults, nod sagely and express regret, but these are the cold equations of the universe, the iron rules of the market, that the Greek people mocked in their Hybris, like thoughtless children that must be raised with loving strictness on the harsh and narrow path that leads to the heights of germanic virtue and its miracle like transformation into trade surpluses.
      As a German citizen I grew up and grew older along a directed arrow that came from a dark and alien past and stretched toward a science fiction like utopia, a promise of rational governance fueled by shared and beautiful values. Ideals that we would approximate simply by going forward in the right direction, ignoring borders and silly anachronistic limitations and restrictions that we inherited from our smelly and meanwhile slightly demented elders. Which dug themselves out of their Graves and - surprise surprise - want to move in with us again! I feel slightly unreal whenever I realize the extent of the damage our political class has done to the decades of of work that went into the European project. The ignorant and sometimes surreal statements of our political and economic "elites". The complete absence of any discussion about macroeconomic concerns in the German media, which is instead replaced by repetitive self congratulations and affirmations of our moral superiority. Not one German party managed to keep even a tiny fig leave of economic competence, with one single exception: the newly democratically refurbished SED, vanguard of socialist east German workers. My world turned into a Phillip K Dick novel, I feel like screaming, nothing makes sense anymore.

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    2. Just one more thought: if they ever collectively realize that their individual lifes and their society were sacrificed not for just ideals and necessary compromises, but literally for nothing except the applause of a misguided and ignorant voting block, they will never forgive us. I know I wouldn't.

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    3. How can the Greek government "be trusted to use the money there [on health and hospitals] and not to reduce its own expenditures" when it is being forced to reduce expenditure across the board.

      The problem is that the morality of the actors (governments and creditors) is asymmetric: the creditors are never held accountable for the damage caused by their loans and demands for repayment while all guilt must lie with the debtors.

      This makes more sense if you take the view that our legal and financial mores are determined on the basis that right is always on the side of the richer.

      David Sweet

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    4. Hanno

      I'm afraid your comment couldn't be a better illustration of the parallel I was drawing in my post.

      Greece is being forced to impose crippling austerity because the Troika lent the Greek government money rather than allowing Greece to default on its debt, and it wants that debt repaid with interest. I have no doubt that the Greek economy is riddled with inefficiency and corruption, just as I am sure the Irish agricultural system was also inefficient in the 1840s. But that does not excuse extracting resources from the Greek people, just as it did not excuse taking grain from Ireland as the Irish starved.

      The practical recommendation is simple. The Greek government should by one means or another default on its remaining debt. It should not be forced out of the Eurozone as a result. Default would involve a transfer of resources from the rest of Europe to Greece, just as famine relief would have involved a transfer of resources from Britain to Ireland. Why should the Greek people be made to suffer because the Troika and others foolishly lent their government money?

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    5. Simon, I do think you're avoiding Hanno's two main points, which as I see them are:

      1) Your dichotomy between "the Greek people" and "their government" doesn't really describe the reality of how Greek political economy is set up. The resource-extracting class is probably as much as 25% of the Greek population (2.1% of GDP still goes on the military budget; your post about malaria prevention cuts could be accompanied by one about the recent order for submarines). There is huge overlap between "the people" and those who are extracting resources from them.

      2. Even if Greece did exactly as you say, it would still have the same governance arrangements and the same utterly discredited political class. There's no guarantee that the resource transfer would be spent on hospitals and mosquito nets and every likelihood it would be spent on more military toys, and more funding of toxic industrial relations and sinecures in the nationalised industries. Every single time that the EU has tried to get involved in providing help with governance issues (even simple technical assistance in creating a tax collection system), the Greek government has screamed about "colonisation" and started with the Nazi analogies.

      I'll add a point of my own, which is that I don't think you're correct to say that "Greece is being forced to impose crippling austerity because the Troika lent the Greek government money rather than allowing Greece to default on its debt, and it wants that debt repaid with interest". The troika programme has been aimed at establishing primary balance, not overall fiscal balance, and there are no major debt repayments scheduled - those bond maturities which exist are covered by troika loan disbursements. So in order to have less pressure on the overall budget, you don't just need a debt default - you would need to say that the troika should continue to provide further funding for Greece on a gift rather than loan basis for the forseeable future. At which point, I would have some sympathy for Romania, Bulgaria and even Poland (all of which are substantially poorer than Greece) asking why they don't get the largesse.

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    6. Submaries instead of malaria prevention: you forgot to mention that it looks like they bought german submarines because of bribes from german defense contractors. Which always enjoyed strong political support from german politicians.

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    7. Bruschettaboy

      The numbers I have seen recently suggest that Greece achieved primary balance in 2013, and are in surplus going forward. So there would now be less austerity if interest was not being paid. But you are right that if Greece had had no financing from 2010, austerity would have had to have been greater still. In reality the alternative to Troika financing was help from the IMF alone, and whether they would have been better or worse off in that case is an interesting question. I discussed the IMF's own analysis of its role in this post: http://mainlymacro.blogspot.co.uk/2013/06/how-greek-drama-became-global-tragedy.html

      However I think this is all misses the key point. The British government did provide some famine relief to Ireland - it was just not enough. That is what the transfer of grain symbolised. Equally the Troika austerity programme imposed on Greece was too tough, helping bring about a collapse in the economy. The Troika were responsible for this. Yes, more default and less austerity would have involved a larger transfer from the those outside into Greece, just as more famine relief would have required more resources flowing from Britain to Ireland. No doubt the poor in Britain might have objected, but it would nevertheless have been the right thing to do.

      Of course to the extent that austerity could have been achieved by cutting defence rather than health, then the Greek government are ALSO responsible for the problems outlined in the Lancet paper. But when it seemed possible that Greece might elect a government headed by Syriza, that might have done something to change the existing political elite, political leaders outside Greece in effect told the Greek people that in that case they would be forced out of the Eurozone. So for this, and other reasons mentioned in other comments, you have to wonder how concerned the Troika really is with bad governance in Greece, or whether they are using this as an excuse to pursue their own interests and ideology, just as the British government used similar arguments to avoid greater famine relief in the 1840s.

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    8. "Before austerity, the Greek taxpayers had to support something like a quarter of the working population who were public do-nothing servants."

      How interesting that you go no further than that. Now Greeks, denied by the EU the normal IMF OSI - the most important and effective part of its medicine - instead have the privilege of 'supporting' irresponsible German and French banks on the one hand, and paying tripled taxes and utilities to a government which has cut to 1/3 all social support. This on salaries reduced to EU poverty level [a senior doctor receives 1200€ pm, the same as EU poverty level] with the minimum wage set at half that. Meanwhile the task force for Greece has insisted on further wage reductions, with Croatia's 320€ a month held up as the desired goal.

      Meanwhile Greece's former lenders are not only in charge of the so-called "reform" - which profits only them - but have made huge profits on their Bailout loans.

      Which takes the privileges of the original lending party to new heights not envisaged by any normal debt law. Evading their responsibility for bad lending - something which IMF rules do acknowledge.

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  8. (or in terms of your analogy - it is actually true that the only real solution for Ireland's problems was independence and a thorough reform of the land tenure system. There was no way of stopping famine and emigration from being the normal condition of Irish society which didn't involve getting rid of the absentee landlords and throwing out an entire political class. Your proposed solution for Greece seems to be analogous to trying to provide Irish famine relief by providing tax subsidies to Lord Lucan.

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  9. At least the Irish peasants who survived Charles Trevelyan's genocide didn't confer an honoury doctorate on him.
    Unlike the University of Cork last week who honoured Barroso with this honour. The same man who's refusal to give a Ireland BANK DEBT writedown is causing untold misery to our citizens.
    Yes, you read it correctly, in Ireland we actually honoured the guy- here's the link in case you don't believe me. Ignore the misleading headline.

    http://www.independent.ie/irish-news/barroso-repeats-support-for-irish-government-despite-antiausterity-protests-30067201.html



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