Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 26 September 2014

The entirely predictable recession

Sometimes when I write about the Eurozone, I get comments about how inappropriate it is to apply ‘an anglo-saxon model’ of how that economy works. I think the best translation of ‘anglo-saxon’ is Keynesian. In an important sense this is rubbish. All I am doing is using the framework that is used by most applied macromodellers everywhere. That framework says that if you have a large fiscal contraction like this

Underlying Government Primary Balances: source OECD Economic Outlook
without a large compensating relaxation in monetary policy, then you will get the stagnation in output that I showed at the top of this post, and a substantial increase in unemployment.

Can this scale of fiscal contraction in itself fully account for the second Eurozone recession? There are various ways of answering this question: see, for example, this work by Jordà and Taylor, or the analysis by Holland and Portes that uses a structural econometric model. A very recent paper (available here) by Ansgar Rannenberg, Christian Schoder and Jan Strasky does something different. It uses modified versions of three different DSGE models to analyse the impact of the Eurozone fiscal contraction from 2011 to 2013. One of these models is QUEST III at the European Commission, which Jan in‘t Veld used in analysis I described here. The other two are FiMod, developed by staff of the Deutsche Bundesbank and the Banco de Espana, and NAWM, the ECB’s New Area Wide Model. All very ‘anglo-saxon’!

The modifications the authors make to the models, and the details of their analysis, would probably only be of interest to inveterate macromodellers like me, so those who want to know more should read the paper. Here I will just quote the key conclusions:

“We find that fiscal consolidation caused a cumulative GDP loss of between 14% and 20% of annual baseline GDP over the 2011 to 2013 period in the Euro Area [EA], implying a cumulative multiplier between 1.5 and 2.2.” and “As a result, the simulated GDP effects of the EA’s fiscal consolidation are large, and would be more than sufficient to explain the recent recession in the EA.”

The idea that a large fiscal contraction shortly after a huge financial crisis would lead to a second recession is not the wild imagining of a group of ‘anglo-saxon’ economists, or a particular macroeconomic ‘school of thought’. It is just mainstream macroeconomics. And we must never forget that this is not the unfortunate cost of having to get debt down in a few periphery countries: as the chart above shows, this fiscal contraction occurred everywhere in the Eurozone. As the simulations described in this link (pdf) show, using the Belgian NIME model, these costs could have been largely avoided if the fiscal consolidation had been delayed until monetary policy was in a position to offset them. It is not just a predictable recession; it is a recession made by policymakers without good cause and therefore an entirely avoidable recession.


66 comments:

  1. Probably best if you switch the DSGE models to the rinse and drain cycle and go back to fundamental identities and the odd first order equation. Neil W spelt it out in "Reconciling S = I + (S - I) to the national accounts". http://www.3spoken.co.uk/2012/02/reconciling-s-i-s-i-to-national.html .

    His most recent graphical interpretation of the data should win prizes. http://www.3spoken.co.uk/2014/06/uk-sectoral-balances-and-private-debt.html

    ReplyDelete
  2. Ok, let's hear some alternative predictions what could/should have happened.
    Please let us know how much the fiscal and monetary stimulus should have been according to you.
    Spain had for example a budget deficit of aprox 10% for five years since the financial crisis according to eurostat.
    Is this large fiscal contraction?
    How large should the budget deficit for Spain have been (and for how long) according to your or the quoted models?

    It's not that difficult to predict higher economic growth and lower unemployment with more fiscal and monetary stimulus. It's less obvious what the long term result will be for each individual country. Take for example Japan, did these models predict the current unsustainable debt bubble in Japan? What should Japan have done differently?

    ReplyDelete
    Replies
    1. Insustainable debt in Japan ? fully sustainable: they just print money and inflation is lower than desired nonetheless.
      Spain should have been higher (a huge real estate bubble had to be compensated for). Plus other Eurozone countries should have been higher (helping each other in the process). Particularly Italy which is at 3% (and the EU foolishly asks her to balance the budget and to implement the Fiscal Compact: an arithmetic impossibility...)

      Delete
    2. @Marco Cattaneo: in that case you should recommend Spain and Italy leave the eurozone: they can borrow what they want, and the can print Japanese style, without inflation as you claim. What more could they wish for?

      Delete
    3. @Anon
      Which is what Spain and Italy should do, eventually. The problem is that their debt is denominated in Euros which means that printing money to pay it would mostly just result in a depreciation of their new currencies. Of course that would still be a good thing as it leads to a better tradebalance but a big benefit from printing money would unfortunately be lost. More importantly, leaving the eurozone will be messy which is why they should probably wait until after the crisis is over to do so.

      Delete
    4. "and the can print Japanese style, without inflation as you claim."

      Silly stuff. There are big differences between Spain and Italy, and Japan.

      Delete
    5. Anonymous 05:12 (and Hugo Andrè) that's for sure. An orderly wind-up of the Eurozone as to be implemented, asap. http://bastaconleurocrisi.blogspot.it/2013/09/tax-credit-certificates-certificati-di.html
      Anonymous 09:40 the difference which matters is that Japan has a printing press while Italy and Spain haven't.

      Delete
    6. Anonymous26 September 2014 03:28
      Excellent points!

      Actually, SWL has been silent for quite some time when asked what amounts of stimulus would produce what amounts of results.

      Dear Prof. Wren-Lewis,

      When will you break your silence?

      Delete
    7. Anonymous 26 September 2014 03:28 - "How large should the budget deficit for Spain have been (and for how long) according to your or the quoted models?"

      That it a really stupid question, I mean really stupid, you are asking at what level a government should set a variable that it can't actually control.

      Delete
    8. Civility, Andreas, civility!

      Delete
  3. For the New-keynesians models to give these kind of multipliers, don't they need to be at zero rate lower bound?

    ReplyDelete
    Replies
    1. Which is the case as concerns the Eurozone.

      Delete
    2. the 2-year bond rate in Spain has never been below 1%

      Delete
    3. Because Southern European rates incorporate a breakup / redenomination risk.

      Delete
    4. Still whatever the reason, fiscal policy will when not on zero rate lower bound causes the rate to rise, and therefore the effect is not as big as on zero rate lower bound, because then the rate will not rise.

      Delete
    5. If rates don't rise, the fiscal stimulus will be even MORE effective...

      Delete
    6. but the New-Keynesian models predict they will when not on zero rate lower bound, and then you don't have multipliers over 1

      Delete
    7. You have to fill the output gap first, which is huge in Southern Europe. Mediterranean countries expanding their deficits today would result in a multiplier definitely much higher than 1

      Delete
  4. It seems to me that you can spend more to get more economic activity.

    What this does not address is how sustainable this is. If the goods a country produces are still not in demand from other countries, then the economy may falter.

    ReplyDelete
    Replies
    1. It is enough for those goods to be in demand from inside the country...

      Delete
    2. Why is it then that there are large swathes of stockpiled products lying unsold outside many Italian factories? This is particularly true of the ceramics industry for example. I have seen them and spoken with people who make them. If these companies are expanding their land use, it is not for more production; it is for more storage.

      Delete
    3. The reason is that Italian companies face a depressed internal demand. This will change via leaving the eurosystem and reflating the economy.

      Delete
  5. if your claim is that there is not just consensus among anglo saxon economists, but also eurozone economists about the need for more fiscal and monetary stimulus: how do you explain there is so little support for this among politicians from left to right in any of the Northern European countries for this? Nordic countries not currently in the eurozone would probably support the ''German'' policy too when in the eurozone.
    Your claim this is because there are a bunch of lawyers in charge of the German economy doesn't sound credible to me.
    Again, from both left as right wing politics, among all Northern countries, there seems to be broad consensus about the current economic policy. Are they all stupid they ignore mainstream macro economics? Don't they have economists among their political party members anymore? To be honest, I do not hear a lot of opposing views from economists in these countries either. How do you explain this?

    ReplyDelete
    Replies
    1. "Again, from both left as right wing politics, among all Northern countries, there seems to be broad consensus about the current economic policy. Are they all stupid they ignore mainstream macro economics?"

      Yes.

      "Don't they have economists among their political party members anymore?"

      No.

      "To be honest, I do not hear a lot of opposing views from economists in these countries either."

      Listen harder, they are the majority of the profession. What you are advertising here is your severely limited reading circle.

      Delete
    2. ''Listen harder, they are the majority of the profession. What you are advertising here is your severely limited reading circle.''

      links please (no problem in German or Dutch).

      Delete
    3. Have a read of http://moslereconomics.com/mandatory-readings/innocent-frauds/

      Politicians still think we are on the gold standard, they don't understand fiat currency economics. It is not in the interest of politicians for the little people to find out either. Unfortunately politicians and economists are both snake oil salesmen. You won't find an Ohm's Law or any other universally accepted LAW in economics, like you find in Engineering.

      Delete
    4. Best argument I can think of is political gridlock. The Eurozone is determined to try and keep the Euro together plus for the possibility of an exit by any individual nation is fraught with difficulties. Germany is pretty dominant in terms of euro zone policy and any stimulus plan that looks like a giveaway to other eurozone nations is not going to go down well with voters.

      Delete
    5. @Andreas Paterson.

      Your reply is spot on. This is the answer.

      I would just add that there is also a desire not to repeat booms and busts which is in everyone's memories, not least of all in those of German voters who are very concerned that the institutional frameworks are not in place in Italy, Spain and Greece for a a large injection of funds not to create another big problem. For the Euro to survive there has to be both fiscal and monetary coordination. But there is not the institutional framework yet for this to happen.

      Delete
    6. "links please"

      Are you irony-impaired to post this on a thread that contains 5 links to illustrate the point made?

      Delete
    7. thats just one study from eurozone economists, and published last week, the others are anglo-saxon. Anglo-saxon economists have been very vocal about the eurozone policy, compared to Northern European economists. There must be an explanation for this. Maybe Andreas Paterson is right. I do have another thought: Northern European economists are very well aware that without structural reforms in some countries, or a framework of fiscal transfers, there is no long term future for the eurozone. And they also know there is no support for fiscal union among the public. Therefore why bother screaming about filling the short term demand gap? It's not going to solve the badly constructed eurozone anyway. Anglo-saxon economists don't care about this, it's not their problem, they don't live in the eurozone.

      Delete
    8. It's impossible to take seriously anyone who uses the terms 'Anglo-saxon economists' and 'Northern European economists'.

      Or anyone who takes the view that solutions to the problems we jointly face are always but always lying in their neighbours' backyard. Always.

      Delete
  6. Well, i would say that a large fiscal contraction shortly after a huge financial crisis would lead to a second recession is not the wild imagining of a group of ‘anglo-saxon’ economists, or a particular macroeconomic ‘school of thought’. It is just mainstream macroeconomics and it would definitely have bad effect on economy.

    ReplyDelete
  7. Anglo - Saxon economics refers to model based approaches that ignore institutional and other contextual issues. Recently it has come to refer to anti-neoliberalism and the paradigm that has dominated which saw loose monetary policy together with substantial market deregulation. An important point of ordo-liberalism is that it is anti-laissez faire. Not anti-Keynesian.

    In this sense, actually, they are very Keynesian and believe strongly in government multiplier effects. The history of Japanese and German management pre Plaza Accord and reunification was (except when pressured by the US to close current account deficits) to have strict rules relating to MP, but considerable discretion when it came to, for example, government capital expenditure which often worked outside the main government balance sheet and drew on funds, such as postal savings, that were directed by the state. So by absolutely no means are they anti-state. In fact they are very pro-state, and very suspicious of markets. The whole foundations of Anglo-Saxon micro-economics (ie classical economics) are an anathema to ordo-liberals.

    The point is Germany wants to help the Eurozone, but it will not splash money at the problem. It wants a fiscal, institutional framework. Hence the need for fiscal union.

    ReplyDelete
    Replies
    1. i think that a stimulus would really help; so if the germans do not want to splash money on the problem; they are not going to see a quick solution. Perhaps in the long run, though this is looking like a pretty long run.

      Delete
    2. Efficient markets is not the starting assumption of Ordo-liberalism. Market failure is. The pejorative term of "Anglo Saxon Economics" refers to the approaches that make the market sacrosanct.

      On this point they are on the same wavelength as Keynes who criticised classical economists for "submitting to market idols" (Keynes 1937).

      Delete
    3. It seems to me as if Keynesianism at times can devolve into trying to engineer the world. Or at least the economies of the world. If we look at the entries in this blog or at Paul Krugman's, this certainly seems to be the case. EZ nations are all neighbors (not rivals at the same time) and monetary and fiscal policy should work hand-in-hand to attain some form of EZ-wide balanced state.

      This is not ordo-liberalism. Ordo-liberalism is about organizing competition within certain pre-defined bounds. Imbalances may exist - within rules that have been previously agreed to. So I don't agree with the above statement. Ordoliberalism's assumption is that markets work if you impose certain rules on them to keep them in check. Like football as a game works only if you agree on a set of rules in advance.

      Finally, Germany is not responsible for lifting other nations out of their crisis. It can and will assist in small ways but the other EZ nations have souverign governments which are responsible.

      Delete
    4. a small way is for the ecb to print 1,000.00 euros and distribute it to each adult; continue until recovery. that way, demand can be stimuated without the germans having to do anything

      Delete
    5. anonymous@05:37

      Anglo - Saxon economics refers to model based approaches that ignore institutional and other contextual issues.

      There is no such thing as an "Anglo Saxon" school of economics, that is simply name calling and it has a nasty edge of ethnic superiority to it. Even talk of AngloSaxon capitalism vs the social market variety is too broad to be meaningful. There is also no difference in practice between modern neoliberalism and ordoliberalism (and at a European level German economic policy is doctrinaire neoliberalism).

      The argument here is not between imaginary AngloSaxon (English speaking really) economists and some more holistic school of thought but between the reality based community and the ordoliberal political movements that control Germany and hangers on and (sadly) most of the EU economic and monetary policy making apparatus.

      The key thing to remember that you can not argue with ordoliberals based on evidence because ordoliberalism is a romantic tradition and not a scientific one. It is also futile to argue with ordoliberals about the moral and social implications of economic policy because ordoliberalism is rules based and not outcome focussed.

      As an example the high youth unemployment and recession in the Eurozone is an unavoidable result of sound (really virtuous) policy making. (Ordoliberalism has a distinctly religious aspect - think of the fiscal compact as a life of Calvinist miserablism and heaven as the economic reward you will enjoy "in the long run" )

      If this indifference to outcomes and focus on rules sounds unpleasantly familiar in a Eurozone context it is because the cargo cult nature of the various EU economic and monetary policy making institutions is owed in large part to the impact of ordoliberal thinking. Europe is run on the basis of sound and rigid rules and if stick to them, well, we will have rigidly stuck to the sound rules. Economic salvation will be assured.

      For those looking for a primer on ordoliberalism in its German context here is a nice article in Social Europe, even if in a typically European style the article advocates compromise rather than confrontation.

      http://www.social-europe.eu/2012/07/the-long-shadow-of-ordoliberalism/

      Delete
    6. 'As an example the high youth unemployment and recession in the Eurozone is an unavoidable result of sound (really virtuous) policy making. (Ordoliberalism has a distinctly religious aspect - think of the fiscal compact as a life of Calvinist miserablism and heaven as the economic reward you will enjoy "in the long run" )'

      Wow, you live in your own head here. I haven't heard in debates in Germany the argument that high youth unemployment is due to sound policy making even once. (And I read/watch a lot.) Instead, German orthodoxy is attributing that to bad policy-making in national economies struck by it, to regulations that favour older employees at the expense of the youth.

      Again, ordoliberalism is about providing a framework (ordo) within which COMPETITION can take freely take place (liberalism). It doesn't impose rules on how to play a game of football (regarding tactics, strategies, technics, etc.) as long as rules are being followed. You're right that it's not outcome-bent as far as it is not aiming at creating some sort of fixed balance for example between nations. Some outcomes are simply the result of bad decisions of actors within that framework. If your team gets thrashed 1-7, don't complain about the rules - try to come up with better players instead.

      Delete
    7. I don't think the argument is necessarily against ordoliberalism as a concept - I think many would agree that having a framework with rules might be a good idea.

      The argument is against the rules that are currently being imposed within that framework. Don't forget that the rules of football have changed over time, to create a game with better outcomes.

      Delete
    8. Rules can be changed but that is not what is happening, as EZ politicians shy away from an open and lengthy debate. Instead, they are relying on Mario Draghi to find ever new ways to subvert the framework.

      Also, you cannot discount out-of-hand the concern that some teams are trying to change the rules in their favour because they don't want to fulfill the painful task of improving their competitiveness within the given framework.

      Delete
    9. '' There is also no difference in practice between modern neoliberalism and ordoliberalism (and at a European level German economic policy is doctrinaire neoliberalism).''

      this is a ridiculous statement, neoliberalism with it's privatizations, small role for government and (financial) deregulation is very anglo-saxon, Germany is among the eurozone countries trying to resist this.

      ''The key thing to remember that you can not argue with ordoliberals based on evidence because ordoliberalism is a romantic tradition and not a scientific one''

      yeah right, and than first claim there is a nasty edge of ethnic superiority about ordoliberalism, how about your views?

      The truth is anglo saxons simply no not understand how countries like Germany, but also Nordics, France and benelux organize their economy with a large role for the state. That's fine, but please stop demonizing something you do not really understand.

      Delete
    10. "... you cannot discount out-of-hand the concern that some teams are trying to change the rules in their favour ..."

      To reverse that, you also can't ignore the possibility that the rules may have been set up by one team to favour them. To extend the football analogy, as though the rules only allowed headed goals, and one team is full of 2+ metres players. The other team just wants goals scored with their feet to also count (to level the playing field, ha ha).

      You might argue that the teams entered the pitch knowing the rules. But sometimes people do things in a spirit of optimism without realising the inevitable outcome. Pace sub-prime mortgages in the States. Moralising about those people and their fate doesn't help anybody.

      Delete
    11. Otherwise, to argue that the-rules-are-the-rules is just an literalist exercise in quasi-religious fundamentalism.

      Delete
    12. "You might argue that the teams entered the pitch knowing the rules."

      They didn't just enter the pitch knowing the rules, they begged/cheated to be part of the league. These countries wanted the benefits of a hard currency like the DM but don't want to do what is necessary to make the currency hard.

      Germany will not accept a Euro-Lira. Either the Euro is as solid as the DM or there can not be single currency for Germany and the crisis countries.

      And, no, adherence to previously agreed rules is a value on its own, provided there is a mechanism in place to consensually adapt the rules to new circumstances. If you don't stick to rules, single countries/team will try to subvert the rules to get an unfair advantage over others.

      Granted, it may not be an absolute value but it IS of great importance.

      Delete
    13. "Either the Euro is as solid as the DM or there can not be single currency for Germany and the crisis countries": that's why the euro in the present form is GUARANTEED not to last.

      Delete
    14. Anonymous 27 September 2014 01:01
      "If your team gets thrashed 1-7, don't complain about the rules - try to come up with better players instead". The Europe integration project was supposed to be about cooperation and common benefit, not about cutthroat competition. It's not working and will not last.

      Delete
    15. '' The Europe integration project was supposed to be about cooperation and common benefit, not about cutthroat competition''

      Lisbon agenda of EU:
      Its aim was to make the EU "the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion", by 2010.[1] It was set out by the European Council in Lisbon in March 2000. By 2010, most of its goals were not achieved.

      In 2009 Swedish prime minister Fredrik Reinfeldt admitted:

      Even if progress has been made it must be said that the Lisbon Agenda, with only a year remaining before it is to be evaluated, has been a failure.

      http://en.wikipedia.org/wiki/Lisbon_Strategy


      All I hear on this blog is about solving the demand gap. How is this going to achieve the goals of becoming ''the most competitive and dynamic knowledge-based economy in the world''?

      Delete
    16. Well, those who have fallen behind tend to complain about cut-throat competition. That is to be expected. But what we have here is not cut-throat competition. What Europe is and has to be is a combination of partnership and rivalry/competition. Germany got cheaper because we foresaw the ascent of China and India. And because we were deemed the sick man of Europe.

      Today's crisis countries wanted a DM-like currency back then. Germany was promised a hard currency. There can be no backing away from this agreement within the common currency. And that's why from a German perspective, it is either this way or no way. A breakup of the EZ is preferable to a subversion of the spirit of the Euro-DM by crisis countries.

      Delete
    17. One could say that the aim was to make the economies (note, plural) of Europe the most competitive, etc., not about pursuing cutthroat competition with the EU.

      You might argue that this amounts to the same thing, but I'd contend that even the German economy is struggling because of the trashing of the economies of it's EU partners.

      Delete
    18. US states do also compete with each other, for example on taxes and to try to persuade companies to move to their state from other states.
      US states cannot use competitive devaluation because of the common currency.

      The people who claim they don't like cut throat competition, but want to go back to former currencies with competitive devaluation are asking for a race to the bottom!
      how low do you want to go to compete with wages in the far East or Eastern Europe!

      Delete
    19. Anonymous29 September 2014 04:42

      "All I hear on this blog is about solving the demand gap. How is this going to achieve the goals of becoming ''the most competitive and dynamic knowledge-based economy in the world''?"
      A continent which is mostly permanently depressed definetely CANNOT ACHIEVE any of those goals.



      Anonymous29 September 2014 04:46

      "And that's why from a German perspective, it is either this way or no way. A breakup of the EZ is preferable to a subversion of the spirit of the Euro-DM by crisis countries."

      And that's what's going to happen. Going on like this it's just crazy.



      Anonymous29 September 2014 08:04

      US states cannot use competitive devaluation because of the common currency.
      The people who claim they don't like cut throat competition, but want to go back to former currencies with competitive devaluation are asking for a race to the bottom!
      how low do you want to go to compete with wages in the far East or Eastern Europe!

      US is far more homogeous than Europe - from a linguistical, economic, political standpoint. Race to the bottom is taking place NOW, by trying to implement internal devaluation in Southern Europe. Just impossible to achieve, and crazy trying.

      Delete
    20. "One could say that the aim was to make the economies (note, plural) of Europe the most competitive, etc., not about pursuing cutthroat competition with the EU."

      Competitiveness in market shares is also a function of price. In football, if a team ups the ante, it puts the pressure on other european teams to match or up the ante in turn. That is called competition.

      A race to the bottom is a normal thing in market economies, the bottom normally being equilibrium price.

      Delete
  8. A research paper evaluating results of a policy afterwards does not look entirely predictable to me. I am not an expert, but as the study mentions in the conclusions (page 2), there have not been a lot of studies done to the eurozone fiscal consolidation of 2011-2013 and all studies use different models with slightly different conclusions and outcomes.
    Maybe the overall conclusion is correct, and fiscal consolidation has been too fast in the eurozone. Well. let's adjust the policy in that case to the latest views, nobody in the eurozone will contest this. This is not about different ideologies as some drama queen economists like to claim, this is about economic modelling.
    That latest study mentions an ECB model, doesn't the ECB publish these kind of studies with policy recommendations?
    The main problems that remain is that there is no eurozone wide macro economic policy, and you can only do this with real political and fiscal union and it remains questionable of some eurozone countries can really recover within the eurozone.

    ReplyDelete
  9. draghi just praised lithuania, which still has not gotten back to its pre crisis GDP. Are Europeans crazy?

    Here in the US; people are ready to lynch obama because growth has been suboptimal though we long ago surpassed our 2007 GDP.

    ReplyDelete
  10. wow so many comments. I wonder how this compares with America's austerity which began in 2011 and is only now letting up. Essentially by how much did QE compensate?

    Germany is only hurting itself. Neighbors can't by their exports if their economies are in the dumps. It's paranoid over inflation and "sound finance" or budget deficits.

    ReplyDelete
    Replies
    1. Yeah but neighbors can only buy our German exports with money we give them and which never gets paid back, it's of no use either.

      Delete
    2. Well you don't understand the argument then if you believe it's just a matter of giving them money which they don't pay back.

      Delete
    3. http://www.project-syndicate.org/commentary/joseph-e--stiglitz-wonders-why-eu-leaders-are-nursing-a-dead-theory

      Europe’s Austerity Zombies
      by Joseph Stiglitz

      NEW YORK – “If the facts don’t fit the theory, change the theory,” goes the old adage. But too often it is easier to keep the theory and change the facts – or so German Chancellor Angela Merkel and other pro-austerity European leaders appear to believe. Though facts keep staring them in the face, they continue to deny reality.
      Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working! But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped.
      But every downturn comes to an end. Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump.
      Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels. In even the best-performing economies, such as Germany, growth since the 2008 crisis has been so slow that, in any other circumstance, it would be rated as dismal.
      ...

      Delete
    4. Peter27 September 2014 11:38

      You forgot to quote this wonderful sentence in Stiglitz's paper:

      " One of the longest-standing propositions in economics is the balanced-budget multiplier – increasing taxes and expenditures in tandem stimulates the economy. And if taxes target the rich, and spending targets the poor, the multiplier can be especially high. "

      That is what France did in Hollande's first two years - and look where it landed them.There is probably no better counterexample to Stiglitz's theories. Don't take him too seriously.

      Delete
    5. "Well you don't understand the argument then if you believe it's just a matter of giving them money which they don't pay back."

      Once burnt, twice shy. I will only point out Spanish real estate and Greek government bonds.

      If you want to invest your life savings in crisis countries, please go ahead. Just accept it please if other people come to the conclusion that they don't want to see their tax-payer money invested there on promises that this will generate growth and thus stimulate German exports. Of course, one could also buy more goods from crisis countries but apparently german consumers don't feel there is enough worthwhile on offer or else there would not be this huge trade surplus.

      Delete
    6. look at the graph more carefully, and you will see that Hollander has been following an austerity program. He needs to give poor pepole money faster than he increases taxes to the rich to be net net expansionary.

      Delete
    7. @Anonymous27 September 2014 15:34

      I'm not entirely sure the claim that France followed a balanced budget multiplier is true. The figures don't seem to show a massive jump in spending. France's policy looks more like plain old fiscal contraction.

      Delete
    8. Eu countries need structural reforms e.g bring drug/prostitution into legal economy, land value tax replace inefficient taxes, increase spending on high fiscal multipliers, labour market reforms. Combine with helicopter drops from the ECB (say 3000 euros a year) to each person in eurozone for stimulus and stop deflation in exchange for structural reform. Once deflation in the south has been stopped taper off policy

      Delete
  11. I also wonder how the robustness of Europe's safety net and social insurance programs come into this. In America, the Fed's aggregate demand management *is* mostly the safety net given how sting social insurance is.

    ReplyDelete
    Replies
    1. Good point! Particularly northern European countries have social systems that operate as automatic stabilizers - built in-keynesianism so to say.

      Delete

Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time.