Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 25 August 2015

A sense of identity

Denis Snower has a provocative (at least for me) piece in Süddeutsche Zeitung in which he writes as follows:
“When the American economist and Nobel laureate Paul Krugman says that the Eurogroup requirements for Greece go “beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief”, he does not derive his judgment from some firmly established economic theorem. When Joseph Stiglitz, another American Nobel laureate, says “What has been demonstrated is a lack of solidarity by Germany”, this is not an implication from some piece of analysis in his textbook. When five leading economists (Thomas Piketty, Jeffrey Sachs, Dani Rodrick, Heiner Flassbeck and Simon Wren-Lewis) write an open letter to Chancellor Angela Merkel, saying that “Right now, the Greek government is being asked to put a gun to its head and pull the trigger,” their perception does not come from rigorous theoretical and empirical analysis. Rather they are all expressing their feelings, which arise from their implicit sense of identity.”

Speaking for myself, I would disagree with the idea that our sentiments, however forcefully put, do not come from rigorous theoretical and empirical analysis. Greece is not the first country to borrow too much. As Jeffrey Sachs sets out here [1], examples from history (involving Latin America, Poland, Russia and Germany herself) show that “believing that indebted sovereign governments should always service their debts is a good working principle nine-tenths of the time, but can be a disaster the tenth time around. We must not push societies to the breaking point, even when they have only themselves to blame for their indebtedness.”

The theoretical analysis comes from not seeing this as just a zero sum game: as just a distributional struggle between Greece and her creditors. As a result of austerity, for every extra Euro that the creditors obtain right now from Greece, Greece loses resources that could amount to 4 Euros. (See here, footnote 2.) There are good macroeconomic reasons for believing that if this transfer to creditors is postponed, the cost to Greece will be much less. As is often the case with the austerity that the Troika demands, it is not evenly spread among the population, and the physical and mental health of Greek citizens has suffered as a result. Perhaps that knowledge influences the language that I and others have used, but it is a big mistake to believe that this passion is not firmly grounded in macroeconomic analysis and evidence.

Snower wants to play the sensible centrist. Unfortunately the current situation is not symmetrical. One side has all the power. One side has been dictating what has happened in Greece for the last five years. When we wrote “Right now, the Greek government is being asked to put a gun to its head and pull the trigger” I think that is a pretty accurate description of the politics. Should the five of us who sent an open letter to Merkel have done the same to Tsipras? What would it have said exactly: best to give in now because the longer you resist the more you will be punished by the Troika?

In the media outside Greece, the discussion is always portrayed as the Eurozone governments lending Greece yet more money. Yet Greece is now in approximate primary surplus, so the negotiations were really all about how quickly the Troika should be paid back. If economists can do nothing else, they should at least make this point in public.

I understand that it is difficult for some economists to go against the nationalist feeling in Germany and other countries. But if your investment advisor had encouraged you to buy some overseas financial asset that later turned out to be worthless, would you refrain from criticising them just because they shared your nationality? Economists in Germany and elsewhere need to start asking awkward questions of their politicians. Why was it necessary for these politicians to use their voters money to bailout the banks and others who had foolishly lent to previous Greek governments? Why, when it was obvious to everyone in 2015 that Greece could not repay all its debt, did the Eurozone group refuse to allow debt relief to be part of the negotiations? And of Schäuble in particular, is it really right that Greece is used as an example so that he can impose his financial will on other Eurozone countries?

Dennis Snower may be correct that what I write about Greece expresses my identity. It reflects my identity as a macroeconomist, and hopefully my humanity in understanding the serious damage that bad macroeconomic decisions can have.

[1] Sachs is writing following a response to our original letter to Merkel from Dr. Ludger Schuknecht, senior economist at the German Finance Ministry.

37 comments:

  1. Austerity causes *real* losses every day. Real losses should always trump monetary losses that can be recovered at a touch of a button.
    Yes I am aware that Greece has been mismanaged and has limited scope for quantity expansion of output.
    Greece needs to exit (Grexit) and get its tourism areas up to scratch.
    "Debt relief" won't help at all.

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    1. I agree that debt relief won’t help – certainly not in the long run. Unfortunately there are large numbers of Guardian reading lefties who think that anything that benefits “poor deserving” debtors and hits “wicked rich” creditors must be beneficial.

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    2. Unfortunately the Guardian reading lefties are in no position of power. It's the moralizing of the Troika (Pay to all what is owed to them, Romans 13:7 etc etc) that you want to worry about.

      And do you actually read this blog? Debt relief means less austerity means greater welfare (please note the small w.)

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    3. "Debt relief means less austerity "
      No it does not. Exiting the eurozone means no austerity (as commonly defined.)
      That's it. Grexit or austerity. Which one do you choose?

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    4. Sorry mate I do not follow that.

      What would i do? Same as the Greeks: stay in the Euro, relieve debt, and have less austerity.

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    5. Governments that do not issue their own currency are revenue constrained. The Greek govt will run out of money if they choose less austerity!

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    6. I can see Grexit is your hobby horse, but not actually the topic of this post. The ability to issue currency is not the only source of revenue.

      You might engage with the possibility that there are other means of achieving less, or indeed no, austerity. Why can't you recognise that debt relief also relaxes revenue constraints?

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    7. In a government that issues its own currency, all spending can be seen as creating money since it does not make sense to have an account full of your own IOUs.
      And it has total control over the interest rate paid on its debt - including zero. It never has to pay back its debt either.
      The limit and cost to spending is real resources.
      Having your own currency is a major advantage!
      "You might engage with the possibility that there are other means of achieving less, or indeed no, austerity."
      I did have that possibility open in January, but subsequent events make that unlikely.
      It has been tried and the Troitka has squashed the Greek government.

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    8. I'm glad to see you now recognize the possibility, even though this clearly contradicts your initial claim.

      As it happens I agree that Grexit is preferable, though it would not solve all Greece's problems.

      One problem they would face is that existing debt would be denominated in euros. Indeed Greece would have control over their interest rates, but they would not have control over exchange rates.

      Given the desired (in my belief and I suspect yours) depreciation the real value of the debt will go up. So even in this state of the world you don't escape the necessity of debt relief (or default) as a means of relaxing austerity.

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    9. Magnus, I am not arguing against default. But if Greece defaults and remains in the € it has a big problem as it has little € to spend.
      It is necessary for Greece to exit and default.

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  2. On the other hand, I have never heard any of the prominent economists so vehemently argue for reform (or have I missed a passionate letter to this effect addressed to Tsipras?). It is one thing - and an admirable one - trying to prevent self-defeating austerity but Messrs. Krugman et al seem in general less worried about bandits like Tsipras (and his predecessors dressed in different party jerseys over the years) robbing their country of trillions of dollars in lost potential output. This could be seen as a bias in terms of "real vs potential" welfare losses. Another way of looking at it would be in terms of the horizon. At business cycle frequency, Krugman et al. may well be right. But that comes with playing the role of useful idiots (using cold-war terminology) propping up an extractive regime impoverishing its own people in the long run.

    A good letter would perhaps call for a debt relief, a realistic adjustment path, a reform of the way EU works (true no-bailout supported by a real banking union, bigger budget, automatic stabilizers) and a true reform agenda (going beyond sacking people and cutting pensions) for Greece. Somehow, the emphasis is always on the first two. Yes, I know letters must be short - but perhaps their length only conveniently reflects the authors' horizons.

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    1. As SWL wrote, Greece has gotten to a primary surplus at great cost to the physical and mental health of its people.

      It's as if you flat out ignore what he wrote. In your mind this never happened. In your mind Germans taxpayers gave Greece money and the Greeks continue to squander it.

      That's not the case. We have two different competing visions of reality. How are we supposed to convince "Anonymous" when he ignores the facts and forces his ideological vision on top of and over what really in fact happened these past 5-6 years?

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    2. Agreed. But it tells you all you need to know about their integrity that s/he posts anonymously ...

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    3. I am not impressed by the advice given my Messrs Krugman and SWL - and it looks very patronising. Greece faces a desparate solution, but devaluation or Eurozone wide inflation will not solve this (as I am glad that Sachs, Eichengreen and Cochrane have listened and have now come to understand the reasons why) and I do not think Krugman really appreciates the reason why the Southern periphery joined the Euro in the first place. You have to look outside ISLM and OCA theory. This requires an understanding of history, not questionable models. Germany is a better run economy than the UK and US. I am sure behind that is some very good economics - obviously not of the Sargent-Lucas-Mankiw kind, but of its own type - that gets results. If Schauble is trying to integrate the Eurozone according the German model, that is is what we ultimately want. What we are not getting from SWL or Krugman are convincing or practical alternatives.

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    4. "Schauble is trying to integrate the Eurozone according the German model, that is is what we ultimately want."

      Chilling.

      You speak of history; those of us who know some need only see the cold, inhuman arrogance you exhibit to reveal eerie echoes of the past. Keep posting, with every remark you pencil in a picture lacking any normal human compassion and bring forward the chances of a concerted opposition.

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    5. Why make such unnecessary associations. This annoys me as much as it must do the Germans. Please stop playing that card. It will just lead to bad and irrational decision making. Think about

      (1) What were the real reasons Greece entered the Euro?
      (2) What are the real concerns Germany has?
      (2) How do we get capital from surplus countries to the deficit ones and not add to existing distortions which will solve nothing but make problems worse in the future.
      (3) Related to (2), how do we get the reforms on both the Greek and Eurozone level to enable an effective anti-deflationary programme?

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    6. Anon is a response to AllanW. Anon 01:58 and 16:35 is not 06:06.

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    7. "about bandits like Tsipras (and his predecessors dressed in different party jerseys over the years) robbing their country of trillions of dollars in lost potential output. " says everything about you own, individual and instraferable, lack of honesty.

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    8. "If Schauble is trying to integrate the Eurozone according the German model, that is is what we ultimately want. "

      Definitely not what we commoners want. Schäuble is doing his best to kill the EU as he somehow believes it will profit to Germany. That corrupt individuals that put their own fortune over millions of people agree with him is not a reason to agree.

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    9. Peter

      how do you know what is going on in my mind? Have you actually read what I have written? Based on your reply, I have serious doubts. Take a deep breath, and try to read it once again. If you manage to get to the second paragraph before your remaining brain capacity runs out, continue reading very slowly. Maybe you'll get it.

      And AllanW, you and Peter criticise me for staying anonymous. Based on the information you provide, you could as well be FSB-employed trolls. I usually care about the substance of which you provide very little.

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    10. Thanks to Jeff Young (below) for the perfect meme that captures German approaches to Greece at the moment;

      "We must keep the trains running on time despite the number of bodies on the tracks."

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  3. I believe that there is something in Germany called the 'Adam Smith problem', in which his ToMS argues for sentimental, social feeling, whereas WoN goes for self-interest and its accompanying greed, and German culture remained perturbed at where the link between the two should come.

    Perhaps this problem with 'Keynesian economics' cuts deeper, well into 19th century pre-unification German-language culture?

    And just when the Germans seemed to have sorted out unified Germany from the 1990s, they then go and try to unify much of Europe with a currency area that they are now in the 2010s treating as though Smith only wrote WoN and that self-interest is all.

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  4. " use their voters money to bailout the banks and others who had foolishly lent to previous Greek governments? ...... the Eurozone group refuse to allow debt relief to be part of the negotiations?"

    Using facts gives these queations much more weight. It was not 'voters money' it was newly printed money by ECB which points to how easy can be to bail out a nation in EZ. And by paying off by Greece such money is to be destroyed really show vindictivnes by Troika and the real purpose of bailouts.
    This is not using some economic theory, this is using facts and true nature of debt in real world. Using facts gives much more weight and prevents you from entering blind corner of argument, like "if its voters money then all EZ voters will loose money with debt relief"

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  6. "Rather they are all expressing their feelings, which arise from their implicit sense of identity.”

    I think that is a very sharp remark. There is a lot of identity-driven behaviour going on here. Unfortunately economics is not very good at understanding such irrational behaviour.

    People will see what they want to see. Krugman sees vindication of ISLM and optimum currency area models which he has been bashing now decades. New Keynesians see what they want to see with this - and bring in a lot of unnecessary clutter. The Germans, see what they want to see - Anglo Saxon economists, often with little knowledge of either Germany or Greece, asking German savers to bail out an economy which is badly managed compared to their own and which is asking for more problems in the future. None of this is necessarily wrong, but I think many onlookers feel that all parties are obscuring the problems.

    A solution for Greece probably includes a short term one to counter austerity,and a long term one, which requires enabling German capital outflows to be transformed into long term productive investment in the south of Europe, which requires institutional reforms in the Eurozone (but not necessarily austerity).

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    1. But your last paragraph is quite consistent with the Krugman/NK view, and inconsistent with the 'German view'!

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    2. I see your point. Basically the long and the short term has to come together.

      In other words you need a Marshall Plan for the Eurozone. The reforms of the Marshall Plan were just as important as the liquidity. The difference is of course the US had the moral and other authority in 1945 to execute the implementation of these reforms. This is really the problem for Germany.

      But just throwing liquidity at the problem? Not the answer. It would simply evaporate (probably overseas) and leave huge distortions domestically (ie it would lead to an inflation of certain assets and a concentration in its ownership and a dispossessed class in a worse position. Meanwhile the Germans would continue to watch this happen and their patience and commitment to the European project would be severely tested.

      I think though you understand why the Euro has to succeed. This is clearly something a few MIT economists do not get.

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  7. Denis Snower has all the below criticisms

    and what is HIS rigorous academic proof of these ascertions???

    because HE SAYS SO!!!!!!!!!!!!!!!!!!!!!!!!!!!

    no effort to prove anything he says

    the only reason he gets read at all is because he is doing the bidding of a group of billionaires

    he does not derive his judgment from some firmly established economic theorem

    this is not an implication from some piece of analysis in his textbook

    their perception does not come from rigorous theoretical and empirical analysis. Rather they are all expressing their feelings, which arise from their implicit sense of identity.”

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  8. "I understand that it is difficult for some economists to go against the nationalist feeling in Germany and other countries. "

    How misconstrued. Of course the German's do not like what is happening in Greece. They are absolutely committed to making the Euro a success. They want a solution for the Greeks, probably more than anyone save the Greeks themselves. And by the way they are taking about 500 times the number of Syrian refugees from Greece that the UK is - some 800 000 - no complaints. I wonder why?

    You know SImon I think some of the remarks I have heard reflect the nature of the economics discipline. Too much model, and not enough sociological, political and historical content. It makes people a little crowy. I see it in Krugman too, as someone who has to work in a number of fields, I see lot of unsophisticated remarks come from him.

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    1. 800.000? are you sure?

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    2. The remark you criticise is an attempt by an economist to take account of some sociology/psychology. Are you telling me that popular German views on Greece are entirely altruistic? At NO POINT have I ever claimed that this represents some difference in the national character compared to other countries - if the UK was the creditor, I have no doubt we would hear much the same nonsense in the UK press.

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    3. http://www.theguardian.com/world/2015/aug/20/germany-raises-estimate-refugee-arrivals-800000

      This is a country that by any standard is

      (1) internationalist and understands its international responsibilities
      (2) European - and understands its commitment to Europe - and genuinely wants to see the Euro succeed;
      (3) Wants a solution in Greece that keeps it in the Euro; that does not necessarily imply austerity, but it does institutional reform, probably at a Eurozone wide level; but it cannot continue to disburse large amounts of liquidity without that condition fulfilled.

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    4. Following on from 04.58.

      Politically impossible? Fiscal union since the eastward expansion has been pretty much off the table for quite some time.

      But financial integration isn't.

      This could be a clever way of dealing with problems in the southern periphery without necessitating treaty and other such changes. I was impressed with John Cochrane's ideas (quite something for me - I certainly do not empathise with a lot of his political economy leanings). For an non-European observer he has a good understanding of why the Euro must succeed and some very good ideas on how to go forward. If we look at interwar history, although for sure, Keynesian counter-cyclical policy was crucial for recovery, also often forgotten were financial reforms and rationalisation in the financial sector. Dealing with the problem of weak banks was also a very important precondition for the eventual implementation of successful Keynesian policy in many countries.

      Europe needs an integrated framework which will see weak banks closed or integrated with stronger ones within a well-thought out Eurozone wide regulatory framework.

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  9. Yes, this "we must run the trains on time" no matter how many people are on the tracks, is getting old.

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  10. «their perception does not come from rigorous theoretical and empirical analysis. Rather they are all expressing their feelings, which arise from their implicit sense of identity»

    That piece is appalling simplistic and twisted, because the issue had nothing to do with feelings and identity, it has everything to do with democracy, the free expression of democratic will in its core principles.

    As the german Constitutional Court has pointed out in that core there is the principle of "no taxation without representation", and having eurozone fiscal union without political union, as the greek government, P Krugman, S Wren-Lewis, and many other mostly anglo-american campaigners seem to be arguing for, is profoundly antidemocratic.

    The german Constitutional Court has ruled, and with great wisdom, that if there is a common fiscal budget taxed from every eurozone country and from which every eurozone country like Greece can spend, both the taxing and the spending budgets must be approved the elected representatives of all the countries involved, in parliament assembled, subject to one-voter-one-vote.

    "no taxation without representation", not feelings and identity. No fiscal union without political union.

    Are the voters of Greece prepared to have taxing and spending in Greece and the other countries decided by one-man-one-vote where they account for 3% of the votes and the remaining 97% of the votes come from the 18 countries that have unanimously negotiated with Greece in the last few years?

    Are the voters of Greece prepared to have nearly all the greek politicians prosecuted by the EU auditing directorate, prodded and supported by the voters and taxpayers of all other countries, for fraud, bribery, embezzlement when they buy the votes of their patronage networks?

    What Y Vaoroufakis in the book and blog, and the many mostly anglo-american participants in the campaign against the 18 eurozone members who have been negotiating with the greek government, seem to want is instead automatic taxation of the 18 eurozone citizens with fiscal transfers to the greek government that then spends the tax money of the other countries as the voters of Greece see fit, as they did so well in 2001-2009, with the hundreds of billions of euros that the greek government fraudulently (as the greek prime minister disclosed in the greek parliament) borrowed from both greek and foreign lenders.

    It is all about democracy, and democracy is very much about agreeing in parliament how much tax to raise and on what to spent it. With the votes of everybody, one-voter-one-vote.

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    1. And yes, this "Democracy uber alles" is also getting real old real quick.

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    2. You put:

      the principle of "no taxation without representation",

      but I'm not aware that immigrants in Germany are exempt from taxes. Nor tourists,

      And when you say:

      Are the voters of Greece prepared to have taxing and spending in Greece and the other countries decided by one-man-one-vote where they account for 3% of the votes and the remaining 97% of the votes come from the 18 countries that have unanimously negotiated with Greece in the last few years?

      Are you so unaware that governments are only a partial representation of the population will? And not a very good one at that, The Spanish government has only some 30 % of the vote, And similarly for other countries, so the result would certainly not be 97 % versus 3 %. Which is why some of the countries more vociferous about the lack of democracy of the EU are against going to one-voter-one-vote.

      Delete

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