Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 13 October 2015

A stimulus junkie's lament

One ‘stimulus junkie’ has already had a go at this FT piece by the chief economist of the German finance ministry, but let me add three points. The first is just factual. What is the unusual feature of this recovery compared to previous recessions? It is fiscal austerity. In the past governments have not generally cut spending or increased taxes just as recoveries have begun, but this time they did. Now perhaps the slow recovery and fiscal austerity are not related. But textbook macroeconomics, a large majority of economists, and all the macro models I know say they are. If German officials and economists continue to ignore this fact, they will lose international credibility.

Second, German officials need to be very careful before they claim that recent German macro performance justifies their anti-Keynesian views, because it might just prompt people to look at what has actually happened. Germany did undertake a stimulus package in 2009. But more importantly, in the years preceding that, it built up a huge competitive advantage by undercutting its Eurozone neighbours via low wage increases. This is little different in effect from beggar my neighbour devaluation. It is a demand stimulus, but (unlike fiscal stimulus) one that steals demand from other countries. This may or may not have been intended, but it should make German officials think twice before they laud their own performance to their Eurozone neighbours. If these neighbours start getting decent macro advice and some political courage, they might start replying that Germany’s current prosperity is a result of theft.

Third, they should also think twice before writing that a misguided concern about the impact of austerity “contrasts with much more convincing global action to repair the banking sector”. As this IMF analysis suggests, very little has been done to reduce the effective public subsidy to large banks in the major economies, and hence to avoid the ‘too important to fail’ problem. This is because politicians continue to ignore calls for much larger capital requirements. The financial system may have been partially 'repaired', but it still has the potential to create another global financial crisis.

There is a pattern here. Simple, basic economics is being ignored. That cutting demand or transfers from government reduces overall demand. That a country in a properly formulated monetary union that experiences a period of below average inflation will gain a short term competitive advantage, but it subsequently has to undergo a period of above average inflation to undo that advantage. That equity rather than debt for firms performs an important role as a shock absorber, and financial firms are no exception. It is not too hard to understand why these basic points are ignored. When the interests of politics and money collide with straightforward economics, economics does not stand a chance. If the incentives for getting the economics right are weak, the idea that economics loses out to money and politics is also just basic economics.  

78 comments:

  1. "In the past governments have not generally cut spending or increased taxes just as recoveries have begun, but this time they did."

    Do we have some data backing this statement up? I am just not a good enough economic historian to know. Not true (I think?) in the UK at least in the 19-21, 30-34, 73-76, 79-83 downturns. It is true of the 1990-91 downturn and the first two years of the 2008- downturn.

    No doubt it is true (else why claim it?) but can someone point me at a robust review establishing this please.

    I am not, for the avoidance of doubt, claiming that tightening fiscal policy doesn't lead to lower growth. Of course it does.

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    1. The links in my blogs are there for a reason!

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    2. You mean this one?

      http://www.voxeu.org/article/why-global-recovery-different

      I'd read it.

      I was hoping for a bit more detail than Figure 3, which looks very thin indeed to me.

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    3. 'very thin'?! As I explain in the following link, it is enough to explain the poor recovery.

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  2. This is a German economist (and former official):
    http://www.lemonde.fr/idees/article/2010/03/05/avis-de-tempete-sur-l-union-monetaire-europeenne-par-heiner-flassbeck_1314796_3232.html
    Sorry, in French. Here an italian translation:
    http://documentazione.altervista.org/le_monde_Flassbeck_Grecia_UME.htm
    Here his blog (sorry, mainly in German):
    http://www.flassbeck-economics.de/
    Luckily, German economists are not all the same.

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    1. Indeed - he and I, together with Sachs, Rodrick and Piketty, together signed this letter about Greece:

      http://www.thenation.com/article/austerity-has-failed-an-open-letter-from-thomas-piketty-to-angela-merkel/

      In fact there are many German economists who take a sensible view. It is just unfortunate that, unlike the UK or US, they appear to be in a minority.

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    2. Unfortunately, Heiner Flassbeck cannot be taken seriously. The fact that SWL does it means the same for him.

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    3. I agree, we should only listen to very serious people.

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    4. Yes, I agree too. Only VSP should be listened...
      Now, here some not serious persons at all, because these are only very good pieces of Deutsche Kabarett (english subtitled):
      https://www.youtube.com/watch?v=2mnvKLoMC7Y (The Troika in Greece)
      https://www.youtube.com/watch?v=jOKuNAdMIEI (Greece and German WWII Reparations - English)
      And here some others videos by "Die Anstalt":
      https://www.youtube.com/results?search_query=Die+Anstalt+sub
      Enjoy, but - of course - don't take it at serious!

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  3. Theft from who? The major competitors for German manufactured exports are outside the EU. Do you mean stealing from China? I agree that austerity policies are wrong. But we need to get the history right, looking at what happened from the time of reunification. We must be careful making accusations of beggar thy neighbour policy with a country with probably the highest standard of living and real wages in Europe. I am sure there is a lot more to this. The German economy has much to commend for it. In fact the UK and Corbyn could learn a lot from it. We need egalitarian outcomes and I think the apprentice schemes and incomes policies it has we ultimately should adopt; they have provided for price stability with relative egalitarianism. What neo-classical theory says is, when it comes to the crunch, is absolutely irrelevant.

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    1. Do you mean competitors or importers - key difference. I agree with some of the things you say, but the facts on wages and competitiveness are clear, and they cannot be ignored when Germany continues to advocate Eurozone austerity and asks 'why cannot you be like us'.

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    2. Haven't you heard Simon. New export markets have opened on Mars :)
      Now we can send lots of real stuff there and pat ourselves on the back.

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    3. Simon, I agree with you mostly on this as well. But you cannot really ask a system that is reached by consensus between firms, governments and most importantly of all, labour itself, to raise wages to help workers abroad. (I am not convinced given who Germany exports to(outside the EU) and imports from (the EU) there will be the feedback effects for German workers from increased aggregate demand in the South. And, German workers do not feel they are being exploited - they are not on zero hour contracts. The German system is consensual and participatory, not antagonistic as in the UK/US. Basically I know what the consequences of US pressure on Japan and Germany to increase to stimulate their economies have been since the 1970s. (This is also one area where history agreed with models - remember all those Project LINK variants - MCM, McKibbin Sachs etc - they also showed that this was not going to be an effective policy.) The result of that pressure was bubbles (if I may call them that) with little effect on world growth or imbalances. I know that weak demand in Germany does not help the Southern Periphery, but the Germans are right to ask whether a stimulatory policy will wreak havoc at home again, cause chaos for the delicately managed incomes policy, set off a housing bubble, without really helping the countries it intends to help. It could be a reply of the past for both concerned. The problem in the south is micro-economic - it is to do with their industrial and trading structures. Devaluation or stimulation will not fundamentally help. My policy prescription would be this: targetted fiscal transfers to Southern Periphery in the form of long term loans to help with either public infrastructure or worker training, or to assist German firms who might consider starting up production facilities in the South. Very likely they are going to demand labour reforms - but more than this, I think they are looking for the skills. Such fiscal transfers could go through the EU, and this might be the beginning of fiscal integration, which will solve a lot of problems in a stroke. My worry though is that the EU is too large, and it will mess up budget contribution and recipient arrangements among the members, with particular antagonism from the newer members.For this reason I think there has to be a two-speed Europe; the Eurozone and the rest.

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    4. Sorry I should clarify that a bit. Their main worry is losing ground to their competitors. Germany, for example, exports to China, but more importantly, it competes with China. I don't think there concern is completely unwarranted.

      I should also clarify, that there would be some feedback effect for Germany(I stress some -as it does also export to the EU as well as non-EU) ; but I would agree that in the long term this would be outweighed by losing ground to non-EU competitors.

      The Germans are also looking for a place to put their excess capital. The South is ideal. But they prefer a hands on approach rather than throwing money around - and not for the wrong reasons. What I said above sounds far fetched; but many East Asian countries also work this way - close relationships between firms and government in overseas investment (Japan in east asia, China in Africa etc, Singapore through its sovereign overseas investment boards.) and government capital expenditure playing a complementary role to private sector investment. (Interestingly the Chinese have seen an opportunity already - buying up state assets in Greece at bargain prices, including port and airport facilities - I am not sure that the purchase of these public utilities is all together good, although I have a feeling it is better than having them purchased by foreign banks or hedge funds. I have no problem with it as long as there is a commitment to long term investment - the Japanese are generally reliable in this respect - hopefully the Chinese too. )

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  4. I have just read Brad DeLong's review of Gabriel Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens, who estimates "that 8% of the world’s financial wealth – some $7.6 trillion – is hidden" in tax havens which is "more wealth than is owned by the poorer half of the world’s 7.4 billion people" ( SEP 28, 2015, Sunlight on Tax Havens, Project Syndicate).

    Perverse incentives are rotting our once democratic politics.

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  5. "Stimulus junkie" is bad framing. Much better to say something along the lines of "giving the economy a blood transfusion." There Is No Alternative. Surgery is required ;)

    ReplyDelete
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    1. Stimulus junkie is exactly right.

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  6. How can you avoid cutting government spending or raising taxes if you cannot borrow?

    What about an answer to that question?

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    1. It's called "printing money". The right of every sovereign nation, though much of the EU (i.e. those on the euro) has given up that right.

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    2. Like the Reichsbank did in 1923 and Zimbabwe is doing all the time. The question is whether the public or foreign partners will accept such money.

      Even if we do not reach hyperinflation, the government printing money might not be reelected because voters do not like raising public debt or fear inflation even if it is lower.

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    3. "Contrary to popular opinion, excessively high deficit spending and exorbitant government debt levels are not the primary cause of a hyperinflation. In most cases they have been the result of other exogenous events such as ceding of monetary sovereignty, war, rampant corruption or regime change. It is these exogenous events that result in the public’s rejection of the currency, a collapse in the tax system and the government response of printing more money to fill in the confidence void. Ultimately the confidence void cannot be filled and the currency is fully rejected by the public in the form of hyperinflation. In my treatise on the monetary system I discuss the importance of this unspoken agreement between the private sector and public sector."


      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

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    4. "The question is whether the public or foreign partners will accept such money."

      " Look at how Turkey functioned for over a decade - quadrillions of liras of deficit spending, interest rate targets often at 100%, inflation nearly the same, continuous currency depreciation and no confidence whatsoever. Yet government “finance” in lira was never an issue. Government lira checks never bounced. "

      Did Turkey's imports collapse to zero during this period?

      http://www.theguardian.com/business/economics-blog/2015/may/21/now-the-bank-of-england-needs-to-deliver-qe-for-the-people#comment-52557292

      Delete
  7. "Germany’s current prosperity is a result of theft. "

    Since when is it theft to offer goods at a better price? Isn't that normally called competition?

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    1. Not when you set wage inflation that will give you price inflation below the ECB's target.

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    2. Re the idea that Germany's inflation has been "below the ECB's target", the official target is something like "near to but below" 2%. Germany actually hit 1.5% for the first 15 years of the Euro's existence far as I can see. So I don't think we can accuse Germany of being excessively concerned about inflation.

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    3. The German unions agreed to wage moderation to avoid higher unemployment. That worked out.

      Do I understand you to be against moderate unions? Are German unions morally obliged to be as irresponsible as those in in the periphery?

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    4. I do not think 1.5% is consistent with an inflation target of 2%. Even if it is formulated as "near to but below 2%".

      The average development of the price deflator of GDP for the years 1999-2014 is about 1.05%. Or am I wrong with using the price deflator of GDP as appropriate key figure for inflation?

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    5. Its more appropriate to look at the GDP deflator. Look also at how German competitiveness has improved relative to, say, France from 2000 to 2008.

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    6. Yes they achieved more full employment and price stability, but that is because the labour market is full of mini jobs.
      Because the idiot public look at unemployment rates, not quality of the jobs created.
      Central banker love BS jobs.

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    7. Prof. Wren-Lewis.

      You have avoided answering my question whether German unions are morally obliged to be as irresponsible as those in in the periphery.

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    8. Why is the GDP deflator more appropriate than the price deflator of GDP?

      Kindly explain.

      As for French competitiveness against the German one, how do you explain the difference?

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    9. 1) The inflation target is 2%. Suppose productivity is 1%. That means that national wages should grow at 3%. If they grow more than that in one country, it will lose competitiveness relate to the rest of the EZ, and vice versa. That gives the opportunity for each country to try and temporarily gain competitiveness by having less than 3% wage inflation. Should unions take that opportunity?

      2) GDP deflator because it measures price of output.

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    10. Mainly Macro14 October 2015 at 11:31

      You ask: Should unions take that opportunity?

      If that reduces unemployment, yes.

      Fritz Scharpf, usually considered more left-wing than not, said several times that the German unions acted in a strategically rational way when they did so.

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    11. Before 2008, German unions did not know there was going to be a Great Recession. So while cutting wages might have helped reduce unemployment in the short term, it would then have led to a German boom and offsetting additional inflation in Germany subsequently. The competitive advantage, and associated current account surpluses, have to be unwound.

      An alternative method of dealing with German unemployment would be a temporary fiscal expansion. This has no long term cost, no future need for above average inflation.

      So even if you put aside the implications for those outside Germany, wage cutting when you are already competitive enough is not a great way of solving unemployment.

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    12. Prof. Wren_Lewis,

      I am puzzled by your response.

      1.
      "cutting wages might have helped reduce unemployment in the short term,"

      Remember what Keynes said about the short and the long term. It seems to have been pretty good business for Germany and its unions.

      2.

      "Before 2008, German unions did not know there was going to be a Great Recession. So while cutting wages might have helped reduce unemployment in the short term, it would then have led to a German boom and offsetting additional inflation in Germany subsequently."

      By your own account, that is what is happening. You said below:

      Mainly Macro14 October 2015 at 11:09
      "But Germany is gradually losing its competitive advantage that it had in 2008."

      3.
      "An alternative method of dealing with German unemployment would be a temporary fiscal expansion. This has no long term cost, no future need for above average inflation."

      You've lost me there.
      Fiscal expansion means borrowing or not repaying debt. Both new and continuing debt has to be repaid or at least rolled over, and interest has to be paid.

      How can you possibly say that there is no long term cost?

      You yourself have pointed out in the past that public debt, if not repaid by the generation that consumed the money, can be a burden on coming generations.

      3.
      "wage cutting when you are already competitive enough is not a great way of solving unemployment".

      Wages are rising in Germany, and, as you point out, it is losing its competitive edge.

      Anyway, wages were not cut. All the unions agreed to in the past, as you say yourself. were low wage increases.

      As for unemployment, look at the numbers. Even as Germany's competitive advantage has been eroding since 2008 (7 years!) and wages are rising, unemployment is lower than it has been for a long time.

      Perhaps you can expand your arguments to make them more convincing. I am willing to be convinced.



      Delete
    13. "So even if you put aside the implications for those outside Germany, wage cutting when you are already competitive enough is not a great way of solving unemployment."

      Here you lost me. The discussion started in Germany around 1997, I still remember how high rank union memebers steted that they had two alternatives, fewer well paid jobs and higher unemployment or more less well paid jobs. In 1998 Krugman wrote his (in)famous "Why Germany kant kompete".

      BTW Germany's umemployment increased until 2005.

      "An alternative method of dealing with German unemployment would be a temporary fiscal expansion. This has no long term cost, no future need for above average inflation."

      You do not see any political issues with this suggestion let's say in 1998??

      Ulenspiegel

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    14. 1) We are talking about within a decade, so Keynes's comment is beside the point.
      2) ? No contradiction that I can see
      3) Paying off higher debt need not be a problem if it is done sensibly
      3) Wages were cut relative to those in other EZ countries

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    15. Still puzzled.

      1) It was you who brought up the short term: "cutting wages might have helped reduce unemployment in the short term."
      Now you say it's a question of a decade. If the unions managed to reduce unemployment for a decade It seems to have been pretty good business for them and their country. And as you say, this is a case where Keynesians can afford to ignore Keynes since it is in accordance with classical macroeconomics.

      2) Taken care of by the above.

      3) "Paying off higher debt need not be a problem if it is done sensibly." True. The cost can be borne.But you said " This has no long term cost". There's a difference between bearable cost and no cost. You yourself have pointed out the possible weight of that cost for future generations. And if voters do not want that it is their decision.

      4) Wages were not cut relative to those in other EZ countries. It was the other countries who exceeded German wages. The strategy of the German unions was well known, The other countries ignored it and now are paying the price.

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    16. I think your (4) above illustrates the problem very well.

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    17. I said:

      "4) Wages were not cut relative to those in other EZ countries. It was the other countries who exceeded German wages. The strategy of the German unions was well known, The other countries ignored it and now are paying the price."

      You say:

      "I think your (4) above illustrates the problem very well."

      So why don't you put it that way instead of speaking of stealing or considering theft to be a term that can be used after "getting decent macro advice and (with) some political courage".

      Delete
  8. "... a country in a properly formulated monetary union that experiences a period of below average inflation will gain a short term competitive advantage, but it subsequently has to undergo a period of above average inflation to undo that advantage."

    Only if the ECB can actually bring about a 2% average inflation in the Eurozone. At present, that is less than clear.

    By the way: Was there ever a properly formulated monetary union? When and where?



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    1. No - read what I wrote. I talked about average, not 2%. You are right that if the ECB can obtain 2% inflation then it implies above 2% inflation, and if they cannot it does not, but then you have to ask where the opposition to a more expansionary monetary policy is coming from. To an outside observer it might look like Germany is deliberately holding back the ECB because they want below 2% average inflation so German inflation can be lower.

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    2. All right, leave out the 2%, so my comment runs:

      "... a country in a properly formulated monetary union that experiences a period of below average inflation will gain a short term competitive advantage, but it subsequently has to undergo a period of above average inflation to undo that advantage."

      Only if the ECB can actually bring about an average inflation in the Eurozone. At present, that is less than clear.

      And my question then is:

      What can the ECB do?

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    3. I retract my question - obviously, there will always be an average inflation in the Eurozone.

      But the question then remains: How will the countries with low inflation and competitive advantages be forced to undo that advantage?

      Prof. Wren-Lewis, kindly explain.

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    4. Basic macro I'm afraid. The key idea is that for a country there is an equilibrium level of competitiveness. Get too competitive, and excess demand will drive up inflation. Its just not obvious at the moment because the EZ as a whole is so depressed. But Germany is gradually losing its competitive advantage that it had in 2008.

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    5. Mainly Macro14 October 2015 at 11:26

      So what is there to worry about? The Germans will get their deserts, and everyone will be happy. All you need is patience. In the long run, the ocean will be flat again.

      But what is to be done about Germany in the short run? Let them get away with it? What would be wrong with that?

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    6. No problem if the ECB could hit 2%. But mainly because of EZ austerity encouraged/enforced by Germany they cannot. In which case Germany does not get its deserts - higher than 2% inflation - and the rest of the EZ pays that cost (much less than 2% inflation).

      Delete
    7. Mainly Macro14 October 2015 at 13:43

      Now it is you talking about the 2% - something ypu objected to above.

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    8. Mainly Macro14 October 2015 at 13:43

      You say:

      "No problem if the ECB could hit 2%. But mainly because of EZ austerity encouraged/enforced by Germany they cannot."

      Kindly explain.

      The ECB has been continually taking decisions that were strongly disapproved of by the German government, German public opinion and the Bundesbank. So the ECB is impervious to German pressure.

      So please tell us the countries in the EZ where Germany managed to enforce austerity to a degree that the ECB could not raise inflation.. How did Germany accomplish that? Or were the countries practicing austerity simply unable to borrow? Then Germany had nothing to do with it.


      Delete
  9. Since 2004 Germany's unit labour costs were below the EU average. However, the same holds true for the unit labour costs of Finnland, Austria and Eire. Did they also persue a "beggar thy neighbour policy"?

    And since when are money wages determined by politicians? Honeckers days are over. Since 1948, in Germany, money wages are determined by unions and employers' associations and the wage bargain is strongly influenced by the rate unempoyment. Since unemployment was high (11,7 % at its peak in 2005 and still 7,8% in 2008. At the present Germany's unemployment rate is 4,7%), so the bargaining power of unions was not high and money wage growth was low.

    The working of the labour market and its influence on aggregate supply or the Phillips curve is also macro, but I confess its not econ 101 its econ 301.

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    1. I did not say it was a deliberate political choice - it does not need to be for my argument to hold.

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    2. Prof. Wren-Lewis,

      So theft can be committed unintentionally?

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    3. I said some countries might start regarding it that way. Its not a term an economist would use. But the key point is that Germany is not suffering the same recession as the rest of the EZ because it undercut its EZ partners. If I was a German minister, I would be rather embarrassed about that.

      Delete
    4. Mainly Macro14 October 2015 at 11:24

      So theft is not a term an economist would use.

      But an economist like you can say "steal"?

      Above you said:

      " It is a demand stimulus, but (unlike fiscal stimulus) one that steals demand from other countries."

      Where's the difference between stealing and theft?

      Delete
  10. "Now perhaps the slow recovery and fiscal austerity are not related. But textbook macroeconomics, a large majority of economists, and all the macro models I know say they are".
    So,
    i) who are the minority of economists setting the agenda?
    ii) Where are the alternative models (does UK Treasury use the same as Ernst and Young still)?
    iii) Michael Kumhof (co-author of Chicago Plan Revisited) and Jim O'Neill (ex-squid) have recently joined the Bank of England is common knowledge.
    What models/textbooks are they using?

    #mediamacro aside, where is the counter-argument to Paul Krugman, Ann Pettifor, Martin Wolf, Ambrose Evans-Pritchard, Felix Martin, Mark Blyth, etc. etc.
    Where is the Empirical evidence justifying current policy?
    Or is it as simple as the banksters like the zirb more than main street?

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  11. If Germany has benefited from anything it is a comparatively weak Euro - a Euro weakened by the poor performance of the southern Europeans - it would almost appear reasonable to believe that troubled southern European economies would be welcomed by Germany. I can't see that Germany's ability to manage a settled industrial relations system, which must suit all those aparty to it, should be called cheating. Germany has a long history of a strongly performing, internationally competitive, industrial sector. However, while Germany has a strong trade performance it can carry an austerity programme at home (benefiting its exports) and still say "look at us, austerity works".

    Henry.

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    1. There is no austerity programme in Germany. Tell me where you think you found it.

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    2. There is an odd asymmetry here. We rightly complain that the periphery countries allowed their inflation to exceed to EZ average, and also rightly say that will have consequences for them later on. But when the opposite happens in Germany, it is largely ignored. When Germany then enjoys a competitiveness led boom and turns round to its EZ neighbours to say why cannot you be like us, you have a problem. When some in Germany obstruct attempts to get EZ average inflation to 2% it looks downright suspicious.

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    3. The only asymmetry I can see is that Germany did its homework earlier than the others.

      As Martin Wolf pointed out, German policy-makers understood the political and economic implications of a currency union. That is why Germany did not seek the Euro. It was a price foolishly asked of Germans to pay for unification whereas most of the other would-be members of the Eurozone did not understand its implications.

      Germany made the best of a situation it did not ask for.

      What is there to object to?

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    4. "There is no austerity programme in Germany. Tell me where you think you found it."

      OK austerity might be stretching it - would fiscally disciplined satisfy you? Austerity begins with fiscal discipline.

      Henry

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    5. Anonymous14 October 2015 at 22:14

      So SWL and his friends signed a letter to Angela Merkel promoting fiscal indiscipline?

      Perhaps SWL will explain to you the difference between austerity and fiscal discipline.

      Delete
  12. "Germany did undertake a stimulus package in 2009."

    So German politicians and their economic counsellors are not Anti-Keynesian after all.

    So why do you keep repeating that they are?

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    Replies
    1. Because they say they are - read the article! I have talked to some German Keynesians, and they definitely believe that they have a minority voice in German policy debates.

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    2. If the Government acted in a Keynesian way, what does it matter what they say? What's in a name?

      The real difference is that German policy makers do not believe in fine-tuning an economy - they regard the British experiment in the fifties to the seventies as a failure. You and the self-declared German Keynesians believe it is possible. That is a legitimate difference of opinion. It does not mean that Keynesian insights are ignored.

      That is the reality in German economics.

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    3. Promoting austerity throughout the EZ when monetary policy is weak is not being against fine tuning, its economic illiteracy that is hugely damaging.

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    4. Prof. Wren_Lewis,

      Kindly name the countries in the Euro Zone where Germany produced avoidable austerity. As you say, austerity means cutting government or raising taxes; that can only be avoided by government borrowing at affordable rates.

      So: Which are the governments that refused to borrow and instead cut spending or raised taxes?

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    5. Mainly Macro14 October 2015 at 11:11

      "Because they say they are - read the article! I have talked to some German Keynesians, and they definitely believe that they have a minority voice in German policy debates."

      So you're basing your statement on what minority Keynesians in Germany said?

      If the German government has acted in a Keynesian manner, that means that those German "Keynesians" are trying to appropriate Keynes's great name for their line of policy, i.e. fine-tuning the economy.

      And you fell for that.

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  13. Prof.Wren-Lewis,

    you say that

    "A country in a properly formulated monetary union that experiences a period of below average inflation will gain a short term competitive advantage, but it subsequently has to undergo a period of above average inflation to undo that advantage."

    Why? Who is going to force it?

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    1. So you will only do things if forced to?
      Argument by authority.
      You don't want us to invade Germany again and free the unemployed citizens of Southern Europe :d

      Delete
    2. Basic macro I'm afraid. The key idea is that for a country there is an equilibrium level of competitiveness. Get too competitive, and excess demand will drive up inflation. Its just not obvious at the moment because the EZ as a whole is so depressed. But Germany is gradually losing its competitive advantage that it had in 2008.

      Delete
  14. Refugee-related spending will act like a small stimulus says Gabriel. Isn't that great?

    Haven't German politicians been telling us that stimulus was leftist nonsense. It only crowds out private investment. And now, with the excuse of spending for "humanitarian reasons", they actually admit that it can increase growth. And that in an economy where unemployment is already low...

    http://uk.reuters.com/article/2015/10/14/us-germany-economy-gabriel-refugees-idUKKCN0S816X20151014

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  15. SWL says that a country that experiences a period of below average inflation will gain a short term competitive advantage, but it subsequently has to undergo a period of above average inflation to undo that advantage.

    Remember what Keynes said about the long run.

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  16. "Public finances in Germany indeed are contributing noticeably to macroeconomic stabilisation. The German government has implemented discretionary measures in a magnitude of over 2% of GDP for the years 2009 and 2010. Most of the effects of these measures have still come into effect. With regard to fiscal stabilisation it is also necessary to keep in mind that its effects should not only be evaluated by discretionary measures alone. Built-in adjustments in public budgets – so-called automatic stabilisers – provide stimulus through a rule-based fiscal framework. These automatic stabilisers are more important in countries with larger social security systems and progressive tax systems. For example, in Germany the contribution of automatic stabilisers in 2009 and 2010 will be nearly 3 % of GDP (including developments in profit-related taxes)."
    http://www.bundesbank.de/download/presse/reden/2009/20090513.weber.london.en.pdf

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  17. I looked up the links in the second paragraph of Prof. Wren-Lewis's post, which are almost exactly a year old.

    What do I find? This entire discussion is a repeat performance of the comments to those posts.

    Prof. Wren-Lewis is not willing to learn. He insists on repeating himself and leaves no choice to his critics but to repeat themselves. This can go on forever, and he has no one to blame but himself.

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    Replies
    1. The rather better question is whether I am right to assume that those making these comments are genuinely confused and need help, or whether they are just wasting my time. The stuff I talk about here is just material you will find in any undergraduate economics course in Germany.

      Delete
    2. Unnfortunately, the confusion is yours.

      Delete
    3. "The stuff I talk about here is just material you will find in any undergraduate economics course in Germany."

      Yes, but they probably learn some things you do not talk about:

      Where is the money to avoid austerity to come from ?

      In your cultural lag of macroeconomics, it comes from the central bank, as was the practice of the BoE and Bank of France before their independence was introduced, sometime in the nineties.

      With the ECB, times have changed. They no longer accept Greek public debt to avoid austerity in Greece. So austerity is unavoidable there unless other countries lend them. And if those countries only lend under conditions, the Greeks have to accept either the conditions or far deeper austerity. Your idea that the Greeks will only have to default and everything will be allright some years after ignores what will happen during those years and Judge Griesa afterwards.

      What about an "aggiornamento" in your theories? At present they appear as irrelevant as medieval scholasticism.

      Delete
    4. Prof. Wren-Lewis,

      What about clearing up the unclearness in the post by Anonymous 21 October 2015 at 06:30?

      Delete

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