The Slack Wire

Mark Blyth on the Creditor’s Paradise

There’s a lot to like in this talk by Mark Blyth, reposted in Jacobin. I will certainly be quoting him in the future on the euro system as a “creditor’s paradise.” But I can’t help noting that the piece repeats exactly the two bits of conventional wisdom that I’ve been criticizing in my recent posts here on Europe. [1]

First, the uncritical adoption of the orthodox view that if Greece defaults on its debts to the euro system, it will have to leave the single currency.  Admittedly it’s just a line in passing. But I really wish that Blyth would not write “default or ‘Grexit’,” as if they were synonyms. Given that the assumption that they have to go together is one of the strongest weapons on the side of orthodoxy, opponents of austerity should at least pause a moment and ask if they necessarily do.

Second, this:

Austerity as economic policy simply doesn’t work. … European reforms … simply ask everyone to become “more competitive” — and who could be against that? Until one remembers that being competitive against each other’s main trading partners in the same currency union generates a “moving average” problem of continental proportions. 

It is statistically absurd to all become more competitive. It’s like everyone trying to be above average. It sounds like a good idea until we think about the intelligence of the children in a classroom. By definition, someone has to be the “not bright” one, even in a class of geniuses.

In comments to my last post, a couple people doubted if critics of austerity really say it’s impossible for all the countries in the euro to become more competitive. If you were one of the doubters, here you go: Mark Blyth says exactly that. Notice the slippage in the referent of “everyone,” from all countries in the euro system, to all countries in the world. Contra Blyth, since the eurozone is not a closed trading system, it is not inherently absurd to suggest that everyone in it can become more competitive. If competitiveness is measured by the trade balance, it’s not only not absurd, it’s an accomplished fact.

Obviously — but I guess it isn’t obvious — I don’t personally think that the shift toward trade surpluses throughout the eurozone represents any kind of improvement in the human condition. But it does directly falsify the claim Blyth is making here. And this is a problem if the stance we are trying to criticize austerity from is a neutral technocratic one, in which disagreements are about means rather than ends.

Austerity is part of the program of reinforcing and extending the logic of the market in political and social life. Personally I find that program repugnant. But on its own terms, austerity can work just fine.

[1] One of my posts was also cross-posted at Jacobin. Everybody should read Jacobin.

What Has Happened to Trade Balances in Europe?

It has gradually entered our awareness that the Greek trade account is now balanced. Greece no longer depends on financial markets (or official transfers, or remittances from workers abroad) to finance its imports. This is obviously important for negotiations with the “institutions,” or at least it ought to be.

I was wondering, how general is this shift toward a positive trade balance. In the FT last week, Martin Wolf pointed out that over the past five years, the Euro area as a whole has shifted from modest trade deficits to substantial trade surpluses, equal to 3 percent of euro-area GDP in 2013. He does not break it down by country, though. I decided to do that.

Euro area trade ratios, 2008 and 2013. The size of the dots is proportional to total 2008 trade.

Here, from Eurostat, are the export-import ratios for the euro countries in 2008 and 2013. Values greater than one on the horizontal axis represent a trade surplus in 2008; only a few northern European countries fall in that group. Meanwhile, in seven countries imports exceeded exports by 10 percent or more. By 2013, the large majority of the euro area is in surplus, while not a single country has an excess of imports over exports of more than 5 percent. The distance above the diagonal line indicates the improvement from 2008 to 2013; this is positive for every euro-area country except Austria, Finland and Luxembourg, and the biggest improvements are in the countries with the worst ratios in 2008. The surplus countries, apart from Finland, more or less maintained their surpluses; but the deficit countries all more or less eliminated their deficits.

So does this mean that austerity works? Yes and no. It is certainly true that Europe’s deficit countries have all achieved positive trade balances in the past few years, even including countries like Greece whose trade deficits long predated the euro. On the other hand, it’s also almost certainly true that this has more to do with the falls in domestic demand rather than any increase in competitiveness.

This is shown in the second figure, which gives the ratio of 2013 imports to 2008 exports on the vertical axis, and 2013 exports to 2008 imports on the horizontal axis. (This is in nominal euros.) Here a point on the diagonal line equals and equal growth rate of imports and exports. Most countries are clustered around 15% growth in imports and exports; these are the countries that had balanced trade or surpluses in 2008, and whose trade ratios have not changed much in the past five years. Only one country, Estonia, has export growth substantially above the European average. But all the former deficit countries have import growth much lower than average. (As indicated by their position to the left of the main cluster.) It’s evident from this diagram that the move toward balanced trade in the deficit countries is about throttling back imports, not boosting exports. This suggests that it has more to do with slow income growth than with lower costs.

Again, the sizes of the dots are proportional to 2008 trade volumes.

Still, the fact remains, trade deficits have almost been eliminated in the euro area. Liberal critics of the European establishment often say “not every country in Europe can be a net exporter” as if that were a truism. But it’s not even true, not in principle and evidently not in practice. It turns out it is quite possible for every country in the euro to run a trade surplus.

The next question is, with whom has the euro area’s trade balanced improved? Europe outside the euro, to begin with. The country with the biggest single increase in net imports from the euro zone is, surprisingly, Switzerland, whose deficit with the euro area has increased by close to 60 billion. Switzerland’s annual trade deficit with the euro area is now 75 billion, about a quarter of the area’s overall trade surplus. Norway and Turkey have increased their deficits by about 15 billion each. The rest of the increase in net exports are accounted for by increased surpluses with Africa (26 billion), the US (27 billion), and Latin America (35 billion, about half to Brazil), and a decreased deficit with Asia (135 billion, including a 55 billion smaller deficit with China, 30 billion smaller with Japan and 20 billion with Korea). Net exports to Australia have also increased by 10 billion.

Why do I bring this up? One, I haven’t seen it discussed much and it is interesting.

But more importantly, the lesson of the Europe-wide shift toward trade surpluses is that austerity can succeed on its own terms. I think there’s a tendency for liberal critics of austerity to assume that the people on the other side are just confused, or blinkered by ideology, and that there’s something incoherent or self-contradictory about competitiveness as a Europe-wide organizing principle. There’s a hope, I think, that economic logic will eventually compel policymakers to do what’s right for everyone. Personally, I don’t think that the masters of the euro care too much about the outcome of the struggle for competitiveness; it’s the struggle itself — and the constraints it imposes on public and private choices — that matters. But insofar as the test of the success of austerity is the trade balance, I suspect austerity can succeed indefinitely.

UPDATE: In comments Kostas Kalaveras points to a report from the European Commission that includes a similar breakdown of changes in trade balances across the euro area. There’s some useful data in there but the interpretation is that almost all the adjustment has been structural rather than cyclical. This is based on estimates of declining potential output in the periphery that I think are insane. But it’s interesting to see how official Europe thinks about this stuff.

“Disgorge the Cash” at the Roosevelt Institute

I have a working paper up at the Roosevelt Institute, as part of their new Financialization Project. Much of the content will be familiar to readers of this blog, but I think the argument is clearer and, I hope, more convincing in the paper.

The paper has gotten a nice writeup at the Washington Post, and at the Washington Center for Equitable Growth.

UPDATE. And in the International Business Times.

“The Idea Was to Create a Modern Gold Standard”

My view on the euro is that it has become a project to restore the rule of money over humanity. To move us back toward a world where in every sphere of life, and especially in collective choices made through government, the overriding question is, “what is most consistent with the accumulation of money claims?” or, “what will the markets think?” The euro is a project to roll back social democracy and to reimpose the “discipline of the market” on the state — or in other words to restore the logic of the gold standard, whose essential condition was that preservation of money-claims had priority over democratic government. From this point of view, crises are not a failure of the system but an essential part of its functioning, since discipline requires that punishment be sometimes visibly meted out.

This kind of Polanyian perspective is typically found on the left. But it’s increasingly clear that many of those on the other side think this way too. Here is a striking recent op-ed from the FT, by one Thomas Mayer:

Germany relied on the Maastricht treaty to make it possible to share a currency without sacrificing political accountability. The idea was to create an economic framework that was in some ways the modern equivalent of a gold standard. Monetary decisions would be made by the European Central Bank, whose only goal would be price stability. The lack of shared political institutions did not matter, because the ECB was to operate in total independence from all political influence. It would never lend to member states, even ones that were at risk of going bankrupt. 

Despite these provisions, the Germans did not entirely trust their partners’ fiscal discipline, so they imposed strict limits to government budget deficits and debt…. With the benefit of hindsight, it was all rather naive. Germany should have insisted on a procedure for government insolvency, and a way of showing the door to states that were unable or unwilling to respect the rules. 

Mayer, the head of a German think tank, does not mention that in the first decade of the euro Germany was one of the most frequent violators of the “strict limits” on fiscal deficits. But it’s helpful to see the idea of the euro as a new gold standard stated so plainly by a supporter. And he makes another important point, which is that even under a new gold standard, the discipline of the markets is unreliable, and needs to be supplemented with (or simulated by) overt political authority.

From early 2010, when a Greek default was narrowly avoided, until early 2012, Angela Merkel, the German chancellor, attempted to re-establish the Maastricht model … and contemplated the possibility that Greece might leave the euro. But she is risk-averse by nature and, confronted with the incalculable risks, she changed course in the spring of 2012. The Greek debt restructuring, she now said, was “exceptional and unique”. Leaving the euro was out of question for any member country. Since this decision meant markets would no longer pressurise governments into sound economic policies, she built a pan-European “shadow state” — a web of pacts to ensure that countries followed policies consistent with sound money. 

It has not worked. From Greece to France, countries resist any infringement on their sovereignty and refuse to act in a way that is consistent with a hard currency policy. The ECB is forced to loosen its stance. Worse, it has allowed monetary policy to become a back channel for transfering economic resources between eurozone members. This is Germany’s worst nightmare… 

A century ago, Eugen Böhm-Bawerk, the Austrian economist and finance minister, proclaimed laws of economics to be a higher authority than political power. Some Germans say that a hard currency is an essential part of their economic value system. If both are right, politicians will be powerless to prevent Germany’s departure from a monetary union that is at odds with the country’s economic convictions.

The essential points here are, first, that the goal of the euro system to create a situation where markets can “pressurise governments into sound economic policies,” meaning first and foremost, policies that preserve the value of money; second, that this requires limits on national sovereignty, which will be resisted by democratic governments; and third, that this resistance can only be overcome through the threat of a crisis. In this sense, from Mayer’s perspective, the steps that were taken to resolve the crisis were a terrible mistake, and required the use of direct political control by a “shadow state” to substitute for the blunted threat of financial catastrophe. This is all very clarifying; the one piece of mystification still intact is the substitution of “Germany” as the social actor, rather than European wealth owners as a class. 
Mayer is just one guy, of course, but presumably he speaks to some extent for his old colleagues at Deutsche Bank, Goldman Sachs and the IMF. [1] And anyway this kind of language is everywhere these days.

The FT’s review of “Lords of Secrecy,” for instance, acknowledges that we increasingly seem to be subjects of “a vast secret state beyond control.” That sounds bad! But the reviewer concludes on a cheerful note:

The “lords of secrecy” do need to be kept in check, of course. But that may soon happen anyway. After all, principles go only so far in holding the clandestine arms of the state to account; money goes a lot further. But money is one thing that is not quite so freely available in Washington, or many other capitals in the west, no matter how many secrets they have.

Here, subservience to the bond markets doesn’t just require limits on democracy or the rule of law, it makes them superfluous.

Returning to the euro, here, via Bill Mitchell, is Graham Bishop on the “revolutionary political implications” of unified interbank payments in the euro area:

While payments are an intensely technical area, the political implications are immense… SEPA establishes an effective ‘referendum veto’ to be exercised by citizens whose national governments might contemplate leaving the euro. In SEPA, citizens are empowered to embed the freedom and the choices associated with the single market so deeply in the economy to make it impossible for any EU government which adopted the euro to abandon the common currency. It is hard to imagine that citizens and enterprises accustomed to these choices would want to leave the euro once they considered what they individually would give up by way of returning to narrow, national offerings for trade in goods and services. 

With SEPA, any citizen who fears that his home state is about to leave the euro to implement a major devaluation can protect themselves by transferring their liquid funds into a bank in another euro country – in an instant and at negligible cost. In effect, this is a free option for all citizens and amounts to an instantaneous referendum on government policy. Such an outflow of retail liquidity from a banking system would cause its rapid collapse. The quiet run out of deposits in the Irish banks last year demonstrated the power of depositors to force radical political change.

There’s not much to say about that unctuous, preening first paragraph, with its cant about freedom and choices, except to hope that some future novelist (or screenwriter, I guess) can do justice to the horrible people who rule us. (Also, notice the classic bait-and-switch in which the only alternative to complete liberalization of capital flows is autarchy.) But what’s interesting for the argument I’m making here is the claim that the great political innovation of the euro is that it gives money-owners the right to a veto or referendum over government policy — up to the point of forcing through “radical change,” on pain of a bank crisis. And to be clear: This is being presented as one of the great benefits of the system, and an argument for the UK to join the single currency.

(Also, if I’m correct that the effect of a withdrawal of ECB liquidity support for Greek banks would just prevent transfers to banks elsewhere, this suggests the threat is self-negating.)

The masters of the euro themselves talk the same way. The “analytic note” just released by European Commission President Jean-Claude Juncker, “in close cooperation with Donald Tusk, Jeroen Dijsselbloem and Mario Draghi,” begins with the usual claims about the crisis as due ultimately to lack of competitiveness in the southern countries, thanks to their “labor market rigidities.” (They don’t say what specific rigidities they have in mind, but they do nod to a World Bank report that identifies such distortions as minimum wages, limitations on working hours, and requirements for severance pay.) “While the Maastricht Treaty was based on the assumption that market discipline would be a key element in preventing a divergent development of the euro area economies and their fiscal positions, with increasing government bond interest rates having a signalling effect.” But in practice divergent policies were not prevented, as bond markets were happy to lend regardless. Then, “when the crisis hit… and markets reappraised the risk and growth potential of individual countries, the loss of competitiveness became visible and led to outflows.” [2] What’s most interesting is their analysis of the political economy of removing these “rigidities” and restoring “competitiveness”:

The policy commitments of euro area countries, made individually or collectively, to growth-enhancing structural reforms have not been implemented satisfactorily. Often, commitments are strong in crisis times and then weakened again when the overall economic climate has improved. In this sense, the stabilising effect of the single currency has certain counterproductive effects with regard to the willingness of national governments to start and implement the necessary structural reforms…

Naomi Klein couldn’t have said it better. Crises are a great time to roll back “employment protection legislation” and force down labor costs — the unambiguous content of “structural reforms” in this context. If your goal is to to roll back protective legislation and re-commodify labor, then resolving economic crises too quickly is, well, counterproductive.

A couple years ago, Paul Krugman was expressing incredulity at the idea that prolonging the European crisis could be a rational act in the service of any political agenda. Last week, he was still hoping that Draghi would emerge as the defender of European democracy. No disrespect to my CUNY colleague, who understands most of this stuff much better than I ever will. But in this case, it seems simpler to take Draghi at his word. Restricting the scope of democratic government was the entire point of the euro system. And since the automatic operation of bond markets failed to do the job, a crisis is required.

UPDATE: Schauble today: “If we go deeper into the [debt] discount debate, there will be no more reforms in Europe. There will be joyful celebrations in the Elysée and probably in Rome, too, if we go down this path.” Thee is not even a pretense now that this is about resolving the crisis, as opposed to using the crisis as leverage to promote a particular policy agenda. It’s surprising, though, that he would suggest that the Euro zone’s second and third largest economies are on the side of the debtors. Would that it were so.

[1] It’s almost too good that he hosts a lecture series on “The Order of Money.”

[2] The funny thing is that, after talking about the “misallocation of financing” by markets, and describing the crisis as “a crisis of markets in terms of their capacity to price risk correctly,” they go on to recommend the removal of all remaining restrictions on capital flows: “we need to address remaining barriers to investment and the free movement of capital and make capital market integration a political priority.” Reminds me of the opening paragraphs of this Rodrik essay.

What If the ECB Pulls the Trigger?

Over the past week, it’s become clear that the real leverage the European authorities have over Greece is via the banking system. What does Greek need continued loans for? Not to pay for public expenditures, thanks to the primary surplus. Not to pay for imports — Greece has a (small) trade surplus. Not to service current debt, if it defaults. What does need to be financed, is the flow of deposits out of Greek banks to the rest of Europe.

So what happens if that financing is cut off, as the ECB is threatening? The usual answer is collapse of the Greek banking system, followed immediately by a forced exit of Greece.  But the other night I was talking to some friends about the situation, and we found ourselves wondering: What concretely are the mechanics of this? What is the exact chain of events from an end to ECB financing to Greek exit from the euro? I don’t know the answer to this, but the more I think about it, the less confident I am in the conventional wisdom.

What concretely does it mean that the ECB is providing liquidity support to Greek banks? As far as I can tell, it is this. When a holder of a deposit in a Greek bank wants to make a payment elsewhere, either to purchase a good or asset outside Greece or to move the deposit elsewhere, the Greek bank must transfer an equal quantity of settlement assets to the bank receiving the deposits. These settlement assets are normally acquired on the fly, by issuing a new liability in the interbank market, but if other banks are unwilling to accept the liabilities of Geek banks, they can be borrowed directly from the ECB, against suitable collateral. This is the lending that the ECB is threatening to cut off.

What if the Greek banks can’t acquire settlement assets? Then other banks will not accept the deposits, and it will be impossible to use deposits in Greek banks to make payments. Depositors will find their accounts frozen and, in the normal course of events, the banks would be shut down by regulators.

But Greece still does have a central bank. My understanding is that much of the day to day business of central banking in Europe is carried out by the national central banks. In principle, even if Greek banks can’t acquire settlement assets by borrowing from the ECB, they can still borrow from the Greek central bank. This doesn’t help with payments to the rest of Europe, since reserve balances at the Greek central bank won’t be accepted elsewhere. But I don’t see why the Greek central bank can’t keep the payments system working within Greece itself. If the Greek central bank is willing to provide liquidity on the same terms as the ECB, what’s going to force the Greek banks to shut down? It’s not as though there’s any Europe-wide bank regulator that can do it.

In a sense, this is a kind of soft exit, since there will now be a Greek euro that is not freely convertible into a non-Greek euro. But I don’t see why it has to be catastrophic or irreversible. Transactions within Greece can continue as before. And for routine trade it might not make much difference either, since the majority of Greek imports come from outside the EU. Where it would make a difference is precisely that it would prevent Greek depositors from moving their funds out of the country. [1] In effect, by cutting Greece off from the European interbank payment system, the ECB will be imposing capital controls on Greece’s behalf. You could even say that, if the threat of cutting off liquidity support can trigger a run on Greek banks, actually doing so will ensure that there isn’t one.

Now maybe I’m wrong about this. Maybe there is a good reason why the Greek central bank can’t maintain the payment system within Greece. But I also think there’s a larger point here. I’m thinking about the end of the gold standard in the 1930s, when breaking the link with gold was considered an unthinkable catastrophe. And yet the objective basis of the money system in gold turned out to be irrelevant. I think, in the same way, the current crisis may be revealing the reflexive, self-referential nature of money. On a certain level, the threat against Greece comes down to: “You must make your money payments, or we will deprive you of the means to make your money payments.”

The rule of the money system requires that real productive activity be organized around the need for money. This in turn requires that money not be too freely available, but also that it not be too scarce. Think of Aunt Agatha in Daniel Davies’ parable. Suppose her real goal is to run her nephew’s life — to boss him around, have him at her beck and call, to know that he won’t make any choices without asking if she approves. In that case she always has to be threatening to cut him off, but she can’t ever really do it. If he knows he’s getting money from her he won’t care what she thinks — but if he knows he isn’t, he won’t care either. He has to be perpetually unsure. And in keeping with Davies’ story, the only thing Jim actually needs the money for, is to continue servicing his debt to Aunt Agatha. The only real power she has is a superstitious horror at the idea of unpaid debts.

In this way I’ve tentatively convinced myself that all Syriza needs to do is hold firm. The only way they can lose is if they lose their nerve. Conversely, the worst outcome for the ECB and its allies would be if they force Greece into default — and everyone watches as the vengeful money-gods fail to appear.

UPDATE: It turns out that Daniel Davies is making a similar argument:

Capital controls are arguably what Greece needs right now – they have
balanced the primary budget, and they need to stop capital flight.
From the ECB’s point of view, I’d agree that the move is political, but
it also means that they are no longer financing capital flight.

There’s
a sensible negotiated solution here – with a lower primary surplus than
the program (in which context I think Varoufakis’ suggestion of 1.5% is
not nearly ambitious enough), a return to the structural programs (the
Port of Piraeus really does need to be taken out of the political
sphere), and an agreement to kick the headline debt amount into the far
future (in service of which aim I don’t think all the funny financial
engineering is helping).

The fall-back is a kind of soft exit,
with capital controls. But the massive, massive advantage of capital
controls over drachmaisation is that they  preserve foreign exchange.
Greece imports fuel and food. With capital controls, it can be sure of
financing vital imports.

The fact that Davies is thinking the same way makes me a lot more confident about the argument in this post.

[1] Greek banks would also presumably be limited in their ability provide physical cash to depositors, but I don’t think this is important.

What It’s About

I’m as thrilled as anyone by Syriza’s first week in government. The European bourgeoisie has declared war on social democracy, with the euro as its weapon to re-subordinate society to the logic of the market. And now — shades of Polanyi’s double movement — society is pushing back. It’s amazing to see Varoufakis declare that the “troika” has no legitimacy and that Greece is done negotiating. (As my friend Harry says, maybe what’s amazing that Dijsselbloem and the rest thought that Syriza would roll over. But I suppose that’s what’s happened before.)

Here’s what I think is the most important point in all this: The debate now is not about claims on real resources, but about power — who decides, and on what basis.

Daniel Davies:

Don’t think of the Greek debt burden, either in cash € terms or as a ratio to GDP, as an economic quantity. It basically isn’t an economically meaningful number any more. The purpose of its existence is as a political quantity; it’s part of the means by which control is exercised over the Greek budget by the Eurosystem. The regular rituals of renegotiation of the bailout package, financing of debt maturity peaks and so on, are the way in which the solvent Euroland nations exercise the kind of political control that they feel they need to have… 

It is, therefore, totally inimical to the Eurosystem to hold out any hope of the kind of debt writedown that Syriza wants, as opposed to some smaller, cosmetic face value reduction or maturity extension. The entire reason why Syriza wants to get a major up-front reduction in the debt number is to create political space to execute the rest of their program. The debt issue and the political issue are the same issue. Syriza understands this, and so does the Eurosystem. The people who don’t understand it are the ones writing editorials in the business press which support the debt reduction but don’t think that Syriza should be given carte blanche to do everything it wants.

One man’s “carte blanche to do everything it wants” is another man’s “freedom to make decisions as a sovereign, democratically elected government.” But this gets the stakes of the negotiations just right.

Krugman is also very good, especially here.

at this point Greek debt, measured as a stock, is not a very meaningful number. After all, the great bulk of the debt is now officially held, the interest rate bears little relationship to market prices, and the interest payments come in part out of funds lent by the creditors. In a sense the debt is an accounting fiction; it’s whatever the governments trying to dictate terms to Greece decide to say it is. 

… the aspect of the situation that isn’t a matter of definitions: Greece’s primary surplus, the difference between what it takes in via taxes and what it spends on things other than interest. This surplus … represents the amount Greece is actually paying, in the form of real resources, to its creditors… Greece has been running a primary surplus since 2013, and according to its agreements with the troika it’s supposed to run a surplus of 4.5 percent of GDP for many years to come. What would it mean to relax that target? 

… let’s think of a maximalist case, in which Greece stopped running a primary surplus at all (this is not a proposal). You might think that this would let the Greeks spend an additional 4.5 percent of GDP — but the benefits to Greece would actually be much bigger than that. Remember, the main reason austerity has been so harsh is that cutting spending leads to economic contraction, which leads to lower revenues, which forces further cuts to hit the budget target. A relaxation of austerity would run this process in reverse; the extra spending would mean a stronger economy

This makes three important points. First, Greece now has a primary surplus, meaning that the public budget is no longer dependent on foreign borrowing to maintain its current operations; default would allow for a higher level of public spending with no increase in taxes. [1] Second, the size of these transfers is a political decision, no less than the scale of the transfers under, say, the Common Agricultural Program. Third, while these flows are — unlike the notional stock of debt — objective economic facts, they are not the most important thing about the debt payments. The most important thing is the policies the Greek government has to adopt to keep generating those flows. It’s a problem that Greece is making payments to the richer parts of Europe, and will do so indefinitely if the troika gets its way. But the bigger problem is that the overriding need to generate those payments prevents the Greek state from taking any positive action either to end the current depression or to foster longer-term economic development.

One issue where Krugman and Davies disagree is if a default on the Greek debt would automatically lead to a collapse of the Greek banking system (in which case exit from the euro would uncontroversially follow) or if this would require a positive decision of the ECB to withdraw support from Greek banks. [2] I don’t claim any expertise here, but Krugman’s position seems more plausible. And in general, one of the welcome effects of the crisis is that supposedly natural economic constraints are forced to take form as explicit political choices.

Maybe the best short overview I’ve seen is this piece by Mark Weisbrot. The key point he makes is that the big fear of the current of Euroland’s rulers is not that economic catastrophe will follow Greek exit from the euro. It’s that it won’t.

And yes, it’s published in VICE. These are strange days.

[1] There’s a certain slippage in these conversations between “Greece” meaning the country as a whole and “Greece” meaning the government. It is true that the Greek government budget is in primary surplus (if the official numbers can be trusted, which probably shouldn’t be taken for granted — leaving aside questions of fraud, there are non-recurring revenues from privatization.) But if we are talking about Greece the country, the relevant number for real resource flows is the trade balance, which is close to zero. But it’s still true that there is no net flow of real resources into Greece to be financed, which is important in thinking about the consequences of default.

[2] As far as I can understand, the Greek banking system could collapse in two ways. First, if it loses access to the interbank payment system, and second, if it faces a run because it becomes clear that the ECB is no longer willing to offer Greek banks liquidity support. Both of these events can happen just as easily if Greece is current on its debt as if it defaults.

Priorities

The Syriza victory as a Rorschach test for U.S. politicians:

Mayor De Blasio and President Obama both called Tsipras this morning to congratulate him. According to the press release from the Mayor’s office,

Mayor Bill de Blasio called Greek Prime Minister Alexis Tsipras Thursday morning to congratulate him on his victory, and to commend him for forcefully raising the issue of inequality during his campaign. The Mayor expressed New York City’s solidarity with Greece in the joint struggle against inequality, and commented on how the Prime Minister’s victory sends a powerful message to progressives across the world. The Prime Minister expressed his admiration for New York City, and called it one of the most extraordinary cities in the world. The Prime Minister invited the Mayor to visit Greece, and the Mayor expressed interest in visiting in the future.

And here’s the one from the White House:

The President spoke with Prime Minister Tsipras today to congratulate him on his recent election victory. The President noted that the United States, as a longstanding friend and ally, looks forward to working closely with the new Greek government to help Greece return to a path of long-term prosperity.  The two leaders also reviewed close cooperation between Greece and the United States on issues of European security and counterterrorism. 

In this context, there’s something sinister about the words “long-term.”

Posts in Three Lines

There is no long run. This short note from the Fed suggests that the failure of output to return to its earlier trend following the Great Recession is not an anomaly; historically, recessions normally involve permanent output losses. This working paper by Lawrence Summers and Lant Pritchett argues that it is very hard to find persistent growth differences between countries. From opposite directions, these results suggest that there is no reason to think that supposedly “slow” variables are more stable than “fast” ones; in other words, there is no economically meaningful long run.

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Krugman on the archaeology of “price stability.” Here is Paul Krugman’s talk from the same Roosevelt Institute/AFR/EPI even I spoke at last month. The whole thing is quite good but the most interesting part to me was on the (quite recent) origins of the idea that price stability means 2 percent inflation. From Adam Smith until the 1990s, price stability meant just that, zero inflation; but in the postwar decades it was more or less accepted that that was one objective to trade off against others, rather than the sine qua non of policy success.
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Capital is back — or is it? Here’s an interesting figure from Piketty and Zucman’s 2013 paper, showing the long-term evolution of capital and labor shares in the UK and France:
What we see is not a stable or rising capital share, but rather a secular shift in favor of labor income, presumably reflecting the long term growth of political power of working people from the early 19th century, when unions were illegal, labor legislation was unknown and only property owners could vote. What’s funny is that this long-term decline in the power of capital is so clearly visible in Piketty’s data, but so invisible in the discussion of his book.
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Orange is the big lie. Like lots of people, I watched the Netflix show Orange Is the New Black and initially enjoyed it, enough to read the memoir on which it’s based. It’s not often you see ideology operation so visibly: The show systematically omits the book’s depictions of abuse and racism among the guards and solidarity among the prisoners, and introduces violence from the prisoners and compassion from the authorities that is not present in the book. For example, both book and show feature an affair between a female prisoner and a male guard, but in the show nothing happens to the prisoner while the guard is fired and prosecuted, while in reality the prisoner was thrown into solitary confinement and there were no consequences for the guard.

The Non-Accelerating What Now Rate of Inflation

The NAIRU is back. Here’s Justin Wolfers in the Times the other day:

My colleague Neil Irwin wrote about this slow wage growth as if it were bad news. I feel much more optimistic. … It is only when nominal wage growth exceeds the sum of inflation (about 2 percent) and productivity growth (about 1.5 percent) that the Fed needs to be concerned…

Read that last sentence again. What is it that would be accelerating here?

The change in the wage share is equal to the increase in average nominal wages, less inflation and the increase in labor productivity. This is just accounting. So Wolfer’s condition, that wage growth not exceed the sum of inflation and labor productivity growth is, precisely, the condition that the wage share not rise. If we take him literally — and I don’t see why we shouldn’t — then the Fed should be less concerned to raise rates when inflation is higher. Which makes no sense if the goal is to control inflation. But perfect sense if the real concern is to prevent a rise in the wage share.

Unemployment and Productivity Growth

I write here frequently about “the money view” — the idea that we need to see economic relationships as a system of money flows and money commitments, that is not reducible to the “real” production and exchange of goods and services. Seeing the money-game as a self-contained system is the first step; the next step is to ask how this system interacts with the concrete activities of production.

One way to look at this interface is through the concept of potential output, and its relationship to current expenditure, or demand. In the textbook view, there is no connection between the long-run evolution of potential output with demand. This is a natural view if you think that economic quantities have an independent material existence. First we have scarce resources, then the choice about which end to devote them to. Knut Wicksell suggests somewhere an evocative metaphor for this view of economic growth: It’s as if we had a cellar full off wine in barrels, which will improve with age. The problem of economic growth is then equivalent to choosing the optimal tradeoff between having better wine, and drinking it sooner than later. But whatever choice we make, all the wine is already there. Ramsey and Solow growth models, with their “golden rule” growth rate, are descriptions of this kind of problem. Aggregate demand doesn’t come into it.

From our point of view, on the other hand, production is a creative, social activity. Economic growth is not a matter of allowing an exiting material process to continue operating through time, but of learning how to work together in new ways. The fundamental problem is coordination, not allocation.  From this point of view, the technical conditions of production are endogenous to the organization of production, and the money payments that structure it. So it’s natural to think that aggregate expenditure could be an important factor determining the pace at which productive activity can be reorganized.

Now, whether demand actually does matter in the longer run is hotly debated point in heterodox economics. You can find very smart Post Keynesians like Steve Fazzari arguing that it does, and equally smart Marxists like Dumenil and Levy arguing that it does not. (Amitava Dutt has a good summary; Mark Setterfield has a good recent discussion of the formal issues of incorporating demand into Kaldorian growth models.) But within our framework, at least it is possible to ask the question.

Which brings me to this recent article in the Real World Economic Review. I don’t recommend the piece — it is not written in a way to inspire confidence. But it does make an interesting claim, that over the long run there is an inverse relationship between unemployment and labor productivity growth in the US, with average labor productivity growth equal to 8 minus the unemployment rate. This is consistent with the idea that demand conditions influence productivity growth, most obviously because pressures to economize on labor will be greater when labor is scarce.

A strong empirical regularity like this would be interesting, if it was real. But is it?

Here is one obvious test (a bit more sensible to me than the approach in the RWER article). The figure below shows the average US unemployment rate and real growth rate of hourly labor productivity for rolling ten-year windows.

It’s not exactly “the rule of 8” — the slope of the regression line is just a big greater than -0.5, rather than -1. But it is still a striking relationship. Ten-year periods with high growth of productivity invariably also have low unemployment rates; periods of high average unemployment are invariably also periods of slow productivity growth.

Of course these are overlapping periods, so this tells us much less than it would if they were independent observations. But the association of above-average productivity growth with below-average unemployment is indeed a historical fact, at least for the postwar US. (As it turns out, this relationship is not present in most other advanced countries — see below.) So what could it mean?

1. It might mean nothing. We really only have four periods here — two high-productivity-growth, low-unemployment periods, one in the 1950s-1960s and one in the 1990s; and two low-productivity-growth, high-unemployment periods, one in the 1970s-1980s and one in the past decade or so. It’s quite possible these two phenomena have separate causes that just happened to shake out this way. It’s also possible that a common factor is responsible for both — a new technology-induced investment boom is the obvious candidate.

2. It might be that high productivity growth leads to lower unemployment. The story here I guess would be the Fed responding to a positive supply shock. I don’t find this very plausible.

3. It might be that low unemployment, or strong demand in general, fosters faster productivity growth. This is the most interesting for our purposes. I can think of several versions of this story. First is the increasing-returns story that originally motivated Verdoorn’s law. High demand allows firms to produce further out on declining cost curves. Second, low unemployment could encourage firms to adopt more labor-saving production techniques. Third, low unemployment might associated with more rapid movement of labor from lower-productivity to higher-productivity activities. (In other words, the relationship might be due to lower visible unemployment being associated with lower disguised unemployment.) Or fourth, low unemployment might be associated with a relaxing of the constraints that normally limit productivity-boosting investment — demand itself, and also financing. In any of these stories, the figure above shows a causal relationship running from the x-axis to the y-axis.

One scatterplot of course hardly proves anything. I’m really just posing the question. Still, this one figure is enough to establish one thing: A positive relationship between unemployment and labor productivity has not been the dominant influence on either variable in the postwar US. In particular, this is strong evidence against the idea the idea of technological unemployment, beloved by everyone from Jeremy Rifkin to Lawrence Summers. (At least as far as this period is concerned — the future could be different.) To tell a story in which paid labor is progressively displaced by machines, you must have a positive relationship between labor productivity and unemployment. But historically, high unemployment has been associated with slower growth in labor productivity, not faster. So we can say with confidence that whatever has driven changes in unemployment over the past 75 years, it has not been changes in the pace at which human labor is replaced by technology.

The negative relationship between unemployment and productivity growth, whatever it means, turns out to be almost unique to the US. Of the dozen or so other countries I looked at, the only one with a similar pattern is Japan, and even there the relationship is weaker. I honestly don’t know what to make of this. But if you’re interested, the other scatterplots are below the fold.

Note: Labor productivity is based on real GDP per hour, from the BLS International Labor Comparisons project; unemployment is the harmonized unemployment rate for all persons from the OECD Main Economic Indicators database. I used these because they are (supposed to be) defined consistently across countries and were available on FRED. Because the international data covers shorter periods than the US data does, I used 8-year windows instead of 10-year windows.