Thursday, 30 July 2015
Jeremy Corbyn, who looks increasingly likely to be the next leader of the Labour Party in the UK, backs the latest fad, namely “peoples’ QE”. The idea is nonsense.
“Peoples’ QE” consists of having the central bank print money (as per conventional QE), but instead of spending the money buying government debt, the money is spent on public investments like infrastructure. The idea is rubbish and for the following reason.
Printing and spending money is stimulatory. Second, the AMOUNT OF stimulus needed varies hugely from one year to the next: indeed, given an outbreak of irrational exuberance, the amount needed will be little or nothing. Hence if infrastructure spending is tied to money printing, the amount spent on infrastructure will gyrate far too much. You can’t start building a motorway and suddenly stop in year X because little or no stimulus is needed in that year.
In short, it may well be that we need more infrastructure investment, but that should be funded basically from the usual sources, namely tax and government borrowing. As to stimulus, printing and spending (and/or cutting taxes) is a perfectly good way of imparting stimulus (indeed, I think it’s the best way). But that additional spending should be spread as widely as possible precisely so as to avoid the above sort of “stop start” motorway building fiasco.
And that’s about the tenth time I’ve made that point. But sure as night follows day, there’ll be an eleventh and twelfth time. I won’t give up repeatedly demolishing popular myths till I die. And the headstone has already been ordered. It reads “Here lies Ralph Musgrave. He achieved little apart from demolishing a few popular economic myths.”
Wednesday, 29 July 2015
In the good old days, i.e. about 12 months ago, it used to be mainly those wicked “far right” parties that advocated exit from the Eurozone and/or European Union.
That made far right parties, in the eyes of many lefties, a bunch of Little Englander, xenophobic, racist, neo-fascist, neo-Nazi, neo anything else you care to mention, ne’er do wells.
But now it’s all change. What with the damage that the Eurozone is allegedly doing to Greece, lefties are now throwing fire and brimstone at the EZ/EU. It’s truly hilarious.
Any chance of apologies being offered for the “xenophobe” etc accusations? No, thought not. (Incidentally I said “allegedly” there because the alternative explanation is that Greece shot ITSELF in the foot, rather than that SOMEONE ELSE shot Greece in the foot.)
But it’s not only in connection with Europe that lefties are doing a volte face. They’re also doing a bit of a volte face on the subject of multiculturalism.
This article appeared in the
As the article puts it, “Regionalising Iraq into different ethno-sectarian regions has been proposed in the past. It can no longer be dismissed.” I’m socked (ho ho).
Of course the high priests of political correctness who write for the Guardian might claim that multiculturalism is worth a try for the amazing benefits it brings and if it doesn’t work, one can do a “separation” is suggested above for Iraq. Well just imagine splitting the UK into Muslim and non-Muslim autonomous regions: the idea is absurd.
As for the amazing benefits of multiculturalism, I’m bowled over by them. They include female genital mutilation, forced marriages, electoral fraud, bombs on trains and busses, killing the authors and cartoonists you don’t like (Hitler did that), abducting school girls and selling them into slavery, destroying centuries old cultural ikons like statues of Buddah. I could go on. The “cultural enrichment” there is a wonder to behold.
Silly me: I’m not much impressed by the alleged advantages of multiculturalism. Clearly I’ve missed something.
Of course it’s been obvious for a long time that the awe in which lefties hold multiculturalism is contrived. Reason for that is when Tibet expresses a desire to retain its culture, identity, traditions etc, lefties go all dewy eyed. But if some white Brit expresses the desire to do the same thing in connection with the UK, lefties foam at the mouth and jump up and down with contrived righteous indignation.
I.e. the left’s desire for mulitculturalism is actually a desire to destroy European civilisation and replace it with Islam or whatever. That’s because destroying your own civilisation, i.e. vandalism, is regarded as cool in leftie circles.
As the historian Arnold Toynbee put it, “Civilisations are not destroyed: they commit suicide.”
Tuesday, 28 July 2015
I dealt with one of Varoufakis’s debatable ideas here. He has had another: set out in this Financial Times article. The idea is as follows.
Greece has suffered from inadequate aggregate demand. Demand could be increased if what might be called “self extinguishing” pairs of debts could be extinguished more quickly. The example he gives is as follows.
“Suppose, for example, Company A is owed €1m by the state and owes €30,000 to an employee plus another €500,000 to Company B, which provided it with goods and services. The employee and Company B also owe, respectively, €10,000 and €200,000 in taxes to the state. In this case the proposed system would allow for the immediate cancellation of at least €210,000 in arrears. Suddenly, an economy like Greece’s would acquire important degrees of freedom within the existing European Monetary Union.”
That would certainly ameliorate what Varoufakis refers to as “the chronic liquidity shortage of a financially stressed public sector and its impact on the long-suffering private sector.” In short, it would lead to increased aggregate demand.
Problem is that any extra demand in Greece sucks in too many imports, which results in Greece being further in debt. Ergo an increase in demand just isn't acceptable till internal devaluation has put right the balance of payments or “external deficit” problem.
Of course there’s alternative to internal devaluation and the austerity needed to bring it about, and that’s Grexit combined with normal or regular devaluation.
Monday, 27 July 2015
Half the world is now being wise after the event on the subject of Greece. Trouble is that even hindsight hasn’t brought 100% pure wisdom in some cases. This article by Richard Koo is a case in point. (h/t to Wonkmonk).
He claims in his 2nd and 3rd paragraph that:
“With its income falling to such low levels, the Greek private sector has been forced to dis-save for years i.e., living off the past savings, making it impossible for the country to pay back foreign creditors.
The drop in the nation’s real output is on a par with that experienced by the US during the Great Depression from 1929 to 1933.”
I suggest cause and effect are being confused there. Greek “income” (if you can call it that) has only been the size it has been over the last decade because of ever increasing debts owed to private banks and more lately to the Troika. That flow of easily available loans has now been cut off, which means that many Greek household incomes have fallen.
But a fall in income caused by a creditor’s decision to be less generous is not an explanation for “making it impossible for the country to pay back foreign creditors”. Quite the reverse: had the creditor continued to lend like there’s no tomorrow, then paying back the creditor would have been EVEN MORE difficult.
The idea that “income” enables an entity to pay off it’s debts sounds reasonable: for example an increase in a household’s income helps it to pay off its debts. However, there’s a flaw there.
It’s true that income deriving from OUTSIDE the household enables the household to pay off its debt. However, income earned by one member of the household off another member of the household DOES NOT.
Same goes for a country, e.g. Greece. Greece owes money to entities OUTSIDE Greece: mainly the Troika. And the type of income that enables Greece to pay off those debts is income earned from EXPORTS: i.e. earned from OUTSIDE Greece.
But there’s no reason to think that Greece’s export earnings will have been influenced by the lack of cash in the hands of the average Greek citizen or the above mentioned fall in Greek incomes. The main factors influencing Greek exports are first the competitiveness of those exports (which will have improved a bit given the cut in Greek wages over the last few years), and second, the general state of the world economy, particularly in countries to which Greece exports. As regards that second factor, one would expect exports to have dropped when the 2007/8 crisis hit and to have improved somewhat since then. And indeed that’s pretty much what happened. See here. Change the "start year" to about 2000 at the top left of the bar chart to get a better picture of the last decade or so.
Having said that, there is one particular form of income earned by one Greek off another that helps repay Greek debts, and that is import substitution. The latter will have been assisted by recent falls in Greek wages, but those wages have not fallen DRAMATICALLY (in terms of Euros) relative to other Euro countries. So we can expect a finite amount of import substitution to have taken place, but not much.
Sunday, 26 July 2015
This paper on Greece is quality stuff. Clearly a lot of research has gone into it and the paper is easy to understand (not that I’ve read the whole thing). Plus there are pleny to charts, and tables with facts and figures.
However I don’t agree with part of the authors’ conclusion, namely that, “The rise in (relative) unit labour costs did not lead to the higher current account deficits in the Eurozone periphery. International competitiveness is not about wage costs, but about technology and innovation. Given a country’s technological capabilities as reflected by its productive structure, export growth and import growth are overwhelmingly determined, not by unit labour costs…”.
The idea that QUALITY is much more important than PRICE, in the case of manufactures may well be true. However, a significant proportion of Greek exports are not high tech: namely tourism.
Plus a significant proportion of potential import substitution isn't high tech either, namely food production.
That point can be nicely illustrated by reference to islands off the West coast of Scotland. No doubt there are numerous such islands where the only form of employment is tourism or agriculture. Now assuming any of those islands declared independence from the UK and became independent countries, would they be able to pay their way? Of course they would!
They might, for the sake of argument, continue to use the pound Sterling, in which case precious little would change. The same holiday makers would turn up in Summer time. And as long as farmers on those islands didn’t raise the price of their produce, they could continue as if nothing much had happened.
Of course if Greece were to rely JUST on tourism for its foreign exchange earnings, vastly fewer Greeks would be able to buy Mercedes cars. I.e. there’d be a big cut in Greek living standards. But devaluation (normal devaluation or internal devaluation) ALWAYS involves a standard of living hit for the relevant country. That point is explained in the economics text books.
Conclusion: a sufficiently large devaluation would get Euros flowing INTO Greece rather than OUT OF Greece. And that would solve Greece’s debt problem sooner or later.
Saturday, 25 July 2015
Thanks in part to the efforts of MMTers, anyone with a brain know knows that there is no great urgency to reduce the national debt or deficit (DD). Even the dimwits at the IMF have now tumbled to this point – see this Brookings Institution article. (For more on dimwittery at the IMF, see here.)
However, it is de rigueur to weep and wail about the debt and deficit. Even Jeremy Corbyn, the left wing UK politician knows it’s important to put on the appearance of a Very Serious Person when talking about the DD. And as a left winger, he’s the last person that really ought to take the DD seriously.
This is getting a bit like the situation that used to exist in the USSR where everyone went around telling lies they knew no one actually believed. The extreme case of that scenario was nicely described by a Russian, I forget where, who described the situation in university lecture theaters, particularly when it came to lectures to do with politics, history, sociology and the like.
He put it something like this. “Lecturers know they’re lying. Students know the lecturer is lying. The lecturers know that students know they are lying. Students know that lecturers know that students know lecturers are lying. And if you have any imagination, you’ll be able to construct ever longer sentences based on that series.”
Friday, 24 July 2015
Brad DeLong claims the Eurozone is repeating the mistakes of the 1930s. Wrong. The big mistake in the 1930s was failure to implement Keynsian deficits. Decent size deficits only came with WWII, and of course unemployment then plummeted. In contrast, the big problem in the EZ is that when a country loses competitiveness, it can only regain that competitiveness via internal devaluation, and that involves years of austerity. (Indeed, De Long pretty much makes that point himself.)
That apart, there is no evidence of deficient demand in the EZ in that Germany has hit the EZ inflation target over the last ten years. Inflation has fallen in Germany in the last 12 months, so if that’s not due to temporary factors, then a bit more EZ wide deficit would be in order. But that won’t solve the basic problem in Greece.