IMF Chief Economist apologizes for being wrong on austerity
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For instance, the Debt Ceiling crisis of 2011 [1] is a perfect example of how these kind of psuedoscientific ideas can cause real harm to a country. Especially given how readily certain groups (coughrepublicanscough) are willing to accept these ideas with virtually zero backing or acceptance from established economists.
See also: Everything Paul Krugman has ever written.
[1] http://en.wikipedia.org/wiki/United_States_debt-ceiling_cris...
That's a tantalizingly simple and intuitive comparison that everyone can understand and relate to. Unfortunately a nation's economy is so utterly unlike a household economy that the comparison is downright dangerous, because it leads to harmful false assumptions like "national debt is always a bad thing", "a nation must always 'earn' more than it spends at all times", and "an economy can never grow in a nation with debt".
I'm no economic wizard but it really surprised me that how everyone in Europe and many in the States are prescribing austerity, when basic history from this very century frequently demonstrates that austerity can lead to economic damage. Yes you can always find programs that can and should be cut back in any developed society, but considering debt to be the central and only problem in a situation where the debtor defines the very money it "owes" seems a little shortsighted to me.
So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe.
Making something that is not politically viable is a politician’s job – and they refuse to do it.
Additionally, a 3rd option worth consideration: letting individual countries default.
Then Greece would be OK, and the German banks about to fall like dominoes. Then the Germans might have become more reasonable about a bailout.
After all, they would really be bailing out not the Greek people, but German banks that shouldn't have bought bonds from crooked Greek politicians and Goldman Sachs.
I don't see how any of that is the Greek people's fault, and in the mythical "free market" said German banks would have been allowed to go bust years ago.
http://whereistheoutrage.net/domestic-issues/budget/budget-d...
And sure, unlike households, nations have the option of printing more money to pay off their debts. Unfortunately that doesn't generally work too well (see also: Zimbabwe, Weimar Germany).
This is not surprising: a surplus means that the government is removing more money from the economy than it's adding, something which is rarely warranted absent a large current account surplus and/or an economy operating at full capacity.
You need to understand the sector financial balances.
That's why my original comment is about: Assuming that a nation is like a household--i.e., that at some point it obviously should earn more than it spends, because that's how a household operates--leads to conclusions that aren't always supported by history.
Weimar Germany's situation partly mirrors the one today. To deal with hyperinflation and a collapsing economy, in '31 Chancellor Brüning cut spending by 30%. It eventually led to a budget surplus but at the cost of 30% unemployment. Those events helped set the stage for what followed in WW2. Obviously the comparison is tangential, but it's interesting to think about nonetheless.
See: http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-ger... http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Re...
You may be right, but it seems there is more than just our current situation to consider. There are long-term ramifications of that debt. At some point, we can't just keep borrowing. It might be working for us today, but like the sprinting marathon runner, eventually it will catch up to us.
And yes, America is currently the most powerful economy in the world's history, and that's why it has an AAA credit rating despite its fairly disastrous finances. But barring total implosion, China'll be the top dog within a decade or so, and what happens then?
If in a hypothetical alternate universe the US had a civil war tomorrow, it could have a massive budget surplus and yet it'd probably find that nobody would be willing to lend to it regardless, because the climate of repayment would be so uncertain.
In today's real world, the US has the power to print its own money. In very real terms it can define the very term "debt" as whatever it pleases. That, combined with its status as a massive buyer of foreign goods, history of entrepreneurship and growth, history of corrective action by the Fed, insanely powerful military, and so on, means that it could owe 100x times as much as it does today, and nations would probably still happily lend.
A nation is not a household. It doesn't reach some magic number "lending ceiling" where everyone else says, "you owe 100 trillion and 1 dollars, we're not gonna lend any more" like might happen to a regular person with a credit card. A "AAA" rating is just some label that some private company makes up.
So the issue isn't some dollar amount drawn out of an economist's hat, but rather the real trust inferred from a nation's geopolitical position.
Any real students of economics please do correct me, as I have no doubt my reasoning is flawed somewhere. But this is how I currently understand it.
About your examples, the first sentence of the Wikipedia article for Zimbabwe is: [1]
"Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in Zimbabwe's civil war and confiscation of private farms."
While in Weimar Germany the French occupation of the Ruhr valley, the at that time most important industrial region of Germany, directly preceded the hyperinflation. ( And arguably the Beer Hall Putsch [2], Hitlers first attempt to seize power, was the more important event in '23.)
I'm definitely pro-Krugman.
If you're interested, there are some particular blog posts about the history of the austerity movement and why it's ridiculous:
http://www.nytimes.com/2010/07/02/opinion/02krugman.html -- is a good place to start.
But I'm not in the mood to argue about it, so have a pleasant day.
This is not to say that there wasn't gross economic mismanagement on the part of the Greek government, but focusing on that distracts from the real solution.
UPDATE: I'm in complete agreement with everyone pointing out that the problems aren't identical. Perhaps the question is whether, if you were to summarize the causes Euro crisis in broad terms, you ought to mention Greece's economic mismanagement first or the overall crash of the financial markets as the more important factor. My assertion is the latter, mostly echoing Stglitz's analysis here:
Spain is closer to Ireland in terms of housing market effects on economic downturn, but ultimately each economy functions on a different system, so it's not entirely wrong to attribute economic problems to separate causes. There is some overlap, of course, but it's definitely not identical.
Just to be clear, my answer is: Each country's problems are rooted in the collapse of the US housing market and the resulting financial crunch. The country-to-country variations are there and they're significant, but secondary.
[Greek/US dual citizen here]
Having lived in Greece for upwards of a decade, during the particularly transitional time from ~1988-2004, this is not in line with my experience. Hear me out before writing me off as an apologist :)
Greece has a large problem with collecting the taxes they claim citizens owe but not a large problem with collecting a large fraction of GDP. According to the World Bank, they are right in line with Sweden and France (http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS). These numbers are corroborated by the OECD (PDF warning http://www.oecd.org/newsroom/41498733.pdf). [Edit: I wrote Sweden and France when I meant to write Spain and France; I apologize for the error but I have left it lest someone think I am trying to whitewash :-)]
Greece has collected plenty of money; we overspent, and we spent stupidly i.e. in ways that obtained either votes or kickbacks, and not in ways that improved the economy or the life of the common person. As just one example, look at the paltry investment of the Greek government in its only competitive advantage, the tourism business. The cast and crew of "Mamma Mia" did a better job promoting tourism in Greece than any Ministry of Tourism effort. Spain, Italy, and Turkey are eating our lunch.
We also got used to almost five decades of "free" foreign money through the Marshall plan, post-communist hysteria leading to US military aid and military bases, EEC/EU growth funds, and having our debt priced as if it were of German quality.
In my opinion, the tax evasion is a serious social justice problem, but it is not a serious budgetary problem. The bulk of Greece's public budget is supplied by ordinary people making ordinary incomes, and it is a travesty that the wealthiest manage to dodge contributing proportionately. But that does not mean the government does not have enough money to do a good job.
I would love to believe that the government has failed due to being starved of resources; at least then a solution like taking on more debt would be plausible. With the situation as it stands, I can only respond with our poet laureate Seferis' exasperated lament, "Everywhere I go, Greece wounds me".
Part of my problem with the statistics you link is that the measure is limited because it's known that US revenues are in the 16-19% range but they are listed here at 9%. Loathe as I am to cite the Heritage Foundation they are the most complete figures on wikipedia and show Greece heavily lagging France and Spain.
http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenu...
Next, the black market in Greece is estimated at 25% of GDP which inflates official collection percentages even more.
http://en.wikipedia.org/wiki/Tax_evasion_and_corruption_in_G...
Finally, it really doesn't matter that they collect some nebulous "large share of gdp". What matters is that the scale of evasion is far greater than Greece's immediate problems.
But Nikos Lekkas, the head of the Greek tax inspectorate, the SDOE ... insisted that Greece could easily pay off its debts if taxes due for payment were paid into the Greek state's coffers.
”Tax evasion in Greece has reached 12 to 15 per cent of the gross national product... That is €40 to €45bn per year. If we could recover even half of that, Greece would have solved the problem.
http://www.telegraph.co.uk/finance/financialcrisis/9319799/G...
You raise an interesting question, to which I don't have a conclusive immediate response. I'll have to dig deeper to really know. The numbers on the US do seem out of line with well-known facts. However, here's another ~30% estimate from Eurostat (http://epp.eurostat.ec.europa.eu/statistics_explained/index....). Given the conflicting reports, I can only say that it's theoretically possible that Heritage is right and OECD/Worldbank/Eurostat are jointly wrong. If I had to weigh Heritage's ideology and their likely expertise on European economic statistics, as compared to lined-up answers from OECD/WorldBank/Eurostat I know where I'd bet. Still, the 9% reported for the US does seem troubling. I have a research project for the evening.
As for the scale of tax evasion and whether it could plug the hole: it's really, really hard to have an objective opinion here. My inner Greek is saying of course SDOE claims that tax evasion is the main problem. I can't prove that they're wrong, and I don't want to pollute the discussion with personal anecdotes. I'll only add that the SDOE claims don't link to any examinable research.
Thank you for an interesting counterpoint :)
[Edit: the Eurostat data shows Greece parallel to Spain but way behind France... so at this point I'm going to tentatively retract the comparison to France pending further research, but I think I am still persuaded that Greece has a tax base that commands a significant-enough fraction of GDP for them to manage responsibly]
I don't think Keynes' model is perfect. I'm excited to see what new kinds of models emerge after this depression -- we have a lot more data to play with. However, at this stage, it makes a lot more sense to stick with models that have kind of worked sometimes rather than to just operate off of pure, baseless speculation.
The problem is ignoring the reality that at some point the government cannot issue more debt. The US government has been in structural deficit for all but a few of the past 40 years. If we look at the funny money of state and local pension assumptions there's even more stimulus. OF COURSE when that's withdrawn the economy slows.
It doesn't matter if the fiscal multiplier is 0.5 or 1.5 when the government simply can't issue more debt. Multipliers matter when a government has decisions to make, when it can't issue more debt there are no decisions to be made.
It's instructive to remember that we match our deficit spending with debt issuance by legal fiat and not for any real operational reason. We could just as well deficit spend freely with no debt issuance (and no, it would not be more inflationary.
Of course, treasuries are a risk free savings vehicle for the private sector and world at large, and they play an important role in managing the payments system (though not one that couldn't be replace), so I'm not suggesting that we stop issuing debt. But it's important to understand how the system works so we can stop with the silly notion that we are just scraping by on the good graces of Treasury buyers.
And, "constant growth" depends on a structurally sound economy. Well, if the economy has been shaped to meet demand from a necessarily contracting customer -- the government -- its structure gets distorted. Add in the distortions from crazy federal credit policy (Fannie / Freddie). Now we have an economy that must reallocate productive resources to meet real demand -- but no one has a clue where that demand actually will be because we're so distant from the environment supporting it.
tldr; 40 years of government stimulus, in various dimensions, has fundamentally detoriated the economy's ability to deliver "constant positive growth." We've gone past the point where we can outgrow the debt growth needed to fuel this government stimulus growth model.
i.e. stimulus, in Keynesian terms.
(Thinking about economics in terms of common sense and morality is generally unhelpful.)
You're correct about inflation but unfortunately their in the Euro so they either have to leave it or suffer a very long and painful internal deflation.
The only thing that would probably help Greece is massive debt foregiveness (bankruptcy if applied to individuals or companies) which isn't a "stimulus" so much as a gift. Again if it worked like a regular bankruptcy they'd agree to pay off part of their debt on a plan, but be forgiven a bunch of it, and their credit would suck for many years to follow.
Really? Than tell me what other non-austerity policy is being proposed. We're not talking about what is being pursued. The discussion is about the merits of the alternatives to austerity. Massive debt forgiveness is one although at this point it's a complete fantasy. What else have you got?
Intl macro isn't really my field, so there may be errors in that description.
So you need less and less effective stimuli programs, the higher the dept to GDP ratio is. ( And I do not know if anyone does claim that dept-financed stimulus is the cure for any economic ill. But if not enough money is the problem, one can simply print that stuff.)
I find it funny when Keynesians talk about bubbles. What do you think happens when you set interest rates absurdly low? You could make the argument it stimulates the economy, sure, but at what cost?
Schiff's misfire is especially relevant to this discussion, because it demonstrates the Austrian school's grossly flawed understanding of public finance and our monetary system (despite having valuable things to say at times).
Actually for me from the point of view of Mises and his praxeology everyone who uses his methodology to advise a policy is just guessing and expecting that his views are coherent with reality.[1]
Austrian school is very deep, and not a monolithic bloc like mises.org loves to say, there were Austrian economists who were not Mises and disagreed with his methodology, including Machlup and Wieser who were Mises student and teacher respectively.
[1]: More of that in here: http://mises.org/mofase/ch4.asp It's just my interpretation of his view.
http://gregmankiw.blogspot.com/2012/12/a-krugman-puzzler.htm...
Which is why it's inaccurate to generalize this problem to "western states". The US is not comparable to any EZ country. We have our own currency and have been able to run large deficits to counteract the demand shortfall caused by the financial crisis and allow the prvt sector to repair balance sheets. This is why the recovery in the US has been much better than the UK or the EZ.
Also, the wealthiest Eurozone countries are not as wealthy as the wealthiest US states, by a fairly significant margin. On the whole the Eurozone ends up being on average about as wealthy, in per capita GDP, as arkansas. The whole system is in need of far greater management than the US dollar but lacks the power to do so, and in total has far less wealth to be able to spend their way out of the problem.
"The US is not comparable to any EZ country. We have our own currency"
Qualitatively, I would see no difference between the US monetizing debt (and devaluing the value thereof) or something like Greece switching to a new currency which they can print (and devaluing the value thereof). Of course, the amount of devaluation (or default) Greece has to do is much greater. But in either case, some debtors are getting stiffed
Strictly, Greece has no money to pay back debtors, let alone fulfill their social obligations. But even the US obligations: debt + social security + medicare/medicaid etc. are now at an unsustainable level.
Besides the eurozone is already trying to adopt a central bank style system:
http://www.nytimes.com/2012/12/14/business/global/eu-leaders...
Of course it is. Rolling over debt securities is everyday practice for both governments and private companies.
> In no way can western states sustain the entirety of their assumed obligations (to bond holders, social beneficiaries and special interest).
That depends on what kind of economic growth we have going forward. Your statement is certainly true if countries keep auteritizing themselves into deflationary death spirals. It is probably true if countries keep relying on upper-income tax breaks and labor market "liberalization" for growth - arguably worked 30 years ago, but returns on that strategy seem to be diminishing. It is not necessarily true under all circumstances.
> People are getting stiffed on old debt, it's only a matter of who, how much and how soon.
It's generally been the case that inflation + economic growth have made old debts shrink as % of GDP. When both of those are negative, debt-holders make a lot of real money, but risk of default goes way up.
As for the austerity 'death spiral', we can have some sympathy for those social beneficiaries being promised payments. Bond contracts weigh heavier than political commitments (once defaulted, people stop buying debt titles, but once lied to people keep voting).
A Link: http://www.independent.ie/business/irish/dan-white-the-econo...
http://studiotendra.com/2012/12/29/what-is-actually-going-on...
When a country of 320,000 people defaults on their debt it doesn't have significant global consequences. When you start defaulting on debt on behalf of 50, 100, or 150 million people then it starts having very serious consequences on the creditors, on financial markets, and so forth.
I'd like to see some explanation as to why this wouldn't work with a larger nation and not simply, because.
I fail to see how a credit writedown for both debtor and creditor suddenly becomes unworkable when it crosses an imaginary population or gross debt line. Plenty of very large companies have undergone debt restructuring and survived to tell the tale. GM was one of the largest companies in the world and the debtors and creditors + equity holders all got wiped out or were given a severe haircut. If the same argument was followed someone would point to a smaller company and say ; well, they are small, it's OK to default. But that big company, no, that's too big.
Nobody pretends that calling an unsustainable and unpayable debt defaulted is a pleasant experience, but it's better to put zombies to the death rather than have them zombie-walking around the economies of the world. If the debt can't be paid back, adding more debt to it is never going to get solved. Anyone who suggested that fixing GM with another set of super-sized loans would have been laughed out of the room - they couldn't make the payments as it was. Yet someone this makes the magic jump from company to country and it's considered sound advice.
Well, not to me.
I'm confused. If Greece couldn't borrow money to sustain its prior spending levels what choice did they have? How is a Keynesian-style stimulus possible if no one will lend you the money to implement it? It also doesn't make any sense to me why a stimulus plan would have worked. Lending Greece more to perpetuate its already unsustainable expenses doesn't make much sense. It seems the Keynesian argument here is that they need to do stimulus - i.e. borrow and spend - even more then the pre-austerity level just to get the economy back to the previous (and unsustainable) debt levels. It's running to stand still.
(FYI, I'm not saying I think this is a good idea; I'm trying to explain what they could, theoretically, do.)
"The result is ever greater levels of social inequality, as wealth is funnelled from the bottom to the top.
Big business, the banks and the super rich are being increasingly relieved of paying taxes.
The resulting deficits in state budgets, exacerbated by the hundreds of billions awarded to the banks in government rescue packages, are now being addressed through a combination of increased consumption taxes, which fall most heavily on the working class, and savage cuts in social programs and public sector jobs and wages."
The private sector in general is in crisis because the banks won't lend. They won't do that because of the problems on their financial sheets - they know they hold toxic assets and they know everyone else does, so they cannot trust anyone to pay off their debt, including other banks. This means that private investment has decreased severely, which puts enormous downward pressure on the economy.
Since the private sector won't invest, the only source of investment big enough to fill the hole (which might be as big as $8 trillion), is government. Austerity is a problem because it limits the governments ability to invest, which means that you have a shrinking economy trying to make up ground, which is a losing battle, especially for the poor as you point out, since they do not have the assets to absorb the economic hit.
I should say none of this is my opinion, I'm merely summarizing Krugman, Stiglitz, and Baker, who are the three economists whose work I've followed on the matter.
Yet somehow per-capita government spending keeps going up: http://www.usgovernmentspending.com/spending_chart_1990_2017....
edit: to be specific, he claims to be a non-fairweather Keynesian: stimulus on the downturn, austerity in good times. They seem to have a cyclical lifecycle and are all off somewhere spawning when it's time for the cuts.
Slightly more technically: there is a correlation between (a) the magnitude of economists' forecasts of cuts in government spending and (b) the quality of their forecasts of economic growth.† The higher the forecast of spending cuts for a particular country, the farther from reality was the growth forecast.
The paper concludes: expected reductions in government spending cause bigger drops in economic output. I leave it to the reader to consider alternative explanations.
† — In 26 European countries. Recently. On average.
"For example, based on U.S. data, Romer and Romer (2010) find that, in response to a tax increase, GDP, investment and consumption all decline, but investment growth falls by about four times more than consumption growth does."
The reference is to this paper: http://emlab.berkeley.edu/~dromer/papers/RomerandRomerAERJun...
(And they say that the premise of democracy is the belief that said electorate knows what it wants, and deserves to get it good and hard. :P)
Of course, if you want to reinvigorate the economy, you'd do better to do something about the bureaucracy first - you know, the bureaucracy that requested stool samples from the guy who wanted to run a (bottled-)olive-oil export website.
It's not as if the government is removing otherwise productive dollars out of the economy to fund its deficits. Treasuries are generally purchased with excess reserves from the primary dealer banks that would otherwise just sit there. Or foreign governments, corporations, institutional buyers looking to stash their cash holdings where they will accrue risk free interest.
We can quibble about multipliers, but deficits represent a net income flow into the private sector and hence have an expansionary effect on demand (even if, unfortunately, those dollars are flowing into the pockets of crony defense contractors and what not).
But... Treasuries? Another day, I'd contest your zero-opportunity-cost suppositions (cf. "crowding out") but more importantly, Greece's bonds don't have anywhere near the credibility of Treasuries, and they're having real problems issuing new ones. You can't finance expansion with deficits if no one will lend you money.
There's no reasonable analogy between the US running a deficit and anyone's credit card. Again, like the commenter at the top of the thread, public and private finance are two different things. The US has infinite spending power. The constraint is not "affordability" but inflation. That's it. A "financially sound" budget for the US is one that maximizes employment with the minimal amount of inflation. It has nothing to do with deficits or surpluses.
You need to look at the federal budget as part of a closed loop of spending and income flows with the private, public and foreign sectors. Just like every country can't run a trade surplus, the public private and foreign sectors can't all run a surplus or a deficit. It has to net out. If the private sector runs a surplus (spends less than it earns) of 4% GDP and we have a current account deficit of 4% GDP, the gov't deficit will be 8%. It's just accounting.
Many public sector jobs have no private analogue (so people fired from the bureaucracy would be relatively unskilled in the private sector, i.e. likely to become unemployed), and cuts to welfare programs reduce the income of the very people who are most likely to spend all their income, i.e. poor people, with knock-on effects in the rest of the economy. Are you seriously suggesting that this effect could not only have been avoided, but the cuts could have been even deeper?
I would qualify and expound upon my statement in defense, but hey, why bother. Clearly only people who already agree with you are serious.
In the context of countries like Greece and Portugal, austerity just means that the governments can't spend more money than they earn, simply because they don't have access to it on international financial markets; the only money they have now is the Troika's. More money from the Troika means more debt, more interests to pay, and longer dependency on outside help.
Also, the main cause for the recession is that the governments want to correct the deficit by raising taxes, that is, by imposing austerity on their people, not on their spending. These countries avoid structural changes, which should target things like labor laws, the unsustainable Social State, the judicial systems, and create conditions to attract foreign investment.
I don't really understand how people can advocate for government stimuli in these countries when that's the sole reason they're in this mess to begin with.