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Ant that is not a fun game, but the meat of policy.
Not ten or twenty years. Three or five. I don't assume a recession lasting ten years or so.
Neither did Herbert Hoover.
Speculating about what might be ten years down the road is idle diversions when you cannot even be confident that the European Union exists ten years down the road.
- Jake Friends come and go. Enemies accumulate.
If not, it might not be an outlandish stress test to take your 3-5 years and double them. In which case you're looking at possibly 10 years.
Without having to bring up the Great Depression, the 1970s crises also spanned ~10 years.
With the current economic conventional wisdom I can't see how we can avoid at least another 5 years of stagnation. Economics is politics by other means
So you assume a crisis lasting another ten years, ending in 2021? And as you should know, the seventies, for all the cries about stagflation, were a decade of considerable growth.
Jake,
I do know that in five years or in ten years governments must still be funded and a welfare state will be probably more necessary then now. So your argument there is a crisis so shut up about taxes is not very convincing. And I don't think europe is doomed, to use an old but forgotten slogan of this blog.
I do know that in five years or in ten years governments must still be funded
No, actually they mustn't.
Taxes do not enable sovereign spending. The sovereign, being sovereign, can spend as much as it likes, when it likes.
Taxes take away purchasing power from the private sector, so that it does not create scarcities, and slows or prevents the concentration of financial wealth with a few oligarchs.
You need taxes because you don't want oligarchs, not because you need them to "fund" government activities.
So your argument there is a crisis so shut up about taxes is not very convincing.
That's not my argument. My argument is that there is a crisis so you should shut up about sovereign surpluses. I am all in favour of taxing more to spend more. I am all in favour of taxing oligarchs to cut them down to size. But I consider it industrial-grade insanity to tax more in a futile attempt to hit a meaningless Grief and Stupidity Pact target based on cargo cult economics.
That is very much a minority position.
And please don't make up my position for me: I never said anything about surpluses. I said balance and that was long-term balance.
Not in the continent we live in, courtesy of the Maastricht Treaty.
Unless by "the sovereign" you understand the ECB.
We have managed to legislate ourselves into an absurd neoliberal/Austrian nightmare. Economics is politics by other means
And of course the ECB is the sovereign. Another part of the european government.
What seems clear is that what Jake and I (but not only us) view as structural, political and economic problems, don't seem like really existing problems to you at all. So it is pretty pointless discussing policy at any level. Before we can talk about solutions we'd better agree on what problems we're supposed to be solving.
But from my point of view, the problems that are there cannot actually be solved within the institutional framework the EU has constructed, with the economic conventional wisdom of the people in charge or likely to be in charge (which is, from the point of view of conventional wisdom, pretty much self-perpetuating regardless of who wins elections). The drive to austerity demonstrates this - it's the only politically and institutionally possible policy in the EU right now, and it is already having disastrous consequences.
Something's got to give, and I'm not sure what it's going to be. Economics is politics by other means
And this institution is the ECB, not the Bundesbank.
The Eurozone rules, enshrined in the Maastricht Treaty (now part of the Lisbon Treaty), explicitly bar the ECB from giving credit to public entities or buying their bonds. This, quite simply, means the Eurozone member states now operate as local/regional governments under them used to. Lacking funding from a supranational entity since the European Union does not have its own fiscal resources, all states can rely on is their own tax income and they must run balanced budgets like a private firm or a local government in order to retain access to private credit. In the Eurozone, therefore, the State must be run like a private firm. What used to be a political slogan is now the only way to function consistently with the institutional framework. Even the Social Democrats admit it and propagate it.
But as usual your linked blog post (very self-referential) is off topic.
The ECB is a part of the european government; but hardly the only one. There is the commission, the parliament, the council, the court. The ECB is not even the most powerful part: The council is equal in power, the court more powerful.
So if the EU is sovereign and I think it is, the ECB is one aspect of it. Not more or less.
And in fact, the ECB has on several occasions over the past year threatened to crash the banking systems of entire countries as a way to get neoliberal shock-doctrine reform packages implemented.
But don't take my word for it, just read Stiglitz's latest piece:
The discussions before the crisis illustrated how little had been done to repair economic fundamentals. The European Central Bank's vehement opposition to what is essential to all capitalist economies - the restructuring of failed or insolvent entities' debt - is evidence of the continuing fragility of the Western banking system. The ECB argued that taxpayers should pick up the entire tab for Greece's bad sovereign debt, for fear that any private-sector involvement (PSI) would trigger a "credit event," which would force large payouts on credit-default swaps (CDSs), possibly fueling further financial turmoil. But, if that is a real fear for the ECB - if it is not merely acting on behalf of private lenders - surely it should have demanded that the banks have more capital. ... Indeed, the most curious aspect of the ECB's position was its threat not to accept restructured government bonds as collateral if the ratings agencies decided that the restructuring should be classified as a credit event. The whole point of restructuring was to discharge debt and make the remainder more manageable. If the bonds were acceptable as collateral before the restructuring, surely they were safer after the restructuring, and thus equally acceptable. This episode serves as a reminder that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least "cognitively") by the banks that they are supposed to regulate.
The ECB argued that taxpayers should pick up the entire tab for Greece's bad sovereign debt, for fear that any private-sector involvement (PSI) would trigger a "credit event," which would force large payouts on credit-default swaps (CDSs), possibly fueling further financial turmoil. But, if that is a real fear for the ECB - if it is not merely acting on behalf of private lenders - surely it should have demanded that the banks have more capital.
...
Indeed, the most curious aspect of the ECB's position was its threat not to accept restructured government bonds as collateral if the ratings agencies decided that the restructuring should be classified as a credit event. The whole point of restructuring was to discharge debt and make the remainder more manageable. If the bonds were acceptable as collateral before the restructuring, surely they were safer after the restructuring, and thus equally acceptable.
This episode serves as a reminder that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least "cognitively") by the banks that they are supposed to regulate.
The ECB is not subject to oversight from either. Another piece of obvious and manifest insanity that was instituted at the insistence of Helmut Kohl and the BuBa.
And of course in any legal conflict about the powers of the ECB the court would decide. Don't know if you can call it oversight in a strict sense.
And the ECBuBa isn't subject to any meaningful oversight from any court of law. Central bank "independence," remember? Will you at least concede that this is a stupid doctrine that needs to be killed dead and exorcised with garlic and holy water?
Sure, if Trichet commits embezzlement or rapes his secretary, he might be prosecuted (or maybe not - bankers have done worse and walked away in recent times). That does not mean that the courts can in any meaningful way provide oversight and policy direction to the ECBuBa (nor should they - that should be Parliament's job, through the Commission).
Of course they are. Who do you think constitutes the council?
But you got me there: The executive board is indeed appointed by the council, not the governments. They even use qualified majority voting. (I was thinking of the way the commission and court are appointed)
The rest of the governing council is indeed appointed by national governments, namely the heads of the central banks.
And who can determine the personal of another institution has power over that institution.
And if the ECB is ever in a legal dispute, the European Court of Justice will decide. The court is probably the most powerful european institution and if you don't even know this, you have no business commenting on the EU.
Again: Will you at least grant that central bank independence is an idiotic doctrine and that the bank should be directly subservient to the Commission, just like every other EU civil service?
b) will you at least grant that the ECB is the ECB and not the Bundesbank?
c) will you at least admit that the national governments and the council determine the composition of the governing council of the ECB? Giving the federal republic about as much influence as larger german state had on the Bundesbank?
a) will you at least grant that the court is more powerful
In most policy areas, yes. In economic policy, which is, after all, the area presently under discussion, no. There is no substantial judicial review of ECB policy decisions.
De jure, certainly. De facto, I cannot point to a single material difference in policy before the past few days.
c) will you at least admit that the national governments and the council determine the composition of the governing council of the ECB?
Obviously, yes.
Giving the federal republic about as much influence as larger german state had on the Bundesbank?
a) That does not follow from the composition of the board.
b) The BuBa always was a state-within-the-state in Germany, so pointing out that the German government fails to control the BuBa representatives to the ECB board hardly proves that the BuBa is not still a cancerous state-within-the-state.
Now, do you or do you not believe that inflation targeting and central bank independence are moronic policies? Do you or do you not believe that states should be forced to pay interest on their own currency? I'd really like to know if we're even speaking the same language here.
Taxes do not enable sovereign spending. The sovereign, being sovereign, can spend as much as it likes, when it likes. That is very much a minority position.
Not among economists. Although the cargo cultists of the neoclassical tradition (including New "Keynesians" like our friend Bofinger) claim that "unfunded" spending will inevitably lead to inflation. But then, they are the same people who think that everybody can be a net exporter.
That comes to the same thing: Long-term balance implies zero nominal long-run growth in the national asset base. This is very likely to prove unstable under current institutional arrangements. In fact, if the economy grows in real terms it will be deflationary, which is proven beyond any sane doubt to be unstable under present institutional arrangements.
Alternatively, one can imagine sustained growth under a balanced budget scenario. Since the only way to create new money (in the sense that most people understand the term, which is to say high-powered money) is to deficit spend, sustained growth under long-run budget balance means that the volume of government-issued money in the economy will approach zero as time goes on.
We tried that in the 19th century. That experiment is the reason we have central banks these days.
You're very fond of calling other people "nationalistic". Reading your commentary - and your apparently instinctive bristling whenever "Germany" is criticised - it might seem to a reader that you're projecting a little.
Look, I don't reduce everybody who dissents to a representative of his country or party.
And I don' think the roots of every economic problem in this world are in just one country. And I would be unhappy with permanent bashing of say the US too.
Do you really think our world can explained or hopefully changed by tracing every problem to a small circle in Frankfurt?
The dominant one: The crisis is caused by government deficits and must be solved by reducing government spending and raising taxes on the poor. Main problem is feckless poors and southerners.
IM's alternative: The crisis is caused by government deficits and must be solved by raising taxes on the rich.
Jake's & Mig's alternative: The crisis is caused by EMU rules limiting government deficits and must be solved institutional reform to allow deficit spending.
Please correct me if I am wrong when stating the positions, but if I am right paiting either side as collaborating with the right-wing narrative in one is unhelpful. Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
There are two distinct but related problems. The first is that the EU as currently constituted lacks an investor of last resort. The second is that it lacks any means to ensure that internal current accounts imbalances do not become a political problem.
There is a variety of possible reforms that would solve these problems. A European treasury not subject to silly "debt brakes" would solve both problems, but may be politically unpalatable. Repealing the GSP and Art. 123 would solve the investor of last resort problem, but not (necessarily) the current accounts imbalances. A Bancor-type arrangement would solve the internal current accounts problem (or rather, signify political acceptance of the existence of otherwise unsustainable imbalances), but would not solve the problem that the GSP circumscribes the states' ability to perform investor of last resort functions.
Finally, the physical economy of Europe (in particular the periphery) has the problem that thirty years of neoliberal brain rot (twenty in the case of Eastern Europe, but with much weaker countervailing pressures) have rendered large swathes of Europe into a wasteland, industrially speaking.
Bingo. She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
Of course, absent neoliberal brain rot, nobody would have thought that a currency union could work without fiscal integration.
the -Mark, as currently constituted, would not be viable.
It doesn't matter if the debts are measured in Euros, DMs, Pesos, or the soon to be offered New Mexico Tamale. If the people who owe the money can't make money to pay it off, they don't have the money to pay it off, thus, they can't pay it off.
Maybe I'm the dumbest m/f'er on the planet, but this seems Real Simple. To me. She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
Well yes. If you define all other economists, including Bofinger or Krugman as cargo-cultists, leaving only the members of your sect as economists, then you have majority.
That is a quite apt description of what the neoclassicals have been doing.
Incidentally, I never claimed that I had a majority on the issue of whether subsidising private bondholders reduced inflation. I claimed that I was right as a matter of fact.
Furthermore you seem to confuse the national asset stock with the national debt,
Uh, no. What I said is that the quote-unquote "national debt" is the monetary base. If you eliminate the "national debt," you eliminate all state money in the economy. And that would be bad.
monetary growth with a deficit,
The two are the same.
In this cause a balanced budget over the cycle would indeed be wrong, but I don't share your assumptions
Those are not my assumptions, they are how fiat currencies work. Go check the Bank of International Settlements Working Paper 292, p. 19-21 if you don't want to take my word for it.
You don't think that the fact that central banks do not create new money - they merely exchange existing money for other forms of money with different term structures - has any bearing on the ability of the central bank to compensate for a total withdrawal of all sovereign money creation?
Did you understand anything in that paper?
They may create fiat currency either in paper or virtual (QE) form opaquely as de facto and unacknowledged agents of Treasuries, but they still do so. "The future is already here -- it's just not very evenly distributed" William Gibson
Of course they do it anyway, but that's because they're busy usurping Treasury functions.
By the same token, under scheme 2, an expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best. This is true in both normal and also in stress conditions. Importantly, excess reserves do not represent idle resources nor should they be viewed as somehow undesired by banks (again, recall that our notion of excess refers to holdings above minimum requirements). When the opportunity cost of excess reserves is zero, either because they are remunerated at the policy rate or the latter reaches the zero lower bound, they simply represent a form of liquid asset for banks.
This paragraph says two things. The first thing it says is that everything Bofinger thinks he knows about banks, banking and money is wrong.
The second, and for the purposes of our discussion, more important, is that the amount of base money in the system is irrelevant to the amount of bank lending, because the central bank always has the option to remunerate excess reserves at the policy rate, or extend rediscount facilities to banks that fail to meet liquidity requirements.
In other words, bank lending is equity constrained, not liquidity constrained. And since the central bank can not provide new equity (unless it is prepared to take equity risk onto its books, something you generally do not want your central bank to do, for a whole host of excellent reasons), the central bank can not affect the volume of lending, except by tightening and relaxing solvency requirements (something you definitely do not want to do).
Absent cash-for-trash programmes by central banks, private sector equity can come from precisely three places, as a matter of simple accounting identity: Private sector physical investment in excess of physical deterioration of the capital plant. A net foreign surplus. And government deficit spending.
Now, unless you wish to postulate that every country can run a foreign surplus (in which case you may want to look into repealing the rules of addition and subtraction), this means that sustainable private sector equity increases are equal to net expansion of capital plant plus sovereign deficit. Give or take maybe half a percent of the GDP of the countries you trade with, as a maximum sustainable trade imbalance.
Running a balanced budget, a responsible central bank rediscount policy, and balanced foreign accounts means that, asymptotically, the private sector's net financial position is zero. That is, the private sector will be unable to save up any high powered money in excess of whatever debt other parts of the private sector may owe the sovereign at any given time.
Why, precisely, is that a good thing?
Absent persistent fiscal deficits and unsustainable foreign positions, the private sector will still have equity (Robinson Crusoe can still stockpile coconuts). It just won't have any net financial position (Robinson Crusoe can't stockpile pound sterling).
Since the private sector usually wants to stockpile financial assets (particularly sovereign financial assets), to provide a cushion against future expenses in the only asset class that is guaranteed by law to cover certain types of expenses, not allowing it to obtain a net financial position is usually Bad.
But Krugman is an orthodox economist ~ the New Keynesians add some wrinkles to allow scope for active intervention "in the short run", but once the short run stickness has worked itself out, its the same basic model.
If that long run model is excluded, then all of its users are excluded in terms of their conclusions drawn from that model, irrespective of how much we may like their political views and their views of things when they do not rely on the falsified mainstream model.
And excluding that single model clearly does not limit the balance to a single model. There are a range of post keynesians, institutionalists, structuralists, a selection among radical political economists, general systems economics, and a number of other approaches not excluded by ruling out the repeatedly falsified long term model of the mainstream as being non-scientific due to its adherence to a repeatedly falsified long run model. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
The rest of us may not find that fact quite so fortunate, but that's hardly Krugman's fault.
The MMT'ers are right when they talk about the financial side of things. But I find that they sometimes get so caught up in debunking financial BS that they pay too little attention to the needs of the physical economy.
In particular, a few of them argue that the US' foreign balance is of no particular concern since its import costs are all denominated in US$. I disagree with that position, because the US' foreign balance position means that if other people start demanding hard currency for their stuff, they risk cutting off the flow of goods and services on which the American society depends to be in a state of not-revolution. Since I rather like my society to be in a state of not-revolution, and since I assume that this disposition is shared by most well-fed, reasonably affluent people, knowing that my society's continued being in a state of not-revolution depended on the largess of foreign powers with possibly divergent geopolitical interests...
... would not improve the quality of my sleep.
Which is true as far as it goes, and that is what you want from a theory on an aspect of the economy. After all, the problem with the underlying theory that Krugman uses is that its a closed model independent of money, and so the premise that money is neutral over the long term is built into the underlying logic of the model, entirely immune to falsification by empirical evidence. Grand Theory of Everything economic models have to date ended up being Grand Theory of Nothing In Particular models, running on false equivalences between the terms of the model and the actual phenomena observed in the real world. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Of course, I realise that he's busy debunking sky-is-gonna-fall scaremongering about the dollar collapsing due to the sovereign deficit - which is entirely the wrong sort of deficit to cause a dollar collapse. So perhaps it is simply that he does not want to open himself to "gotcha" games by quote miners.
In the latter case, you are talking about 2/3 of US petroleum supply no longer arriving, except on barter terms or by diverting funds from exports that have earned hard currency. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Which couldn't possibly cause riots.
If you're comfortable with "jobless recoveries" then you can have "considerable economic growth" while a large number of people experience considerable economic pain. Stagflation was not about stagnation in economic growth but about high inflation with high unemployment. Economics is politics by other means
I am not sure, but wasn't unemployment too lower in the seventies compared to the eighties?
Yes. The great victory of the neoliberal brain rot was to first make the permanent crisis worse, and then redefine the permanent crisis to be normal.
Wasn't the term jobless recovery invented in 1991?
Correct. Prior to that the same phenomenon had been know as a "growth recession."
Anyway there was no permanent ten year crisis in the seventies.
Time series of oil prices, interest rates and unemployment disagree.
Just like all the serious people talk about the "Great Recession" and nobody laughs in their faces. Economics is politics by other means
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