tag:blogger.com,1999:blog-35589444498064725032024-03-18T20:02:59.650-07:00Political Economy in PublicReflections on comparative political economyDavid Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.comBlogger38125tag:blogger.com,1999:blog-3558944449806472503.post-57779506267129083992020-11-06T03:22:00.003-08:002020-11-06T14:49:23.763-08:00How Trump Could Stay in Power Despite Losing the Vote -- the US Constitution and Frustrated Majorities <p><span> <span> </span></span><span style="color: #262626; font-family: Courier; text-indent: 36px;">The 2020 US election reflects, and will not resolve, the ongoing crisis of the US constitutional order. While there are still votes to be counted, it is now highly likely that they will yield an electoral college victory for Joe Biden (who leads by over 4 million votes in the institutionally irrelevant nationwide count, a figure that will probably grow to around 6 million once California’s tally is completed). Whether Biden will take office in January 2020 is less certain. The choice of the voters might be thwarted in at least two ways. The first is via court decisions rejecting the admission of certain votes to the count in crucial states. Should a case or cases with sufficient impact to tip the election to Trump reach the Supreme Court, that Court, with a 6-3 Republican majority, will almost certainly decide in Trump’s favour. So far, no likely vehicle for such a challenge to the results has emerged, but the Trump campaign is actively seeking one. A second possibility is that individual state legislatures with Republican majorities will disregard the preferences of the majority of their voters and appoint Trump-supporting delegates to the electoral college. The Constitution reserves to state legislatures the right to specify how these delegates are selected, and all have chosen to do so via popular vote. Whether a decision to change procedure and disregard that vote after it has taken place would be constitutionally permissible is disputed, but the Supreme Court as the ultimate arbiter of constitutionality would again likely favour Trump. [UPDATE: This prospect seems to be <a href="https://talkingpointsmemo.com/cafe/legislative-appointment-electors-unlawful-wont-even-work-trump">quite unrealistic </a>under the legislation regulating disputes over electors.] A period of social upheaval, including massive protests and counter-protests with significant potential for violence, could well accompany the legal jousting involved and continue after a Supreme Court decision. Despite this prospect, Trump and some close allies are clearly presently willing to pursue either or both of these paths to a second term, and the potential that they will do so successfully cannot be discounted.</span></p>
<p style="color: #262626; font-family: Courier; font-stretch: normal; line-height: normal; margin: 0px; text-indent: 36px;"><span style="-webkit-font-kerning: none; font-kerning: none;">In a broader context, this degree of uncertainty exists because the Constitution, despite amendment, retains the imprint of its late 18th century creation. Its crafters sought to cement a coalition between two groups intent on protecting their property interests from possible democratic revision. One consisted of Northern monied interests, including creditors due money from governments and individuals. The second consisted of Southern agriculturalists reliant on enslaved labourers. For these groups, the Constitution contained both direct guarantees (such as the provision that the import of enslaved people would not be prohibited for at least 20 years, or the ban on states’ use of paper money) and more implicit ones designed to constrain popular influence. These implicit guarantees included the constitution’s counter-majoritarian features, such as the cumbersome amendment procedures, the separation of powers, the bicameral legislature with differentially timed elections and an unrepresentative Senate, the independent judiciary, and the electoral college system for electing the president. That these counter-majoritarian features came to seem something more than walls around property and slavery is down to their eloquent and sincere defence by the Federalists, for whom they also represented a bulwark against tyrannical majorities deaf to legitimate minority concerns, security against ill-considered upheavals in legislation, and a means to organise a national government capable of acting consistently over time on behalf of the evolving purposes of the (initially exclusively white and male) electorate.</span></p>
<p style="color: #262626; font-family: Courier; font-stretch: normal; line-height: normal; margin: 0px; text-indent: 36px;"><span style="-webkit-font-kerning: none; font-kerning: none;"><br /></span></p><p style="color: #262626; font-family: Courier; font-stretch: normal; line-height: normal; margin: 0px; text-indent: 36px;"><span style="-webkit-font-kerning: none;">In the 21</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sup>st</sup></span><span style="-webkit-font-kerning: none;"> century, these procedural defences of the Constitution’s frustration of majorities ring increasingly hollow. They have become simply weapons in a partisan battle. It may be that the next phase of this battle takes an acute form that returns Trump to the White House despite the will of national and state electorates. Alternatively, if Biden does take office, the issue will be whether the partisan battle returns to its more usual form of the Senate (which allocates 82 seats to representatives of less than half the population) and the Senate-shaped judiciary obstructing policies supported by a President and House of Representatives with a deeper popular mandate. Control of the Senate is likely to turn on whether the Democrats can win January run-off elections for Georgia’s two Senate seats (which would give them 50 seats and control due to the tie-breaking vote of the Vice President). The extraordinarily intense social and political conflict that will wrack Georgia, home to around 3.5% of the country’s voters, in the weeks to come will be testimony to the continuing legacy of the exclusionary politics of the 18</span><span style="-webkit-font-kerning: none; font-stretch: normal; line-height: normal;"><sup>th</sup></span><span style="-webkit-font-kerning: none;"> century. </span></p>David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-6176012338285715992019-05-10T06:10:00.000-07:002019-09-13T08:04:12.204-07:00Obama, FDR, and the Fed<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="-webkit-font-kerning: none; font-family: inherit; font-size: 12pt;">Eric Rauchway has written an excellent <a href="https://www.blogger.com/%E2%80%AAhttp://bostonreview.net/politics/eric-rauchway-obamas-original-sin%E2%80%AC">review</a> of Reed Hundt’s new book about the missed opportunity of Obama’s early presidency, framed around a topic he’s exceedingly well qualified to discuss: the contrast between Obama and FDR. As Rauchway writes, </span></div>
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<span style="-webkit-font-kerning: none; font-family: inherit; font-size: 12pt;">While many voters hoped Obama’s policies might represent a dramatic change along the lines of the New Deal, instead Obama acquiesced to emergency considerations and ideological blandishments aimed at tempering expectations and a return to “normalcy.”</span></blockquote>
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<span style="font-family: inherit;"><span style="-webkit-font-kerning: none; font-size: 12pt;">So why did things work out this way? Rauchway suggests one reason was the Obama team’s dubious interpretation of the transition from Hoover to FDR (under the then-operative rules, it was not until March 1933 that FDR took office after his election in November 1932). During this transition—described in Rauchway’s outstanding </span><span style="-webkit-font-kerning: none; font-family: Courier-Oblique; font-size: 12pt; font-style: italic;"><a href="https://www.basicbooks.com/titles/eric-rauchway/winter-war/9780465094585/">Winter War</a> </span><span style="-webkit-font-kerning: none; font-size: 12pt;">and in less detail but larger context in his equally indispensable </span><span style="-webkit-font-kerning: none; font-family: Courier-Oblique; font-size: 12pt; font-style: italic;"><a href="https://www.nytimes.com/2015/11/22/books/review/the-money-makers-by-eric-rauchway.html">Money Makers</a></span><span style="-webkit-font-kerning: none; font-size: 12pt;">—Hoover argued that the worsening financial panic stemmed from fears of radical measures, including renunciation of the gold standard, that might follow FDR’s assumption of office. As Rauchway shows, by refusing any active policy to fight the panic, such as declaring a national banking holiday, unless FDR would formally proclaim his support, Hoover sought to bounce FDR into renouncing the New Deal and endorsing liquidationist orthodoxy. FDR did not play along. In his memoirs, Hoover decried FDR’s supposed irresponsibility in allowing the panic to worsen for political advantage (though this amounts to projection—nothing prevented Hoover from acting on his own). Hundt quotes a key member of Obama’s economic team invoking Hoover’s self-serving version of history to defend cooperation with the Bush administration in the autumn of 2008, and Rauchway writes that Geithner and Obama himself have made the same argument. </span></span></div>
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<span style="-webkit-font-kerning: none; font-family: inherit; font-size: 12pt;">Hoover’s effort to use inaction in the face of a raging financial panic as a means of political coercion to constrain democratic choices regarding economic policy is hardly unique. Following Karl Polanyi, I’ve called it “<a href="https://journals.sagepub.com/doi/abs/10.1177/0032329215617465">governing by panic</a>,” and it’s a kind of politics that needs much more analysis. Though Polanyi was not a fan of the economic reasoning that led FDR to break with the gold standard in 1933, he <a href="https://books.google.co.uk/books?id=YfpIs1Z6B2sC&lpg=PP1&dq=karl%20polanyi%20the%20great%20transformation&pg=PT331#v=onepage&q&f=false">saw</a> its political significance as enormous precisely because it weakened the power of financiers to dictate policy by threatening a market meltdown. </span></div>
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<span style="-webkit-font-kerning: none; font-family: inherit; font-size: 12pt;">The situation was somewhat different in 2008-2009, though. One can’t say that in late 2008, Obama tied his hands and made the sort of surrender that FDR avoided in the winter of 1932-1933. Scope remained for much more decisive and radical action, on restructuring banking, on fighting foreclosures, and on fiscal stimulus, than was in fact adopted. Indeed, it is explaining the decisions made in this period that is the focus of Hundt’s book. </span></div>
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<span style="font-family: inherit;"><span style="-webkit-font-kerning: none; font-size: 12pt;">In understanding these decisions, I would certainly not gainsay the importance of Obama’s choice to rely on economic advice from neoliberal establishment figures, and the political timorousness of his team when it came to stimulus spending. However, to explain the contrast between the Hoover-FDR period and the Bush-Obama one, I would argue that the role of the Federal Reserve was crucial. From 1929-1932, the Fed’s monetary policy was staggeringly passive (a picture persuasively drawn in Friedman and Schwartz’s </span><span style="-webkit-font-kerning: none; font-family: Courier-Oblique; font-size: 12pt; font-style: italic;">Monetary History </span><span style="-webkit-font-kerning: none; font-size: 12pt;">and which is thoroughly borne out by more recent research). Key Fed officials did not view its role as serving as a lender of last resort for failing banks, nor did they believe they had much capacity to improve the economic situation through monetary easing. Unlike Hoover, Fed officials did not try to use withholding of panic-fighting measures as an instrument of political pressure (though some of their reluctance to buy government bonds in open-market purchases derived from fear that this would encourage deficit spending), since this approach would have required them to believe that they could do something about it in the first place. Indeed, the Fed’s most active panic-fighting measure was to entreat Hoover to declare a bank holiday.</span></span></div>
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<span style="font-family: inherit;"><span style="-webkit-font-kerning: none; font-size: 12pt;">The Fed’s passivity was bad for the economy, but it was probably good for democracy. The case for monetary expansionism, if it was going to carry the day, needed to do so in the court of public opinion. During Hoover’s presidency, schemes for monetary expansion were proposed in Congress and remained a matter of broad public debate, continuing a stream of non-technocratic deliberation on monetary policy that stretched back to the monetary populism of the late 19</span><span style="-webkit-font-kerning: none; font-size: 8pt;"><sup>th</sup></span><span style="-webkit-font-kerning: none; font-size: 12pt;"> century. In </span><span style="-webkit-font-kerning: none; font-family: Courier-Oblique; font-size: 12pt; font-style: italic;">Money Makers</span><span style="-webkit-font-kerning: none; font-size: 12pt;">, Rauchway shows that in early 1933 FDR stage-managed a showing of strong Congressional support for monetisation of silver as a way of building support for his own less radical policy, but there’s no question that FDR’s monetary innovations drew on a tradition of economic thinking nourished by its engagement with popular politics and that did have substantial currency (so to speak) in Congress. Congress subsequently passed broader banking reforms and a revision of the Fed Reserve statutes that included provisions that proved crucial to giving the Fed flexibility in the crisis of 2008. Congress also supported FDR in his casting aside of the budget-balancing orthodoxy that was prominent in his election campaign. Whether to credit the post-1933 recovery to fiscal policy, to monetary policy, or simply to the broad optimism FDR was able to promote is a matter of some scholarly controversy. However, there is no question that FDR’s administration and Democrats in Congress felt it their right and duty to shape a comprehensive crisis-fighting policy; no one else was going to do it for them. When the Fed did not act to contain the crisis, it was tackled through the democratic process.</span></span></div>
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<span style="font-family: inherit;"><span style="-webkit-font-kerning: none; font-size: 12pt;">The early 21</span><span style="-webkit-font-kerning: none; font-size: 8pt;"><sup>st</sup></span><span style="-webkit-font-kerning: none; font-size: 12pt;"> century situation was strikingly different. As a leading scholar of the Great Depression, Bernanke was very determined to avoid a repetition of the Fed’s notorious passivity. Unlike the leaders of the ECB, he did not consider it his place to use financial meltdown as a bargaining tool to promote political ends. (Those untroubled by the place of central bank independence in a democratic order ought to consider this contrast—the personal qualities and economic philosophies of individual central bankers made an enormous difference to policy in the crisis; they had huge scope for discretion and were very distant from accountability.) Had it not been for unprecedented discretionary Fed action, the financial crisis would have become catastrophic well before September 2007, when the ill-fated decision to allow Lehman to fail set off a global financial implosion. Immediately thereafter, the Fed resumed pulling out all the stops to do what it could to mitigate the effects. It was clear, though, it could not do enough. Congress was brought into the crisis-fighting effort only at this point, and presented with in effect a binary choice—approve TARP or watch the meltdown spread. The best way to win a game of chicken is not to have any brakes; with the Fed and other central bankers overwhelmed, that was in effect Paulson’s situation in bargaining with Congress. It is fair enough to argue, as Rauchway does in his review, that the Democrats could and should have used the threat of withholding support for TARP to extract more serious concessions. Perhaps the mythology of FDR’s irresponsibility did contribute here. However, the broader issue is that Congress was involved only when a Fed-led effort to address the crisis had broken down, and asked in an atmosphere of incredible tension to offer the executive the discretion and financial means needed to patch that effort up. Precisely because the Fed had the power and independence to be a plausible headquarters for fighting the financial crisis, the democratic process was sidelined.</span></span></div>
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<span style="-webkit-font-kerning: none; font-family: inherit; font-size: 12pt;">Hundt apparently offers new details on the early 2008 decision of the Obama administration to request a fiscal stimulus far smaller than administration economist Christina Romer had advised. (Romer had made her reputation in part by <a href="https://doi.org/10.1017/S002205070001189X">arguing</a> that FDR’s fiscal stimulus was too small to reverse the Great Depression, and that it was monetary policy, fortuitously eased by international capital inflows, that did the trick; in 2009, with the Fed already stimulating for all it was worth, this was not going to happen again.) The basic picture has been clear for a long time: Obama’s advisers thought a larger stimulus could not have made it through Congress. But why not? Christopher Adolph, in an important <a href="https://doi.org/10.1017/S1049096518000847">essay</a>, invites us to</span></div>
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<span style="font-family: inherit;"><span style="font-size: 12pt;">imagine a historical counterfactual: suppose that in 2008–2012, central banks had either suddenly ceased to exist or somehow credibly committed to take no further monetary policy action once the zero-bound had been reached. Would elected governments have remained so reluctant to order fiscal stimulus if there were no hope of a central banker </span><span style="font-family: Courier-Oblique; font-size: 12pt; font-style: italic;">ex machina</span><span style="font-size: 12pt;"> waiting in the wings? Or would the divided and conservative governments of the time been forced to turn—as so many did in the twentieth century—to Dr. Keynes’ usual remedy? A broad increase in spending and tax breaks surely would have reduced economic inequality, in sharp contrast to the persistent and rising inequality that followed the policy leadership of the Fed and the ECB.</span></span></blockquote>
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<span style="font-family: inherit; font-size: 12pt;">Does the existence of a politically-insulated central bank savior crowd out more redistributive fiscal alternatives? Could it, in fact, foreclose public debates on the role of government in a recession because an actor with no electoral connection stands ready to staunch the bleeding?</span></blockquote>
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<span style="-webkit-font-kerning: none; font-family: inherit; font-size: 12pt;">The passivity of the Depression-era Fed means that we don’t entirely have to imagine the counterfactual. With the central bank out of the picture, the democratic process delivered in both fiscal and monetary terms. Recent scholarship has emphasized, properly, the racially exclusionary character of much of the New Deal, deriving from FDR’s desire to keep Congressional Democrats from the South on side. This is deeply distressing, and the long-term consequences were dire, but it also serves to reinforce the point that the New Deal was made possible through political bargaining processed through the electoral institutions. </span></div>
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com1tag:blogger.com,1999:blog-3558944449806472503.post-2467697308672937942019-03-19T07:40:00.000-07:002019-03-20T03:19:19.765-07:00JS Mill on Brexit<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: inherit;">Back in the 19<span style="font-stretch: normal; line-height: normal;"><sup>th</sup></span> century, John Stuart Mill worried about a danger to democracy built into the institution of majority rule itself. Suppose almost all potential voters for a party view (Group A) view failing to win just over 50% of the vote as catastrophic, but know that their party cannot reach this threshold without the support of a much smaller Group B. If Group B can believably insist that it will not vote for the party unless it accepts their candidate as head of the party, it has wide scope for effective extortion, invoking the catastrophic prospect of a win by the other party (Group C) . As Mill <a href="https://en.wikisource.org/wiki/Page:Mr_J._S._Mill_on_Personal_Representation.djvu/14">put it</a>:</span></div>
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<span style="font-kerning: none;"><span style="font-family: inherit;">Any section [Group B] which holds out more obstinately than the rest can compel all the others to adopt its nominee; and this superior pertinacity is unhappily more likely to be found among those who are holding out for their own interest than for that of the public. The choice of the majority [Group A] is, therefore, very likely to be determined by that portion of the body who are the most timid, the most narrow-minded and prejudiced, or who cling most tenaciously to the exclusive class-interest; <b>in which case the electoral rights of the minority [that is, Group C], while useless for the purposes for which votes are given, serve only for compelling the majority [Group A+Group B] to accept the candidate of the weakest or worst portion of themselves [Group B].</b></span></span></blockquote>
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<span style="font-kerning: none;"><span style="font-family: inherit;"> Mill’s words, especially the bolded ones, have kept coming back to me over the past few months as the Brexit process has lurched along. What are the votes of Remainers/BINOs/soft-Brexiteers useful for, in the present situation? Not for “the purposes for which votes are given,” if this these purposes are to shape policy, or to ensure that voters’ voice is attended to. Rather, the views of this group just shape the field of play for the contest between Theresa May and and the ERG over who can display the most obstinacy. </span></span></div>
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<span style="font-family: inherit;"><span style="background-color: white; color: #222222; font-stretch: normal; line-height: normal;"> Mill hoped that proportional representation would overcome this problem, but of course this might simply move the just-over-50% cliff edge, and the disproportionate power of the obstinate small group, into Parliament. </span>More elaborate institutional fixes are definitely worth thinking on. But for the moment I think partisans of democracy need to promote a strong norm against brinkmanship (aka brinksmanship). Brinkmanship is an effort to use a looming catastrophe to force someone to accept an outcome they don’t like (here’s an <a href="https://www.ft.com/content/3eb997ca-14c9-11e9-a581-4ff78404524e">overview</a> of the Brexit endgame that makes use of the concept<span style="background-color: white; color: #222222; font-stretch: normal; line-height: normal;">)</span>. Brinkmanship <i>only </i>works if the person pursuing this strategy is able to convince others that she personally finds the catastrophe tolerable. In other words, as game theorists have argued for a very long time, brinkmanship often relies on ‘preference falsification’—politicians pretend they prefer catastrophe to not getting their own way. Even worse, the most effective practitioners of brinkmanship are those who authentically and obviously prefer something everyone else finds catastrophic to not getting their own way. In other words, situations in which brinkmanship comes into play foster deception, while rewarding intransigence and manifest scorn for others’ reasoned opinions. </span></div>
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<span style="font-family: inherit;">Democracy cannot possibly lead to positive effects in such circumstances. We get only a politics of winners and losers; what used to be widely known as the politics of <i>kto kogo</i> . Deliberately engineering a looming catastrophe for political purposes isn’t just reckless. It implies a contempt for democracy itself. Those who practice extortion, whether with guile or without it, should not be permitted to use the machinery of democracy to facilitate it. </span></div>
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-65058916090496125352017-04-29T15:25:00.001-07:002017-05-07T23:52:34.888-07:00Germany's trade unions and its export surplus: Streeck's mistake<div dir="ltr" style="text-align: left;" trbidi="on">
In the latest LRB, Wolfgang Streeck <a href="https://www.lrb.co.uk/v39/n09/wolfgang-streeck/playing-catch-up">asserts</a> the following:<br />
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<span style="background-color: white; color: #333333; font-family: "georgia" , "palatino" , "palatino linotype" , serif; font-size: 14.001px;">German prosperity has depended historically on the export of manufactured goods and, later, the non-export of manufacturing jobs. Appeals to German unions to help rectify the obscene trade imbalance between Germany and other euro countries – by demanding higher wages and thereby raising unit labour costs – therefore fall on deaf ears. For the unions the euro is an ideal solution to the employment problem that hit them in the 1990s with the return of price competition and the internationalisation of production. Monetary union gives German manufacturing a captive market in Europe, as well as an edge over European competitors that have to operate in more inflationary institutional settings. On top of that, it equips German firms with an undervalued currency in markets outside the Eurozone, especially at a time when the ECB’s quantitative easing keeps pumping up the bloc’s money supply. To restrain the competitiveness of German industries in order to save the single currency, as outsiders sometimes suggest, would from the perspective of the unions be committing suicide for fear of death. It would also break up their alliance with employers and the government, held together no longer by trade union power but by the constraints and opportunities of the Eurozone. And it isn’t only the unions for whom the competitiveness of German manufacturing is of paramount importance. Their priorities are shared by the government, currently a grand coalition of the centre-right, representing industry, and the centre-left, where the SPD is basically the political arm of IG Metall.</span> </blockquote>
While I quail a bit at contradicting a German leftist regarding German unions, the publicly available evidence suggests this is flatly wrong. German unions would be very happy to see increased wages as part of a package to reduce the export surplus. In fact, just yesterday the <a href="http://en.dgb.de/">website</a> of the <a href="https://en.wikipedia.org/wiki/German_Trade_Union_Confederation">German Trade Union Confederation</a> (DGB), an organisation <a href="http://en.dgb.de/member-unions">including</a> the aforementioned pre-eminent German union IG Metall, had <a href="http://www.dgb.de/themen/++co++87711a7c-2bed-11e7-8524-525400e5a74a">this</a> to say:<br />
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<b>Export surplus: We need more domestic demand!</b></blockquote>
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<i>Strengthen purchasing power, support imports</i> </blockquote>
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[Despite its claims to the contrary] the German government can and must act: It can dry up the low-wage sector and support centralised wage bargaining [<i>Tarifbindung</i>] and thus contribute to ensuring that employees here have more money to demand products. This supports imports and pushes enterprises to invest more domestically for a growing market.</blockquote>
Similarly, an economics think-tank that's part of the DGB-affiliated Hans-Bockler-Stiftung recently <a href="http://m.morgenpost.de/wirtschaft/article210314681/Studie-Hoehere-Loehne-senken-Handelsueberschuss.html">argued</a> that the best policy against the export surplus would combine higher wages with increased government spending for investment purposes. <br />
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Hmm, maybe an exception? How about this, from a 2010 IG Metall <a href="https://www.igmetall.de/0162812_06-2010_1d186d8b052a540eff6cef60456b94dc927da336.pdf">analysis</a> (page 12):<br />
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German wage policy has European responsibilities. In the sectors which in the past lagged behind, we need further wage rises that make use of the room for manoeuvre in distribution...</blockquote>
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There's no doubt that German unions supports a high-value-added industrial model that relies on substantial exports. But the idea that they reject wage rises that would permit these exports to be matched better by substantial imports is just wrong. </div>
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One could say a lot more about the wrong-headed supply-side economics in Streeck's piece, but it's certainly clear that German unions don't share this viewpoint. <br />
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<b>Update</b><br />
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Just one more piece of evidence, from the <a href="http://igm-gewerkschaftstag-2015.de/wordpress/wp-content/uploads/2016/01/IGMetall_Beschlussbroschuere_23GT.pdf">report</a> adopted by the <a href="https://igm-gewerkschaftstag-2015.de/zahlen-daten-und-fakten/">485 delegates</a> to IG Metall's 2015 <a href="https://igm-gewerkschaftstag-2015.de/das-hat-der-gewerkschaftstag-2015-beschlossen/">congress</a> ("Gewerkschaftstag"), as an authoritative a statement of official union policy as I can find (pp. 77-78):<br />
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The economy based essentially on exports exacerbates the trade imbalances in Europe. In Germany the unit wage costs over the last 15 years have risen much less than in other European countries. This leads to export surpluses, while other other countries are forced to finance their demand through credit. ...</blockquote>
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Our struggle for a better Europe also means supporting the struggles for higher wages and against precarious employment domestically. Success in the struggle against the extremely unjust distribution domestically will help people in all of Europe. </blockquote>
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-7835474475473647042016-10-05T05:30:00.000-07:002016-10-11T11:47:33.673-07:00Constitutions, Credible Commitment, and Brexit<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: inherit;">In a famous <a href="http://www.jstor.org/stable/2122739">paper</a>, North and Weingast linked the security of property rights to constitutional government. They argue that the 17th century Glorious Revolution in England created a “credible commitment” by the English state to property rights by giving property owners’ Parliamentary representatives a veto over legal changes infringing those rights. </span></div>
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<span style="font-family: inherit;">For this argument, it is an embarrassing circumstance that the separation of powers between Crown and Parliament N&W described was a transient feature of English and later British institutions. Once the monarch’s role dwindled to a mere formality, the UK’s government was characterised by a hyper-centralisation of power in the Prime Minister and the ruling party, a centralisation usually known as the “<a href="https://paulcairney.wordpress.com/2013/11/10/policy-concept-in-1000-words-multi-level-governance-and-the-westminster-model/">Westminster model</a>.” Especially given the absence of a formal written constitution, a British PM has extraordinary scope for discretionary action, including action damaging to property rights. The N&W argument would imply that this lack of constitutional constraint should undermine property rights, which on the contrary are generally seen as being quite secure in Britain.</span><br />
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<span style="font-family: inherit;">The Brexit referendum and associated policy initiatives recently announced, however, go some way to rehabilitating the importance of the causal mechanism North and Weingast proposed. N&W argued that when English property owners became secure in their rights, they were more willing to invest. The causal pathway runs from constitutional constraint to the ability to rely on a stable institutional framework, and thence to the readiness to make investments. Now, property rights don’t have to be conceived narrowly as the sort of rights explicitly specified in legal title or contractual arrangements. In fact, an ancient common-law doctrine (known as “promissory estoppel” or “reasonable reliance”) suggests that someone who has undertaken costly actions while relying on another’s promise is entitled to legally enforced compensation if that promise is violated.</span><br />
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<span style="font-family: inherit;">The Brexit campaign, and especially its aftermath, have shone a spotlight on many such promises made by the British state that it now proposes to violate. <a href="http://www.ibtimes.co.uk/eu-citizens-right-live-uk-one-main-cards-brexit-negotiations-says-liam-fox-1584828">Immigrants from the EU</a>, for instance, relied on the assumption they would have freedom of movement and that it made sense to pursue a career (for instance in academia or the medical profession) within Britain. <a href="https://www.theguardian.com/uk-news/2016/oct/04/rudd-announces-crackdown-on-overseas-students-and-new-work-visas">Prospective university students</a> around the world invested time, effort, and often money in study choices premised on the prospect of admission to British universities and the possibility of working here after graduation. <a href="https://www.theguardian.com/business/2016/sep/30/nissan-hard-brexit-compensation-new-uk-investment-tariffs">Corporations</a> sited operations in the UK, relying on its integration with the EU and access to the EU’s single market. Some people in <a href="http://www.bbc.co.uk/news/uk-northern-ireland-37545894">Northern Ireland</a> probably acquiesced in continued British rule because they relied on membership of the EU rendering the internal Irish border less significant. </span><br />
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<span style="font-family: inherit;">From the perspective of the doctrine of reasonable reliance, all these groups are having ‘property rights’ expropriated. And this is an expropriation facilitated precisely by the Westminster model and the absence of a written constitution. It was the Westminster model that made the calling of a referendum with such profound constitutional significance subject only to the internal decision of the Conservative majority in Parliament. The continuing relevance of limited constitutional constraints is shown vividly in discussions about the <a href="http://www.telegraph.co.uk/news/2016/10/02/theresa-may-no-scotland-opt-out-or-veto-from-brexit/">role of Scotland</a> or the claim that the Government can rely on “<a href="https://ukconstitutionallaw.org/2016/07/08/thomas-fairclough-article-50-and-the-royal-prerogative/">royal prerogative</a>” to invoke Article 50 to leave the EU without Parliamentary approval. With no-one constitutionally empowered to veto them, the Conservatives can act at will to shred what the morality embedded in common law (and what could be more English than that?) would unambiguously regard as property rights—just the sort of scenario North and Weingast describe.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">One of the central arguments N&W make is that for absolute monarchs, a reputation for protecting property rights is an inadequate substitute for constitutional constraint, since monarchs’ royal prerogative always includes changing their minds. A reputation, though, is better than nothing. There’s probably little hope that the Tories will recognize how particularly dangerous it is for a government with so much legal discretion to display such contempt for promises on which so many have relied. </span><br />
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<span style="font-family: inherit;">P.S.:</span><br />
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Some lawyers and scholars think the present Government’s beliefs about the scope of its legal discretion are mistaken. Many interesting arguments about the bearing of the UK (unwritten) constitution on Brexit’s admissibility can be found <a href="https://ukconstitutionallaw.org/blog/">here</a>.<br />
<br />
Joseph Singer wrote a great <a href="http://www.jstor.org/stable/1228814">article</a> seeking to extend the notion of property rights building on the idea of reliance.<br />
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-89814520685637881092016-09-25T07:56:00.003-07:002016-12-19T21:59:19.572-08:00Independent central banks, democracy, and Skcolidlog<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: inherit;">Goldilocks’ ideal porridge, you may recall, was neither too hot nor too cold, but rather just right. A lot of people think this ideal has been reached in the relationship between central banks and democracy. The operational autonomy of central banks’ personnel and policy ensures there’s not too much democracy, while the ultimate authority of elected officials over personnel <i>selection</i> and policy <i>goals</i> mean there’s not too little democracy either. Just right? </span></div>
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<span style="font-family: inherit;">Not at all, I argue in this post. Experience demonstrates that the ‘operational independence in pursuit of democratically established goals’ formula creates fundamental and disruptive tensions in democratic polities (including and especially the EU/Eurozone, which I class among them). These tensions primarily affect the coordination of fiscal policy and monetary policy. And instead of Goldilocks, we have Skcolidlog: either central banks have too much power to dictate fiscal policy, or too little.</span></div>
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<span style="font-family: inherit;">That the ECB enjoyed from early 2010 through the middle of 2012 an influence on Eurozone fiscal policy so immoderate as to fundamentally contradict democracy is a point I have argued <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/the-ecb-and-policy-blackmail.html">before</a> (and at length <a href="http://pas.sagepub.com/content/44/1/81.abstract">here</a>). The ECB threat that government bond markets would be abandoned to self-fulfilling market perceptions of fiscal collapse compelled many governments to moderate or reverse programmes of fiscal stimulus and overrode electoral politics.</span></div>
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<span style="font-family: inherit;">But lately, the shoe may seem to be on the other foot. Consider this exchange at Draghi’s September 2016 <a href="http://www.ecb.europa.eu/press/pressconf/2016/html/is160908.en.html">press conference</a>: </span></div>
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<span style="font-family: inherit;">Question: You've been urging governments to act for some time, and I'm wondering if there's a sense that maybe they might now be a little more willing to act and that the ECB could encourage that willingness by not raising excessive expectations about future monetary policy measures, hence the tone today.</span><br />
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<span style="font-family: inherit;">Draghi: The ECB can't be in a sort of – let me say, what the ECB can do is to basically flag what is needed for monetary policy to be even more effective than it is at the present time.</span></blockquote>
</blockquote>
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<span style="font-family: inherit;">In effect, the journalist asked whether Draghi could threaten to limit monetary stimulus in order to compel action by the fiscal authorities, probably hinting toward further fiscal stimulus. Draghi replied that he had only verbal persuasion at his disposal. (Draghi went on to demonstrate <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/09/draghi-and-fiscal-demand-stimulus-hes.html">once again</a> how low fiscal stimulus is on his list of priorities, but that is beside the point for now). </span></div>
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<span style="font-family: inherit;">While ECB leaders’ protestations of their limited influence in promoting austerity are <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/the-ecb-and-policy-blackmail.html">unconvincing</a>, Draghi’s assertion that in present circumstances he has little leverage on policy is far more believable. The difference between the two situations turns on the nature of the ECB’s mandate. When amidst the government bond market panics of 2010-2012 it was the ECB’s readiness to play a lender of last resort role that was the axis of contention, it was a plausible assertion that this role lay outside the ECB’s mandate. This was one reason a threat to permit bond-market meltdowns was credible. But in the present situation, where the ECB is dramatically failing to meet its clearly specified mandate to attain price stability (which it has defined as inflation ‘close to, but below 2% per year’), it has almost no flexibility: no matter how unhelpful fiscal policy is, the ECB must continue to stimulate, including via policies many find extreme, such as negative interest rates and a massive quantitative easing programme. The ECB has no threat to deploy.</span></div>
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<span style="font-family: inherit;">Thus, the discretion created by the lack of a clear mandate to play a lender-of-last-resort role left the ECB with ‘too much’ power, but the presence of such a clear mandate in the case of fighting deflation left it with ‘too little’, at least from the perspective of those who believe further fiscal stimulus is urgently necessary. </span></div>
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<span style="font-family: inherit;">That a Goldilocksian balance remains elusive is not just an idiosyncratic result of current economic conditions. In fact, we are faced with a quite general limitation of the the present formula for reconciling democracy with independent central banking. Lorenzo Bin Smaghi recently <a href="http://blogs.ft.com/the-exchange/2016/09/07/the-ecb-shows-that-central-banks-are-sometimes-the-only-game-in-town/">likened</a> the situation now facing central banks, in which they must soldier on despite a lack of supportive fiscal policy, to that facing central banks in the 1970s and early 1980s, when the challenge was inflation, not deflation. Most notoriously, Reagan’s budget deficits in the face of the inflation of the early 1980s pushed Fed chair Paul Volcker to maintain extremely high interest rates. In both cases, central bank policy in service of a price-stability mandate had to go to extremes to compensate for unsupportive fiscal policy. </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjXOMjLtM0YiW48TicQrNaiAVNyS84JkfsnejSIaxWIrSeBRTwD7tF_wN3Ua7VmFUF7cMhRsG4wn0P4r6EnDSflOka0kHwXe7bXBvVYwIDRIc5l_pcUMMUGthyiH5S2G4fK5xrbXIjBSpL/s1600/fisc+monetary.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="377" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjXOMjLtM0YiW48TicQrNaiAVNyS84JkfsnejSIaxWIrSeBRTwD7tF_wN3Ua7VmFUF7cMhRsG4wn0P4r6EnDSflOka0kHwXe7bXBvVYwIDRIc5l_pcUMMUGthyiH5S2G4fK5xrbXIjBSpL/s640/fisc+monetary.png" width="640" /></a></div>
<span style="font-family: inherit;">A very simple game-theoretic analysis (which builds on Blinder’s 1982 <a href="https://www.kansascityfed.org/publicat/sympos/1982/S82BLIND.PDF">discussion</a> of the Reagan-Volcker episode) helps to illustrate the generality of the Skcolidlog pattern in central bank-fiscal authority relations. The diagram above depicts policy choices by fiscal authorities followed by policy choices by central bankers. What it means to ‘reinforce market trends’ is contextual: this could be to contribute to a market panic by explicitly repudiating lender-of-last-resort actions, or to contribute to inflation through fiscal and monetary expansion, or to contribute to deflation or ‘lowflation’ via fiscal and monetary resriction. To counteract market trends is to adopt the opposite policies in each of these circumstances. Case I, “joint irresponsbility,” is the outcome fear of which drove much of the enthusiasm for central bank independence in an inflationary environment, where it would represent both fiscal and monetary authorities adopting expansive policies. But it could equally reflect both the central bank and the government failing to act in the face of a market panic. Case II is the one Smaghi discusses, where the central bank compensates for inappropriate government policy. Case III would involve a central bank pushing in a direction opposite to government policy, where as case IV is coordinated policy to counteract market trends.</span></div>
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<span style="font-family: inherit;">This diagram helps clarify when fiscal and when monetary authorities have the preponderance of bargaining power. When the central bank is constrained to fulfil an inflation mandate, the boxes shaded in gray are not available to it. Thus, the fiscal authorities unilaterally choose between options II and IV. Very often it has turned out that fiscal authorities have preferred to force central banks to go it alone instead of coordinating policy, even when the latter would have arguably generated better growth outcomes and more effective attainment of the goals expressed in the central bank’s mandate. The reason for this is that governments have other agendas for fiscal policy. Reagan wanted to “starve the beast,” Cameron to cut back the size of the state. Fiscal authorities arguably did not have to bear the full political costs of these macroeconomically inappropriate policies because central banks compensated for some of their negative economic effects. I think a good case could be made that the ability of elected governments to compel such compensatory action by central banks does serious damage to mechanisms of electoral accountability that are usually held to be at the heart of democracy’s advantages. </span></div>
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<span style="font-family: inherit;">On the other hand, when the central bank does have discretion, and the gray boxes are open to it, as in the lender-of-last-resort case, it can often impose its will on government policy. In particular, if the CB prefers case II to case III, and case III to case IV, then fiscal authorities fearful of their policies being undermined may have to choose to reinforce market trends as a condition of central bank action. This is what happened to some European governments when the ECB was willing to rescue government bond markets only on condition of austerity. </span></div>
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<span style="font-family: inherit;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiEmEVaHqfe6ieevrMFkc8R2gx5Jj2BkXY2w12XIJjxx8i1ia6UpjS1cBwe7dkvPOMJOO21n7iI5_MFCqLw5qO_xzz9tTJwVpU5wf3kls_civ9JfdayMoyhGD9JInbrs6r-5r8VgzdqBgG/s1600/fisc-monetary+w+cases.png" imageanchor="1"><img border="0" height="272" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiEmEVaHqfe6ieevrMFkc8R2gx5Jj2BkXY2w12XIJjxx8i1ia6UpjS1cBwe7dkvPOMJOO21n7iI5_MFCqLw5qO_xzz9tTJwVpU5wf3kls_civ9JfdayMoyhGD9JInbrs6r-5r8VgzdqBgG/s640/fisc-monetary+w+cases.png" width="640" /></a></span></div>
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<span style="font-family: inherit;">The diagram above shows some empirical cases of each outcome, with ‘1970s’ standing in however approximately for joint monetary and fiscal irresponsibility. What all of this implies to me is that the idea that independent central banks bound by a policy mandate can serve as a useful check on elected governments depends, in fact, on an unrealistic conception of the circumstances in which central banks act (they will sometimes be called upon to act in areas beyond their mandate) and on the preferences of democratically elected governments (who may use mandates to force central banks to deal with the consequences of their inappropriate policies). The cases suggest that the Skcolidolg pattern has some real empirical relevance. </span></div>
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<span style="font-family: inherit;">What, then, is to be done? Some people <a href="https://www.theguardian.com/business/economics-blog/2015/may/21/now-the-bank-of-england-needs-to-deliver-qe-for-the-people">argue</a> for giving central banks more power over fiscal policy, especially in near-deflationary circumstances like at present. But it seems to me—I won’t try to defend the point in this already over-long post—that this runs the risk of exacerbating the problem of electoral accountability that has hindered electorates from understanding the impact of the macroeconomically inappropriate policies that right-wing governments seem so prone to run. Nearly two decades ago, Berman and McNamara <a href="https://www.foreignaffairs.com/articles/1999-03-01/bank-democracy">argued</a> that insofar as the case for the economic advantages of independent central banking was dubious, it provided no grounds for overriding the usual preference for favour of democratic governance in the case of central banking. When one looks at how central banking has interacted with democracy in practice, their case only gets stronger. It’s time to bring central banks back under the direct control of elected officials, so that they bear the responsibility for both good and bad choices about monetary policy. Ultimately, there’s no way to get the porridge right unless you make it yourself. </span></div>
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com1tag:blogger.com,1999:blog-3558944449806472503.post-88203086912855341732016-06-03T05:59:00.001-07:002016-06-03T05:59:09.313-07:00Experiments in political science and the Cartwright critique <div dir="ltr" style="text-align: left;" trbidi="on">
Over the course of the last couple of years, the political science discipline has twice hit the headlines for scandals linked to "field experiments." Maybe this isn't surprising: such experiments have become incredibly fashionable. Success in an academically fashionable endeavour can bring large rewards, and it's certainly plausible this has created incentives making <a href="http://nymag.com/scienceofus/2015/05/how-a-grad-student-uncovered-a-huge-fraud.html">fraud</a> or <a href="http://talkingpointsmemo.com/dc/dartmouth-stanford-project-montana-elections-law">poor judgement</a> more likely.<br />
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To the extent that bad behaviour reflects incentives, one can always try to to police against it more vigorously. But changing incentives <a href="http://personal.lse.ac.uk/woodruff/_private/materials/property_rights_in_context_scid.pdf">may be more effective</a>. In this spirit, I'd like to encourage political scientists to <i>stop being so damned excited by experiments and offering such big reputational rewards for them</i>!<br />
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As a reason to calm down, consider some <a href="https://www.dur.ac.uk/resources/philosophy/CartwrightEP2013.pdf">arguments</a> (or great <a href="http://www.lse.ac.uk/newsAndMedia/videoAndAudio/channels/publicLecturesAndEvents/player.aspx?id=1227">lecture version</a>) from the brilliant philosopher of science <a href="https://www.dur.ac.uk/philosophy/staff/?id=10659">Nancy Cartwright</a>. Experiments (of the presently fashionable sort) rely on the logic of randomly assigning groups to "treatment" and "no treatment," so that any difference in outcome between the two groups can confidently be ascribed to the treatment. Yay, science!<br />
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Cartwright's core insight is that what such experiments can establish is only the role of a particular link in what might be a complicated, and highly context-dependent, causal chain. To build on an example she uses: Suppose you had a set of toilets, and assigned each of them randomly to have the lever attached to its side pressed or not. On completion of the experiment, you could confidently assert the relationship "lever pressing leads to water release." This formulation, though, would entirely obscure the point that these levers only release water because they are part of a mechanism to open a chamber supplied with water by pipes, etc.<br />
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Thus, if you went off to deploy your exciting new experimental result to solve California's drought by having everyone push the levers attached to the sides of their toasters, you'd be disappointed by the results. As Cartwright says (<a href="https://www.dur.ac.uk/resources/philosophy/CartwrightEP2013.pdf">p.102</a>), "Once stated this is an obvious and familiar point," but nonetheless one too often overlooked. This she effectively demonstrates with empirical examples of the disappointing performance of 'experimentally validated' policy interventions in new contexts.<br />
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So why is it that experimentalists are overlooking this obvious and highly consequential point? [I'm not going to defend in detail the claim that they are, but will assert that the discussions about 'external validity' from experiment evangelists are not nearly searching enough.] Let's use a little notation to make the argument more compact: the causes of an outcome <b>O</b> of an experiment are the experimental intervention <b>I</b> (such as lever pushing) + the rest of the mechanism <b>M. </b><br />
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So the question becomes, why the emphasis on <b>I </b>rather than <b>M</b>?<br />
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<ul style="text-align: left;">
<li>A lot of the methodological backdrop for political science experiments is drawn from experimental medical trials. In these, the common features of human organisms are regarded as similar enough that <b>M </b>will function in the same way. This assumption can be <a href="http://www.theguardian.com/lifeandstyle/2015/apr/30/fda-clinical-trials-gender-gap-epa-nih-institute-of-medicine-cardiovascular-disease">criticised</a> even in a medical context, but for social scientists the issue is orders of magnitude more significant. </li>
<li>Unlike pressing a lever, field experiments in political science are difficult to organise and often quite expensive. After all that effort to demonstrate the role of <b>I</b>, it's hard to remember that the <b>M </b>is important too.</li>
<li><b>I </b>will often have been chosen precisely because it's the aspect of a broader mechanism that is easiest to manipulate. If the effects of <b>M </b>cannot be assessed via randomised controlled trials, then experiment absolutists will deny the possibility of making any meaningful claims about those effects. They haven't faced up to the fact that this means that they will <i>never</i> have any basis sanctioned by their own methodological precepts to assert that the results of one experiment have any generalisable implications whatsoever.</li>
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Whatever its origins, the mania for measuring the effects of interventions, and the corresponding neglect of the causal import of the context of these interventions, strikes me as very bad thing for many reasons, on which I hope to expand on another occasion.<br />
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PS: Cartwright's is not the only impressive critique of experimentalism on offer; I especially recommend Dawn Teele's <a href="http://books.google.com/books?vid=ISBN030016940X">edited volume</a>. But so far, the critiques don't seem to have made much of a dent in the popularity of field experiments. Political science as a discipline seems to have an almost congenital need to affirm its 'scientific status'. But we should be suspicious of anything we need so much. How much did that ring really help Gollum?<br />
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-79896884389946975392015-12-10T04:56:00.000-08:002015-12-10T04:56:55.689-08:00Puffing the magic Draghi<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">Mario Draghi had a rough time last week. The extension of QE he announced disappointed markets, who were apparently expecting him to exceed expectations. (Sounds oxymoronic to me, but I'm just a political scientist, not clever like a bond trader.) The upshot was a sharp rise in the <a href="http://www.ft.com/fastft/2015/12/09/euro-hits-1-10-as-post-ecb-rally-quickens/">value of the euro</a>, which is a problem for a Eurozone <a href="http://politicaleconomyinpublic.blogspot.com/2014/07/europes-missing-demand-model.html">demand model</a> heavily reliant on exports. </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Maybe Mario will be cheered up after Politico published a <a href="http://www.politico.eu/article/the-house-that-mario-draghi-built-european-central-bank-president-euro-headquarters/">puff piece</a> about him today. I wasn't; the article veered from the uninformative to actively misleading, reporting <i>inter alia</i>: </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: #f7f8f8; font-family: ff-tisa-web-pro, Georgia, Times, 'Times New Roman', serif; font-size: 18px;">Draghi ... [took] bold steps that enabled him to save the euro. Now that the danger of a disintegration of the eurozone has abated, the ECB president is embarking on an even tougher political task: to convince Europe’s governments that they must do their part of the heavy lifting to take the continent out of the slump. ...</span> </span></blockquote>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: #f7f8f8; font-family: ff-tisa-web-pro, Georgia, Times, 'Times New Roman', serif; font-size: 18px;">He is prodding EU governments to boost spending to put the European recovery back on a path to growth. ...</span> </span></blockquote>
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<span style="background-color: #f7f8f8; font-family: Arial, Helvetica, sans-serif; font-size: 18px;">For the moment, Draghi is happy to let Coeuré [ECB board member] and Praet [ECB chief economist] push the message that Germany in particular needs to splash out more on public infrastructure, to address what one ECB executive board member called an “absurd situation” where spending is so subdued that the fiscal deficit of the eurozone is much lower than the 3 percent allowed by the Stability and Growth Pact.</span></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">This a reiteration the myth that Draghi is an active supporter of a demand-stimulus approach to resolving Europe's growth crisis. However, all of the <a href="http://politicaleconomyinpublic.blogspot.com/2014/09/draghi-and-fiscal-demand-stimulus-hes.html">arguments</a> I made against this myth more than a year ago remain valid. Above all, Draghi's shown not the slightest inclination to use his ample sources of political leverage to push for increased spending stimulus. Nor has he repudiated his <a href="http://eprints.lse.ac.uk/63381/">key role</a> (see pp.34-38) in pushing for an austerity-led reaction to the Eurozone bond crisis, continuing to imply that no other choice was possible. As he recently <a href="https://www.ecb.europa.eu/press/key/date/2015/html/sp151112.en.html">put it</a>, "don’t blame the fire damage on the fire brigade."</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Perhaps, though, Draghi is beating the drums for demand stimulus behind the scenes? He is, after all, somewhat constrained as the public face of the ECB leadership. Consider this exchange from the latest ECB <a href="https://www.ecb.europa.eu/press/pressconf/2015/html/is151203.en.html#qa">press conference</a>: </span><br />
<blockquote class="tr_bq" style="background-color: white; border: 0px; box-sizing: border-box; color: #191919; line-height: 22.4px; margin-top: 20px; padding: 0px;">
<span style="border: 0px; box-sizing: border-box; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 700; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="font-family: Arial, Helvetica, sans-serif;">Question: Last year in Jackson Hole, you advocated for a policy mix with monetary policy reforms, investment and fiscal policy, and today you have emphasised the role of fiscal policy. Do you miss more fiscal stimulus in countries with margin, like Germany, for example, and do you consider that the neutral fiscal stance that the European Commission is advocating for the eurozone as a whole is adequate now, in a sort of liquidity trap?</span></span></blockquote>
<blockquote class="tr_bq" style="background-color: white; border: 0px; box-sizing: border-box; color: #191919; line-height: 22.4px; margin-top: 20px; padding: 0px;">
<span style="font-family: Arial, Helvetica, sans-serif;">Draghi: We had a brief exchange on this issue, and our conclusion now is that, first of all, the first answer should be given by the Commission. The second point is that we'll continue reflecting on this, and we will have a view on what is the degree of appropriateness of the fiscal stance; whether we have a view about the aggregate fiscal stance; what is the degree of compliance with existing rules; whether the flexibility which has been exercised before all the terrible happenings of this year – so before the recent terrorist attacks, but also before the refugees events – whether that flexibility would be justified. So there are lots of factors in play altogether. How do we assess the fiscal stance today given the presence of the previous flexibility, the refugees, the need for security of the euro area? It's a very complicated question, so we are going to reflect on that.</span></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">One might read this as a sign that political conflict at the top of the ECB is limiting what Draghi can do by way of advocating fiscal sanity. However:</span><br />
<br />
<ul style="text-align: left;">
<li><span style="font-family: Arial, Helvetica, sans-serif;">Draghi has <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/11/why-mario-draghis-ecb-colleagues-just.html">more than once</a> found ways to move beyond the consensus of the bank's leadership, and there's no evidence he's trying to do so on this issue.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">There is likewise no evidence that he personally views austerity as a crucial component of the growth catastrophe. Asked at a November Europarliament meeting about what was needed to promote growth, Draghi had literally not a single word to say about government spending (see <a href="https://polcms.secure.europarl.europa.eu/cmsdata/upload/9ef1476e-9017-468b-823c-555b051e6061/1079059EN.pdf">p.11</a>).</span></li>
</ul>
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-23521772727463999312015-02-09T07:16:00.000-08:002015-02-16T14:38:47.929-08:00Can Greece escape the ultimatum game? (And no, Draghi's not trying to help them do it)<div dir="ltr" style="text-align: left;" trbidi="on">
At the start of a <a href="http://www.ft.com/cms/s/0/9d493d48-afd5-11e4-b42e-00144feab7de.html#axzz3RFplwtA6">crucial week </a>for Syriza's effort to negotiate a revision to the disastrous current arrangements between Greece and the Troika, I thought it would be helpful to try to describe the bargaining situation in a systematic way using <strike>game theory</strike> a very simple diagram (yes, it is game theory, but it's very straightforward). Here it is:<br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDdpdDZjyFcybgL0yx-ZHC8sP0MYlRNAE_GvylT8AE-zpiw89cCe1Xd1GQGF7d3KNvCAM1mKax9BMSetZZMVBjCFS0xXtKMCks68PdBkS22Q5zdyDf3eJ0OPq_VHPfI4QZR1g0_yVCREBp/s1600/Grexit+game.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDdpdDZjyFcybgL0yx-ZHC8sP0MYlRNAE_GvylT8AE-zpiw89cCe1Xd1GQGF7d3KNvCAM1mKax9BMSetZZMVBjCFS0xXtKMCks68PdBkS22Q5zdyDf3eJ0OPq_VHPfI4QZR1g0_yVCREBp/s1600/Grexit+game.png" height="418" width="640" /></a></div>
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<div class="separator" style="clear: both; text-align: center;">
</div>
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The European Commission (EC) needs to decide whether or not they will propose a compromise or insist on the Troika's current terms. Greece then needs to accept or reject the offer. The rectangles at the far right show possible outcomes--if Greece rejects whatever the EC proposes, it leaves the Euro (Grexit). Let's make some assumptions about how the parties rate the outcomes: Greece prefers a compromise to the Troika's terms, and both to Grexit. The EC prefers the Troika's terms to compromise, and both to Grexit.<br />
<br />
If this is an accurate depiction of the situation, the EC gets what it wants--it can face the Greece with the choice between taking the Troika's terms and Grexit, and Greece will choose the Troika. It's an "<a href="http://en.wikipedia.org/wiki/Ultimatum_game">ultimatum game</a>;" Greece has to take whatever the EC offers, because otherwise it's faced with the catastrophe of Grexit. <br />
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So how can the Greek government change the game? <br />
<br />
<ol style="text-align: left;">
<li>Announce that it prefers Grexit to Troika terms. Then (bottom right in the diagram) Greece would be expected to choose reject, giving the Grexit outcome. Since the EC prefers compromise to Grexit, it would offer a compromise. So why doesn't Greece just do this? </li>
<ul>
<li>To announce this might set off an even worse banking panic than Greece is currently experiencing.</li>
<li>It only works if the EC reliably prefers compromise to Grexit.</li>
<li>It might not be believed</li>
</ul>
<li><a href="https://www.blogger.com/blogger.g?blogID=3558944449806472503" name="commitmentdevice"></a>Disable its capacity to accept Troika terms, or at least create uncertainty about whether it would be able to accept Troika terms (meaning that Troika intransigence would lead to Grexit)</li>
<ul>
<li>This is one way to interpret Tsipras' "<a href="http://www.bbc.co.uk/news/world-europe-31261475">defiant</a>" speech yesterday, in which he promised very publicly and very vigorously that Greece will not accept a continuation of the present Troika. (Political scientists <a href="https://scholar.google.co.uk/scholar?q=audience+costs+commitment&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ei=P8HYVKfLMsWR7AacmYFQ&ved=0CCAQgQMwAA">just love </a>talking about how "domestic audience costs" -- the costs of going back on a promise to a domestic constituency -- allow politicians to make threats on the international stage that would otherwise not be credible. Compare <a href="http://russeurope.hypotheses.org/3395">this discussion</a> by Jacques Sapir.)</li>
<li>Again, this only works if the EC fears Grexit; Varoufakis is <a href="http://www.theguardian.com/business/live/2015/feb/09/greek-bailout-crisis-tsipras-bridging-loan-live-updatges#block-54d8ab9ae4b0eb17c135f49c">trying to make sure</a> that they do</li>
</ul>
<li><a href="https://www.blogger.com/blogger.g?blogID=3558944449806472503" name="changeminds"></a>Convince the EC leaders that compromise should be be preferred to Troika terms. So far this doesn't seem to be going very well.</li>
<li>Find a way to create another possible outcome, with no compromise but also no Grexit</li>
<ul>
<li>It's sometimes suggested that because Greece is presently running an obscenely large primary surplus (i.e., it's budget is heavily in the black before debt repayment is taken into account), it could just stop repayments, and abandon new borrowing. However, since the Greek government can't print Euros, the sustainability of this path would depend on the cooperation of the ECB to keep the prospect of bank panics at bay.</li>
</ul>
</ol>
<div>
So this week's negotiations will turn on whether the Greek government has managed credibly to cut off the possibility of accepting the Troika's terms and how much the rest of the Eurozone fears Grexit. </div>
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<h3 style="text-align: left;">
PS: Was the ECB trying to help Greece by refusing to accept its bonds as collateral?</h3>
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Last week, the ECB stopped accepting Greek government bonds as collateral for ECB loans. The immediate and obvious <a href="http://www.nakedcapitalism.com/2015/02/ecb-greece-drop-dead.html">interpretation</a> of this decision was that it continued the <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/the-ecb-and-policy-blackmail.html">pattern</a> (<a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/10/governing-by-panic.html">long version</a>) of using the withholding of ECB emergency lending as a form of policy leverage. Paul Krugman <a href="http://krugman.blogs.nytimes.com/2015/02/05/a-dance-with-draghi/">pleaded</a> unconvincingly that Draghi was too subtle for such a brutal display of strength, arguing that really this measure was meant to wake up Germany--a position the Greek government had little choice but to <a href="http://www.macropolis.gr/?i=portal.en.the-agora.2191">echo</a>. </div>
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One version of the claim that the ECB was not trying to intimidate Greece into accepting the Troika terms, proposed by <a href="http://coppolacomment.blogspot.co.uk/2015/02/what-on-earth-is-ecb-up-to.html">Frances Coppola</a>, rests on the idea was that weakening Greece strengthened its bargaining hand in a strategic context (as under 2, above). But the argument doesn't work: A bargaining analysis offers no support for the idea that the ECB was trying to help Greece. The ECB decision did nothing to make accepting the Troika conditions more difficult, or make Grexit relatively more attractive. Indeed, given that the ECB <a href="https://www.ecb.europa.eu/press/pr/date/2015/html/pr150204.en.html">explicitly mentioned</a> that it was the prospect of a failure in negotiations with the Troika over continued support for Greece that prompted the decision, it raised the benefits to Greece of a successful agreement. Moreover, to the extent that the decision signalled the likely attitude of the ECB toward supporting Greek banks in the absence of a successful agreement, it worked against option 4, as well. So to the extent that the ECB decision did reflect a bargaining logic (other things <a href="http://www.ft.com/cms/s/0/8f36e752-ad5d-11e4-97c1-00144feab7de.html?siteedition=uk">may have been at stake</a>), it would make sense only as an effort to coerce Greece, not to help it. </div>
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com4tag:blogger.com,1999:blog-3558944449806472503.post-61738493647382480002014-12-16T04:32:00.001-08:002014-12-20T02:08:08.759-08:00The Russian crisis and the Eurozone: some economic context <div dir="ltr" style="text-align: left;" trbidi="on">
Pretty dramatic things are happening with the Russian rouble. Its dollar value is as of yesterday just about half of what it was on average in 2013. <br />
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What does this mean for the eurozone? Over the course of the first decade of this century, oil revenues and the real appreciation of the rouble made the Russian economy much larger in euro terms than it had been, and it correspondingly became a more important export market for eurozone countries. The share of Russia in the eurozone's exports tripled between 1999 and 2008; while it has declined slightly since, 4.7% of eurozone exports went to Russia in 2013. Given that even the eurozone's anaemic growth since the financial crisis is <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/09/kalecki-and-the-ECB.html">entirely attributable to export growth</a>, this is not insignificant.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
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<tr><td class="tr-caption" style="text-align: center;"><div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdEzAU17h1LUCIMNilsAAEGM5Sh7NJSjAOyE6BDEyrMCGIBOCkgeRgb0z90Uk3qk9f6yNAMY-yaFdKl5VEeT1ZTbcJ07xTBpqnfI-lpVV4vgrWS6vVXLVAmkTEp_fJ9cUlN5VGQ__PMUXH/s1600/Russian+crisis.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdEzAU17h1LUCIMNilsAAEGM5Sh7NJSjAOyE6BDEyrMCGIBOCkgeRgb0z90Uk3qk9f6yNAMY-yaFdKl5VEeT1ZTbcJ07xTBpqnfI-lpVV4vgrWS6vVXLVAmkTEp_fJ9cUlN5VGQ__PMUXH/s1600/Russian+crisis.png" height="433" width="640" /></a></div>
Source: Eurostat, OECD, EIA, own calculations. Brent prices and export/import figures nominal</td></tr>
</tbody></table>
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In the chart, I've tried to give some indications of possible impacts of the rouble's fall by recalculating 2013 figures on Russian and eurozone GDP at yesterday's exchange rate, and giving a rough extrapolative estimate of how much exports to Russia might fall as a result of the declining purchasing power of Russian consumers in euro terms.<br />
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This estimate suggests a fall in sales to Russia of 0.5% of eurozone GDP, which would be highly significant, especially to an economy growing as slowly as the eurozone's is. However, there are potential compensating factors (and potential further dangers):<br />
<br />
<u>Potential compensating factors</u><br />
<br />
<ul style="text-align: left;">
<li>Russia's demand for imports may prove inelastic (consumers may not scale back purchases proportionately to the rouble's fall).</li>
<li>The eurozone will be spending less on importing oil, improving its trade balance. If consumers and businesses spend and invest the money no longer going to oil, this will promote growth. </li>
</ul>
<div>
<u>Potential further dangers</u></div>
<ul style="text-align: left;">
<li>In liquidity trap conditions, consumers and businesses may <i>not</i> spend and invest the savings from cheaper energy prices. Then falling energy prices would simply contribute to the severe risk of deflation in the eurozone.</li>
<li>There could potentially be serious consequences to the international financial system of Russian companies being unable to pay back dollar-denominated debt (see <a href="http://blogs.wsj.com/moneybeat/2014/12/15/russias-debt-problem-may-not-be-as-bad-as-it-seems/">here</a> for a relatively sanguine discussion of their payment prospects). <a href="http://www.google.co.uk/search?q=financial+fragility+minsky">Financial fragility</a> means that relatively small events can have a big impact. </li>
</ul>
</div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-88275589277296530952014-11-06T01:30:00.001-08:002014-11-06T05:42:26.840-08:00Why Mario Draghi's ECB colleagues just kneecapped his credibility: the politics of market tripwires<div dir="ltr" style="text-align: left;" trbidi="on">
<div style="text-align: left;">
<span style="font-family: inherit;">Something is afoot at the European Central Bank. People at the very top of the institution--leaders of the central banks of the member nations, and members of the small <a href="http://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html">Governing Council</a> responsible for key decisions--have apparently co-ordinated to anonymously <a href="http://uk.reuters.com/article/2014/11/04/uk-ecb-governors-idUKKBN0IO1H020141104">tell Reuters</a> just how very much they dislike Draghi's leadership style. He even looks at his mobile phones--all three of them--when they're trying to say important things to him! </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">I think it likely that these public complaints had a very specific goal--and it wasn't to get Mario to put his screens away. Instead, they are intended to weaken Draghi's influence over ECB policy and strengthen the influence of other members of the ECB Governing Council. To do this, it was necessary to weaken the credence markets give to Draghi's statements, and that the ECB insiders shaped their remarks accordingly--or so I argue in this post.</span></div>
<h1 style="text-align: left;">
<span style="font-size: large; line-height: 23px;"><b>The politics of market tripwires</b></span></h1>
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<div style="text-align: left;">
<span style="font-family: inherit;">To understand the conflict between Draghi and his colleagues, one needs to bear in mind that it is playing out on the backdrop of the intense attention financial markets pay to the pronouncements of central bankers. </span></div>
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<span style="font-family: inherit;"><br /></span></div>
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<span style="font-family: inherit;">Financial markets, as is well-known (read <a href="https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch12.htm">Keynes</a> on this) are characterised by self-fulfilling prophecies. If market participants believe an asset will fall in value, they will convert prediction into fact by selling it and driving down the price. Market participants thus have an understandable terror of being the last to sense a shift in the collective prophecy (more prosaically known as "market expectations"), unable to sell before the price has fallen or buy before it has risen. </span></div>
<div>
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">Thus, investors are especially sensitive to what I'll call "<b>market tripwires</b>" -- events expected to cause a general shift in market expectations. When one of these tripwires is triggered, investors rush to react as quickly as possible, in some circumstances creating a panic. An example of a market tripwire familiar from the financial pages is the earnings forecasts of stock market firms--whether these are met, exceeded, or undershot can set off large shifts in prices. </span></div>
<span style="font-family: inherit;"><br /></span></div>
<div>
<span style="font-family: inherit;">Sometimes, political actors create market tripwires in order to impose costs or constraints as a tool of influence. For example, the IMF's Michael Mussa accused Argentina's Finance Minister Domingo Cavallo of doing just this to pressure the IMF into extending more help as Argentina fought to stave off devaluation of the peso in the summer of 2001 (I assume the story is true, but don't know for certain; for present purposes it's enough that it <i>could</i> be true):</span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;"><span style="line-height: 16px;">Through leaks to the local press, the Argentine government circulated the story that the Fund … would augment [a planned] disbursement with an addition of about $8 billion. Financial market reacted positively to this news, and the bank runs slowed. ...</span>The suggested augmentation of Fund support was announced without consultations with the rest of the Argentine government. ... There were no prior consultations with the Fund, nor any prior indication of support from the Fund for a substantial augmentation of its lending. <b>Indeed, Cavallo's tactic was to force the Fund to augment its lending by creating a <i>fait accompli</i>. Financial markets and Argentine citizens reacted favorably to the announcement of augmented Fund support. If they were disappointed that this support was not forthcoming, the Fund (and the international community more broadly) would be responsible for the consequences.</b> [<span style="text-indent: -20px;">Mussa, Michael. 2002.</span><i style="text-indent: -20px;"> Argentina and the Fund: From Triumph to Tragedy.</i><span style="text-indent: -20px;"> Washington, DC: Institute for International Economics, p. 41-42]</span></span></blockquote>
<div style="text-align: left;">
<span style="font-family: inherit;">In our terms, Cavallo tried to create a market tripwire. He hoped to turn the IMF's failure to provide additional support into a signal for market panic, betting that the prospect of the panic would cause the IMF to agree to his demands. </span></div>
<div style="text-align: left;">
<h1 style="text-align: left;">
<b><span style="font-family: inherit; font-size: large;">Draghi's tripwires</span></b></h1>
</div>
<div style="text-align: left;">
<span style="font-family: inherit;">More than once, Draghi has used his status as the ECB's main spokesperson to do something very similar--make public announcements about policy, shifting market expectations, and implicitly (or explicitly, for all I know) inviting his ECB colleagues to contemplate the consequences of failing to carry out the policy.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">A highly consequential example was Draghi's famous "<a href="http://www.reuters.com/article/2012/09/25/us-ecb-draghi-plan-idUSBRE88O09A20120925">whatever it takes</a>" statement in July 2012, inserted into a prepared speech at the last minute.</span></div>
<blockquote class="tr_bq">
<span style="font-family: inherit;">Just as shocked were the ECB boss's aides and his colleagues on the bank's policymaking Governing Council, none of whom knew Draghi would make such a sweeping promise. "Nobody knew this was going to happen. Nobody," one senior ECB official said of the speech.</span></blockquote>
<span style="font-family: inherit;">The tactic worked. Draghi's statement had a huge immediate impact in alleviating panic on sovereign bond markets, creating a market tripwire: failure to agree on an official lender-of-last-resort programme would reignite the panic, almost certainly in worse form. The well-reported narratives of the ensuing <a href="http://www.reuters.com/article/2012/09/25/us-ecb-draghi-plan-idUSBRE88O09A20120925">hard</a> <a href="http://online.wsj.com/news/articles/SB10000872396390443507204578020323544183926">bargaining</a> that concluded with the announcement of <a href="http://en.wikipedia.org/wiki/Outright_Monetary_Transactions">OMT</a> demonstrate that Draghi's statement was made well before he could be sure that he could get support for the sort of programme he wanted. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">This week's anonymous attacks were motivated by an effort to prevent Draghi from doing it again. This time, the issue on the table is not bond market panic, but the threat of deflation, brought on by weak growth prospects and the contraction of ECB lending as banks pay back earlier ECB loans without taking on new ones. To deal with this contraction would <a href="http://www.economist.com/blogs/freeexchange/2014/11/economists-roundtable-euro-zone-1">necessarily</a> involve the buying Eurozone sovereign bonds (imprecisely known as Quantitative Easing, or QE), which German members of the ECB leadership <a href="http://blogs.wsj.com/economics/2014/10/07/qa-with-german-bundesbank-president-jens-weidmann/?KEYWORDS=jens%20weidmann">oppose</a>.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">In recent months, Draghi has clearly been trying to encourage the market to believe that this sovereign bond buying will happen, creating a market tripwire that he can use as leverage to make the program happen. Examples are:</span><br />
<div>
</div>
<br />
<ul style="-webkit-text-stroke-width: 0px; color: black; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; widows: auto; word-spacing: 0px;">
<li><span style="background-color: white; font-family: inherit; font-size: small;">Draghi's warning in his Jackson Hole speech--like "whatever it takes," inserted at the <a href="http://www.businessinsider.com/the-key-part-of-mario-draghis-jackson-hole-speech-2014-8?IR=T">last minute</a> beyond the control of the rest of the ECB leadership--that deflationary expectations were spreading and a promise that the ECB would "</span><span style="background-color: white; color: #222222; font-family: inherit;"><span style="font-size: small;">use all the available instruments" to try to fight them</span>.</span></li>
<li><span style="background-color: white; font-family: inherit;">A <a href="http://www.ecb.europa.eu/press/pressconf/2014/html/is140904.en.html">statement</a> in early September that the ECB would try to expand its balance sheet to the levels of early 2012 (ie, reverse the contraction of its lending) </span></li>
</ul>
<span style="font-family: inherit; line-height: 23px;">Members of the ECB Council are perfectly aware of what this manipulation of market expectations is intended to accomplish. <a href="http://uk.reuters.com/article/2014/11/04/uk-ecb-governors-idUKKBN0IO1H020141104">According</a> to one of Reuters' interviewees, the balance sheet statement,</span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;"><span style="background-color: white;">"...created exactly the expectations we wanted to avoid," an ECB insider said. "Now everything we do is measured against the aim of increasing the balance sheet by a trillion (euros)... He created a rod for our own backs."</span> </span></blockquote>
<div style="text-align: left;">
<span style="font-family: inherit;">You say that like it's a <i>bad</i> thing. Draghi wanted precisely that rod as a tool of policy influence. </span></div>
<h1>
<b><span style="font-size: large;">No, don't believe him</span></b></h1>
<div style="text-align: left;">
<span style="font-family: inherit;">Of course, market tripwires only work as a tool of policy influence if markets <i>believe</i> the statements intended to set them. Cavallo would have gained no leverage over the IMF if the announcement of an impending expansion of support had not slowed bank runs. "Whatever it takes" would not have helped the passage of OMT without its calming effects on the markets.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">So to disable the tripwire tactic, <strike>the German members of the ECB leadership</strike> Reuters' anonymous insiders set out to tell markets that Draghi is not to believed. </span></div>
<blockquote class="tr_bq">
<span style="background-color: white;"><span style="font-family: inherit;">"We specifically agreed at the meeting... not to put any numbers on the table," [said] one central banker. "Draghi's reference to the balance sheet of 2012 irritated a lot of colleagues. So he has had to backtrack a bit ... to compensate."</span></span></blockquote>
<div style="text-align: left;">
<span style="font-family: inherit;">In other words, just because Draghi promises something, it's not necessarily going to happen. It is precisely Draghi's ECB opponents need to make <i>this</i> point, I believe, that explains why these complaints were made in public rather than in private. In July 2012, Draghi <a href="http://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html">said</a>:</span></div>
<blockquote class="tr_bq">
<span style="background-color: white; text-align: justify;"><span style="font-family: inherit;">Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.</span></span></blockquote>
<div style="text-align: left;">
<span style="font-family: inherit;">What his ECB colleagues are saying is: no, don't believe him. Wait to hear from us.</span><br />
<span style="font-family: inherit;"><br /></span>
In particular, as becomes clear in the final paragraphs of the <a href="http://uk.reuters.com/article/2014/11/04/uk-ecb-governors-idUKKBN0IO1H020141104">Reuters piece</a>, don't believe Draghi if he hints that QE is coming. You can believe in QE if and when it is announced as an official policy. <span style="font-family: inherit;">The insiders claim that without a consensus for QE in the ECB--and it's currently opposed by "at<span style="background-color: white;"> least seven and possibly as many as 10 of the 24 council members"--it can't happen because it's too politically divisive. (On this matter, one can only hope that the ECB majority will listen to <a href="http://www.economist.com/blogs/freeexchange/2014/11/economists-roundtable-euro-zone-1">Paul de Grauwe</a>. A long as the ECB has unaccountable power, it should be used for good and not only <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/the-ecb-and-policy-blackmail.html">for evil</a>.) </span></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
</div>
<div>
<span style="font-family: inherit;">Kneecapping Draghi's credibility will make it harder for him to use his public announcements as a tool of unilateral policy-making, but it has costs, too. If the anonymous insiders succeed in turning Draghi into "the boy who cried QE," he will be unable to reassure the markets at moments when they need it most. For them that may be a <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/weidmann-for-one-misses-our-bond-market_10.html">feature</a> rather than a bug of their strategy, but the rest of us should fear the dismantling of whatever capacity there is to contain the dangerous fickleness intrinsic to financial markets, and the destruction of whatever limited hope there is that deflation can be <a href="http://edition.cnn.com/2014/06/05/business/opinion-ecb-woodruff/">avoided</a> without reversing austerity.</span></div>
</div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com1tag:blogger.com,1999:blog-3558944449806472503.post-37002408290053062052014-10-22T08:59:00.001-07:002014-10-26T02:24:18.515-07:00Governing by panic<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">Readers of this blog may be interested in my new <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2513391">paper</a>, "Governing by Panic: The Politics of the Eurozone Crisis." Here is the abstract:</span><br />
<div class="page" title="Page 3">
<div class="layoutArea">
<div class="column">
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span>
<br />
<blockquote class="tr_bq">
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">The Eurozone’s reaction to the economic crisis beginning in late 2008 involved both efforts to
mitigate the arbitrarily destructive effects of markets and vigorous pursuit of policies aimed
at austerity and deflation. To explain this paradoxical outcome, this paper builds on Karl
Polanyi’s account of how politics reached a similar deadlock in the 1930s. Polanyi argued that
democratic impulses pushed for the protective response to malfunctioning markets.
However, under the gold standard the prospect of currency panic afforded great political
influence to bankers, who used it to push for austerity, deflationary policies, and the political
marginalization of labor. Only with the achievement of this last would bankers and their
political allies countenance surrendering the gold standard. The paper reconstructs Polanyi’s
theory of “governing by panic” and uses it to explain the course of the Eurozone policy over
three key episodes in the course of 2010-2012. The prospect of panic on sovereign debt
markets served as a political weapon capable of limiting a protective response, wielded in
this case by the European Central Bank (ECB). Committed to the neoliberal “Brussels-Frankfurt consensus,” the ECB used the threat of staying idle during panic episodes to push
policies and institutional changes promoting austerity and deflation. Germany’s
Ordoliberalism, and its weight in European affairs, contributed to the credibility of this
threat. While in September 2012 the ECB did accept a lender-of-last-resort role for sovereign
debt, it did so only after successfully promoting institutional changes that severely
complicated any deviation from its preferred policies. </span></blockquote>
</div>
</div>
</div>
</div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-46009451708992109972014-10-20T11:24:00.000-07:002014-10-20T11:24:59.714-07:00When is a social democrat not a social democrat?<div dir="ltr" style="text-align: left;" trbidi="on">
<div style="text-align: left;">
<span style="font-family: inherit;">When he's Sigmar Gabriel, head of Germany's SPD and Minister for the Economy. Here's Mr Gabriel in an <a href="http://m.bild.de/politik/inland/sigmar-gabriel/ueber-steuerungerechtigkeit-38213868,variante=L.bildMobile.html">interview</a> with the Bild newspaper, defending the so-called "black null," the plan for a balanced budget:</span></div>
<blockquote class="tr_bq" style="text-align: left;">
<div style="text-align: left;">
<span style="font-family: inherit;"><span style="box-sizing: border-box; margin: 0px; padding: 0px;"><b>Bild</b>: There's a discussion in the SPD about whether or not new [government] debts ought to be incurred. Is budget discipline social-democratic? </span> </span></div>
</blockquote>
<blockquote class="tr_bq" style="text-align: left;">
<div style="text-align: left;">
<span style="font-family: inherit;"><strong style="box-sizing: border-box; margin: 0px; padding: 0px;">Gabriel:</strong> Yes. Workers [<i>Arbeitnehmer</i>] want their taxes to be spent on social security, schools, or policy and not on interest payments to big banks for government debt. Only big banks earn money from high government debts. Government borrowing is antisocial.</span></div>
</blockquote>
<blockquote class="tr_bq" style="text-align: left;">
<blockquote class="tr_bq">
<span style="font-family: inherit;"><strong style="box-sizing: border-box; margin: 0px; padding: 0px;"></strong></span></blockquote>
</blockquote>
<div style="text-align: left;">
<span style="font-family: inherit;">There's a major problem with this argument: </span>as <span style="background-color: white; line-height: 18px;">Ambrose Evans-Pritchard <a href="http://www.telegraph.co.uk/finance/economics/11168355/World-braces-as-deflation-tremors-hit-Eurozone-bond-markets.html">noted</a>, last week German government bond interest rates were "</span><span style="line-height: 20px;">touching levels never seen before in any major European country in recorded history." In fact, c</span><span style="font-family: inherit;">orrecting for inflation, Germany can literally borrow money interest-free: August's </span><a href="https://www.eecb.europa.eu/stats/prices/hicp/html/inflation.en.html" style="font-family: inherit;">inflation rate</a><span style="font-family: inherit;"> was 0.8% per year, and its ten-year bonds as of today </span><a href="http://www.bloomberg.com/quote/GDBR10:IND" style="font-family: inherit;">yield</a><span style="font-family: inherit;"> 0.85%. </span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">Anyone who cannot find a way for the state productively to invest interest-free loans cannot be characterised as a social democrat (there's </span>certainly<span style="font-family: inherit;"> plenty of <a href="http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11150306/German-model-is-ruinous-for-Germany-and-deadly-for-Europe.html">low-hanging fruit</a>). </span><span style="font-family: inherit;">For that matter, anyone who deliberately misleads workers about the costs of borrowing doesn't deserve the title either. </span></div>
</div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-1517131096646800992014-09-23T09:27:00.000-07:002014-09-26T02:25:36.146-07:00Kalecki and the ECB<div dir="ltr" style="text-align: left;" trbidi="on">
In 1943, Michael Kalecki <a href="http://courses.umass.edu/econ797a-rpollin/Kalecki--Political%20Aspects%20of%20Full%20Employment.pdf">gave</a> what has recently become a <a href="http://www.theguardian.com/commentisfree/2013/jan/14/deepening-mess-words-polish-economist">very</a> <a href="http://crookedtimber.org/2013/08/18/krugman-keynes-kalecki-konczal1/">influential</a> analysis of why it was that capitalists might object to Keynesian demand stimulus policies designed to ensure full employment. Such objections might seem puzzling, insofar as demand stimulus puts money in the hands of customers, selling to whom is how capitalists make their money. Kalecki argued that capitalists would indeed support stimulus to get out of recession for precisely this reason. However, they would object to using this policy to reach full employment (sacrificing profit as necessary), because<br />
<br />
<ul style="text-align: left;">
<li>Full employment raises worker bargaining power and undermines shop-floor discipline.</li>
<li>Deficit spending involves allocating money to people who haven't "earned" that money (for backup for the scare quotes see <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/commons-hale-polanyi-and-naturally.html">here</a>), challenging "the fundamentals of capitalist ethics [which] require that 'You shall earn your bread in sweat'--unless you happen to have private means." </li>
<li>For reasons explained <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/europes-missing-demand-model.html">here</a>, without deficit spending, investment is crucial to maintaining full employment. Governments who shake business confidence therefore provoke unemployment. "This gives to the capitalists a powerful indirect control over Government policy," which, Kalecki argues, they very much wish to preserve. Thus, "The social function of the doctrine of 'sound finance' [balanced budgets] is to make the level of employment dependent on the 'state of confidence'." </li>
</ul>
<div>
It's really rather remarkable the extent to which these three motivations have found echoes in the Eurocrat and German establishments' reaction to the Eurozone crisis. </div>
<div>
<ul style="text-align: left;">
<li>Calls for <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/08/draghis-duplicity-on-relative.html">structural reform</a> and especially <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/competitiveness-unit-labour-costs-and.html">competitiveness</a> are directed primarily at reducing worker bargaining power.</li>
<li>Moralised discourse about "earning" is <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/09/theodicyofmarkets.html">deeply entwined</a> with the export-led model that justifies the competitiveness emphasis.</li>
<li>Some officials have <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/weidmann-for-one-misses-our-bond-market_10.html">voiced</a> the idea that the "state of confidence" should determine policy quite directly (obviating Kalecki's <a href="http://scholar.google.co.uk/scholar?hl=en&as_sdt=0,5&q=marxism+functionalism">functionalism</a>.)</li>
</ul>
<div>
One might think that recent events--the <a href="http://www.ft.com/cms/s/0/16d54dd4-237a-11e4-8e29-00144feabdc0.html?siteedition=uk#slide0">end of growth</a>, the <a href="http://online.wsj.com/articles/eurozone-inflation-remains-at-record-lows-1410945335">fall of inflation</a> to just .4%, the increasingly <a href="http://ftalphaville.ft.com/tag/tltro/">manifest</a> limitations of ECB string-pushing--might be enough to change some minds. Perhaps--but not at the ECB. Here's an updated picture of the European demand situation (for background see <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/europes-missing-demand-model.html">here</a>).</div>
</div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh83x_U53oFU7NP1CbwEzSc4c66gAnU9ByYpR427HvMmSb372aIT03vKwrXMNxTfffS2mM1x3535AJj4aT8Wcykpg3DgYrSGkEN5TnCyVgX-lwozBk-12FU6psRB9sGw5t_jmlZIa97tEF7/s1600/1st+half+2014+components.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh83x_U53oFU7NP1CbwEzSc4c66gAnU9ByYpR427HvMmSb372aIT03vKwrXMNxTfffS2mM1x3535AJj4aT8Wcykpg3DgYrSGkEN5TnCyVgX-lwozBk-12FU6psRB9sGw5t_jmlZIa97tEF7/s1600/1st+half+2014+components.png" height="390" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: left;">Source: Eurostat, chain-linked prices with 2005 reference year; these figures show a small amount of growth in Q2 2014 , so they're more optimistic than the headline real figure of zero growth. Investment is "gross capital formation."</td></tr>
</tbody></table>
One could look at this and note that the economy has replaced only 2/3s of its lost growth, government consumption has dramatically failed to keep pace with even this anaemic growth, that household consumption is lower than it was five years ago, and conclude that it's no surprise that investment has fallen. What market would investment seek to tap? Even remarkable growth in the trade surplus can't compensate for missing domestic demand--stimulating the latter would seem the obvious policy.<br />
<br />
But Mario Draghi has a different take. As Kalecki would have expected of a capitalist, but perhaps not a public servant, it's the state of business confidence that's key. <a href="http://www.ecb.europa.eu/press/key/date/2014/html/sp140922.en.html">Here's</a> Draghi speaking to a committee of the European Parliament yesterday. <br />
<blockquote class="tr_bq">
the success of our measures critically depends on a number of factors outside of the realm of monetary policy. Courageous structural reforms and improvements in the competitiveness of the corporate sector are key to improving business environment. This would foster the urgently needed investment and create greater demand for credit. Structural reforms thus crucially complement the ECB’s accommodative monetary policy stance and further empower the effective transmission of monetary policy. As I have indicated now at several occasions, <i>no monetary – and also no fiscal – stimulus can ever have a meaningful effect without such structural reforms</i>. <b>The crisis will only be over when full confidence returns in the real economy and in particular in the capacity and willingness of firms to take risks, to invest, and to create jobs.</b> This depends on a variety of factors, including our monetary policy but also, and even most importantly, the implementation of structural reforms, upholding the credibility of the fiscal framework, and the strengthening of euro area governance.</blockquote>
<div>
Draghi clearly does not believe in Keynesian arguments. Consider the italicised words in the passage above. The idea that monetary stimulus won't work without structural reform is at least coherent--the idea is that there will be no demand for cheap loans without confidence in the business environment. But a fiscal stimulus does <i>not</i> depend on confidence in the same way--the government just spends the money.</div>
<div>
<br /></div>
<div>
As if further evidence were needed, when pressed about whether countries with a better fiscal balance should spend more expansively, all Draghi would say is that the <a href="http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/index_en.htm">country-specific policy recommendations</a> agreed by the European Council in July ought to be followed. For Germany, the <a href="http://ec.europa.eu/europe2020/pdf/csr2014/csr2014_council_germany_en.pdf">relevant recommendations</a> actually endorse rapid movement toward a budget surplus. </div>
<div>
<br /></div>
<div>
In sum, the evidence that the supposed change of tone of Draghi's Jackson Hole speech was <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/09/draghi-and-fiscal-demand-stimulus-hes.html">not serious</a> mounts.</div>
</div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-18927653242823008282014-09-11T05:12:00.001-07:002014-09-30T03:26:47.382-07:00Export orientation, supply-side thinking, and the theodicy of markets<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: inherit;">This blog has argued (hardly uniquely) that the focus of the German and Eurocrat policymaking establishment on <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/weidmanns-deceit-on-spanish-export.html">exports</a> and <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/competitiveness-unit-labour-costs-and.html">competitiveness</a> is <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/europes-missing-demand-model.html">destructive</a> for the Eurozone's economy. Today, I want to argue that there's an intellectual feedback loop between highlighting export-led growth and the belief that individual, company, or country merit determines economic success. This is very much work in progress, and I'd particularly welcome feedback.</span><br />
<blockquote class="twitter-tweet" lang="en">
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Kurt <a href="https://twitter.com/hashtag/Lauk?src=hash">#Lauk</a> eröffnet den <a href="https://twitter.com/hashtag/Wirtschaftstag?src=hash">#Wirtschaftstag</a>: Wirtschaftlicher Erfolg ist kein Geschenk, sondern muss jeden Tag hart erarbeitet werden.<a href="https://twitter.com/hashtag/wt2014?src=hash">#wt2014</a></span><br />
<span style="font-family: inherit;">— Wirtschaftsrat (@wirtschaftsrat) <a href="https://twitter.com/wirtschaftsrat/statuses/484671170563014658">July 3, 2014</a></span></blockquote>
Early in July, Angela Merkel's party, the CDU, held its "Economy Day." The head of the party's economic council began with <strike>an excerpt from the <i>Treasury of Teutonic Stereotypes</i></strike> a pronouncement. "Economic success is no gift;" he said, "rather, it must be earned every day through hard work." <span style="font-family: inherit;"><span style="background-color: #fbfbfb; line-height: 28px;"><br />I have a name for this kind of thinking: the "theodicy of markets." </span>In the study of religion, <a href="http://www.newyorker.com/arts/critics/books/2008/06/09/080609crbo_books_wood?currentPage=all">theodicy</a> refers to the problem of reconciling the existence of evil with the presence of a god both omnipotent and benevolent (here's a moving <a href="http://www.humansofnewyork.com/post/90268158526/ive-been-a-deep-believer-my-whole-life-18-years">example</a>). But <a href="http://www.britannica.com/EBchecked/topic/638565/Max-Weber">Max Weber</a> used the term more generally, to refer to a doctrine that explains and justifies good and bad fortune. He <a href="http://books.google.co.uk/books?id=t2R9AwAAQBAJ&lpg=PA271">wrote</a>:</span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">The fortunate is seldom satisfied with the fact of being fortunate. Beyond this, he needs to know that he has a <i>right </i>to his good fortune. He wants to be convinced that he ‘deserves’ it, and above all, that he deserves it in comparison with others.</span></blockquote>
<span style="font-family: inherit;">A theodicy, in Weber's sense, explains why people deserve what they get. A theodicy of markets argues that those who flourish in a market economy deserve to do so. The sentiment expressed above is an example: economic success is no gift--it's deserved, because it results from hard work.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Weber's argument--made in the context of religion--is that intellectuals work hard on their theodicies trying to make them logically coherent. The intellectual difficulties they confront drive the development of doctrine and thereby influence action.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">In this light, it's worth investigating the intellectual challenges facing the theodicy of markets.</span><br />
<span style="font-family: inherit;">Mapping desert (or merit) onto market outcomes is at best <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/commons-hale-polanyi-and-naturally.html">a dicey business</a>, because it implicitly involves endorsing the fairness of the multitude of bargaining situations determining relative prices. (Germany, for instance, is an exporter of luxury cars, demand for which probably has something to do with increased economic inequality in the countries beyond its borders.) To refer to "productivity" as justifying success is just to rename the problem, since productivity is measured with respect to output prices.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">More generally, at a very high level of abstraction, success in any endeavour is a joint product of merit (skill and effort) and circumstances. To maintain a claim that success is deserved, prediction of and adaptation to circumstances can be defined as part of the relevant success-generating effort. However, this move requires a very particular conception of circumstances: they must be amenable to prediction and, hence, fairly resistant to change, including change through the vagaries of deliberate human action. An actor's success under a given set of circumstances would otherwise have to be ascribed in part to some other actor's decision not to change those circumstances, downgrading the importance of desert. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Now in talking about the concrete issue of economic success such a conception of circumstances is, of course, quite absurd. The circumstances under which economic success is pursued can and do change due to deliberate action. Even Mr Lauk, who told us economic success is no gift, <a href="http://www.handelsblatt.com/politik/international/ruf-nach-echten-initiativen-cdu-wirtschaftsrat-mahnt-putin-zur-deeskalation/v_detail_tab_print/10254076.html">concedes in another context</a> that sanctions on Russia will damage the German economy. So prior economic success was, in part, a "gift" of good relations with Russia (not to mention the purchasing power gifted to Russian consumers by high oil prices). </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">So how does one maintain a theodicy of markets in the face of the manifest role of manipulable circumstances? Consider this remarkable July 2014 <a href="http://www.bis.org/review/r140718c.htm">statement</a> from Andreas Dombret, a member of the board of the Bundesbank:</span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">[The] strong influence of international trade [on Germany's recovery] worried some observers. Many felt that Germany's reliance on exports was risky, as it exposed Germany to the ups and downs of the global economy. ... </span></blockquote>
<blockquote class="tr_bq">
<b><span style="font-family: inherit;">I have doubts that turning away from global markets would strengthen the German economy. Facing global competition ensures that German companies keep up with technological progress and retain their high productivity. This might come at the price of higher volatility, but to me this seems like a price worth paying.</span></b></blockquote>
<div>
<span style="font-family: inherit;">The first thing to note is how very, very weak this is as a piece of economic argumentation. To claim that policy of supporting domestic demand is equivalent to a policy of insulating firms from international competition is absurd--indeed, one of the arguments sometimes made against demand stimulus is that its effectiveness is limited when consumers prefer foreign to domestic products. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Given the flimsy argument, maybe Dombret's statement is better understood as <a href="http://en.wikipedia.org/wiki/Motivated_reasoning">motivated reasoning</a> emerging from an emotional commitment to the theodicy of markets. In particular, it resolves the problem of reconciling merit with the role of circumstances by</span><br />
<ol>
<li><span style="font-family: inherit;">Partitioning circumstances under which economic success is pursued into the mutable (domestic demand) and the immutable ("the ups and downs of the global economy"). </span></li>
<li><span style="font-family: inherit;">Asserting that altering the mutable circumstances would undermine the promotion of merit ("productivity") and should thus be avoided.</span></li>
</ol>
<br />
<span style="font-family: inherit;">One implication of [1] is that there ought to be a strong "<a href="http://www.oxforddictionaries.com/definition/english/elective-affinity">elective affinity</a>" between a commitment to the theodicy of markets and support for an export-led demand model. Export performance is the true test of economic merit, precisely because exports are directed into a "global economy" imagined as impermeable to policy manipulation. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Imagined is the right word here, because of course "the ups and downs of the global economy" are strongly affected by policy decisions in individual nation-states. Or course, this problem could be avoided if every nation-state would accept the self-denying ordinance to ensure the triumph of merit by avoiding demand stimulus. Here's Bundesbank head Jens Weidmann throwing cold water on the idea that external circumstances should be changed in an interview with Le Monde (<a href="http://www.bundesbank.de/Redaktion/DE/Interviews/2014_08_13_weidmann_le_monde.html">German</a>, <a href="http://www.bundesbank.de/Redaktion/DE/Interviews/2014_08_13_weidmann_le_monde_frz.html">French</a>) last month:</span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">In general I am sceptically inclined to the idea that one can demand a contribution from others to one's own sustainable growth... Growth must instead come through one's own efforts. It is the responsibility not of the governments of neighbouring countries nor of the European Central Bank, but rather of each government to create a domestic environment that supports business innovation and employment.</span></blockquote>
<span style="font-family: inherit;">And <a href="http://www.bundesbank.de/Redaktion/EN/Reden/2014/2014_07_18_weidmann.html">here</a> he is in Spain in July:</span><br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #372f32; font-family: inherit;">At the time [of founding the Euro and agreeing the deficit-limiting Maastricht criteria], it was assumed that by constraining governments' ability to fiscally stimulate demand - and by shifting monetary policy to the European level - governments would have no choice but to implement structural reforms, improve their supply side, and strengthen their potential for sustainable growth.</span></blockquote>
</div>
<span style="font-family: inherit;">Note the use of the word "sustainable" in both contexts, which seems to me to be another tactic of displacement, analogous to the rejection of demand stimulus, an implicit assertion that the market generates morally appropriate outcomes, at least in the long run (when, of course, we're all dead).</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">To sum up, then: to sustain the idea that "economic success is no gift" requires some substantial mental gymnastics with deeply destructive consequences for economic policy; in particular, it promotes an unrealistic reliance on export demand. I'd be very curious to hear from readers whether they found this convincing and/or of interest.</span></div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-26839879087840207452014-09-10T05:06:00.000-07:002015-02-09T14:07:08.878-08:00Draghi and fiscal demand stimulus: he's not serious<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: inherit;">Mario Draghi's <a href="http://www.bis.org/review/r140826a.pdf">speech</a> in Jackson Hole last month has been <a href="http://www.nakedcapitalism.com/2014/08/blog-roundup-mario-draghis-speech-jackson-hole-mean-policy-shifts.html">widely seen</a> (one more <a href="http://www.flassbeck-economics.de/was-im-august-wichtig-war/">auf Deutsch</a>) as a bellwether, particularly for his discussion of the importance of <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/europes-missing-demand-model.html">increased demand</a> to ward off deflation and create growth.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">In plain language, Draghi seemed to many to be saying: austerity plus structural reform is not going to work; Germany needs to spend more and stop raising a fuss about budget deficits elsewhere in the Eurozone. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">I would have parsed the words of the speech differently, but in any event a better way of judging how serious Draghi is about promoting fiscal demand stimulus is to look at how he acts. And I think the evidence of the succeeding weeks strongly suggests that bringing fiscal stimulus to pass is low on his list of priorities. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">We have some information on how the ECB leadership has acted when it wants to promote particular fiscal or other policies on the part of Eurozone national governments.</span><br />
<br />
<ul>
<li><span style="font-family: inherit;">It makes maximum use of its bargaining leverage, <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/the-ecb-and-policy-blackmail.html">conditioning</a> its monetary actions on government policy.</span></li>
<li><span style="font-family: inherit;">Rather than viewing the Eurozone's governing treaties as a given, it advocates changes--as Draghi did when <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/the-fiscal-compact-as-obsolescing.html">pushing the fiscal compact</a> or more recently in his <a href="http://www.ecb.europa.eu/press/key/date/2014/html/sp140709_2.en.html">call</a> for more centralized control over structural reform. </span></li>
</ul>
<div>
<span style="font-family: inherit;">But we don't observe anything like a parallel assertiveness in pushing for fiscal stimulus at Draghi's recent <a href="http://www.ecb.europa.eu/press/pressconf/2014/html/is140904.en.html">press conference</a> or anywhere else. A counterfactual Draghi pushing stimulus with similar forcefulness would have</span></div>
<div>
<ul>
<li><span style="font-family: inherit;">Tried to exert leverage over German policy, for instance by throwing his weight behind the application of <a href="http://www.telegraph.co.uk/finance/economics/10758577/Germany-risks-EU-fines-with-record-current-account-surplus.html">external mandates and financial penalties</a> to reduce the German trade surplus (which would <a href="http://ec.europa.eu/economy_finance/publications/occasional_paper/2014/pdf/ocp174_en.pdf">require</a> stimulus of German domestic demand). After all, this is part of the <a href="http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_procedure/index_en.htm">legal framework</a> of the Eurozone, for other parts of which Draghi isn't in the least hesitant to advocate. He might even have hinted that monetary policy measures known to annoy Germany would be needed if these rules were not followed.</span></li>
<li><span style="font-family: inherit;">Stated that should budgetary rules not<i> </i>give sufficient flexibility to stimulate demand, they ought to be changed.</span></li>
</ul>
</div>
<div>
<span style="font-family: inherit;">Instead of this, what did we observe? (From last week's <a href="http://www.ecb.europa.eu/press/pressconf/2014/html/is140904.en.html">press conference</a>.)</span></div>
<div>
<ul>
<li><span style="font-family: inherit;">Draghi declined the opportunity offered by a questioner to address the need for expansive policy in Germany and other countries with low budget deficits.</span></li>
<li><span style="font-family: inherit;"><span style="background-color: white; text-align: justify;">He stated "the Stability and Growth Pact [setting out budget-balance rules] is our anchor of confidence ... [and its] rules should not be broken," and went on to say that "... discussions on flexibility should not be viewed or should not be such that they would undermine the essence of the Stability and Growth Pact."</span><span style="background-color: white; text-align: justify;"> </span></span></li>
</ul>
</div>
<div>
<span style="font-family: inherit;">Draghi's example of how one might use the flexibility of the SGP is also indicative of how distant he is from serious demand-stimulus advocacy:</span></div>
<blockquote class="tr_bq">
<span style="background-color: white; text-align: justify;"><span style="font-family: inherit;">Within the Stability and Growth Pact, one could do things that are growth-friendly and also would contribute to budget consolidation, and I gave an example of a balanced budget tax cut. Reducing taxes that are especially distortionary, where the short-term multipliers could be higher, and cutting expenditure in the most unproductive parts, so mostly, actually not mostly, entirely, current government expenditure.</span></span></blockquote>
<div>
<span style="font-family: inherit;">Since tax cuts put money in the hands of people already known not to be spending or investing enough, they're <a href="http://krugman.blogs.nytimes.com/2009/08/04/spending-versus-tax-cuts/">ineffective stimulus policy</a>, even more so when offset by spending cuts. And how does Draghi support the idea that this sort of policy might be good for "business confidence and private investment ... [even] in the short-term," in the words of his Jackson Hole <a href="http://www.bis.org/review/r140826a.pdf">speech</a>? Who's that hiding in footnote 15? Yes, it's <a href="http://krugman.blogs.nytimes.com/2014/07/30/useless-expertise/">Alberto Alesina</a> (<a href="http://krugman.blogs.nytimes.com/?s=alesina">more</a>).</span></div>
<div>
<span style="font-family: inherit;"><br /></span></div>
<div>
<span style="font-family: inherit;">Draghi did announce sweeping new monetary policies measures last week. But it don't mean a thing if you just <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/ecb-string-pushing.html">push that string</a>. People who <a href="http://www.ft.com/cms/s/0/578c7fce-3689-11e4-85be-00144feabdc0.html">think</a> Draghi is on the side of the demand-stimulus promoting angels now (including <a href="http://krugman.blogs.nytimes.com/2014/08/23/draghi-at-deflation-gulch/">Krugman</a>) are misreading the situation badly. The ECB <a href="http://www.ft.com/cms/s/0/190b32ae-d49a-11df-b230-00144feabdc0.html">went to war</a> for austerity and structural reform--it could do the same for stimulus, but it isn't. </span></div>
</div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-73925564590675168922014-08-15T07:47:00.001-07:002014-08-15T08:10:08.021-07:00The Bundesbank is not demanding an increase in German demand<span style="font-family: inherit;">Yesterday's very bad news that <a href="http://www.ft.com/cms/s/0/16d54dd4-237a-11e4-8e29-00144feabdc0.html#slide0http://www.ft.com/cms/s/0/16d54dd4-237a-11e4-8e29-00144feabdc0.html#slide0">growth has stopped in the the Eurozone</a> reflects the <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/europes-missing-demand-model.html">lack of a realistic demand model</a>: the ECB and much of the Eurocrat establishment see the key to growth as holding down worker wages in order to stimulate exports, but</span><br />
<ul>
<li><span style="font-family: inherit;">exports are and will remain too small to be an engine of growth for the Eurozone, especially because</span></li>
<li><span style="font-family: inherit;">this strategy suppresses domestic demand, raising the amount of growth impulse needed.</span></li>
</ul>
<span style="font-family: inherit;">So where is the demand going to come from? As the Eurozone's largest economy, Germany has a huge influence on aggregate demand. That it has practised a policy of <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/competitiveness-unit-labour-costs-and.html">wage restriction</a> makes recovery much harder throughout the currency block.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">On this backdrop, it's worth evaluating the Bundesbank's recent intervention in the discussion on wages in Germany. To foreshadow my conclusions:</span><br />
<br />
<ul>
<li><span style="font-family: inherit;">there is little evidence that the Bundesbank has embraced a demand-led growth model for Germany or the Eurozone</span></li>
<li><span style="font-family: inherit;">the Bundesbank's intervention focused on collectively bargained wages, but it's raising wages set outside collective bargaining that is the key issue</span></li>
</ul>
<br />
<b><span style="font-family: inherit;">Emergence of the debate</span></b><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">In a meeting with union leaders and economists in July, the Bundesbank chief economist Jens Ulbrich <a href="http://www.ft.com/cms/s/0/656ff1f6-10ec-11e4-94f3-00144feabdc0.html#axzz3AMvPiYI0">told them</a> (<a href="http://www.faz.net/aktuell/wirtschaft/konjunktur/bundesbank-chefvolksiwrt-jens-ulbrich-fuer-hoehere-loehne-13055591.html">more background</a>) that the time for wage restraint was over. This was already creating something of a stir before Bundesbank chief Jens Weidm<span id="goog_1697377960"></span><span id="goog_1697377961"></span>ann (<a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/weidmann-for-one-misses-our-bond-market_10.html">previously</a> <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/weidmanns-deceit-on-spanish-export.html">discussed</a>) <a href="http://www.bundesbank.de/Redaktion/DE/Themen/2014/2014_07_30_weidmann_ordnet_bundesbank_position_in_der_lohndebatte_ein.html?startpageId=Startseite-DE&startpageAreaId=Teaserbereich&startpageLinkName=2014_07_30_weidmann_ordnet_bundesbank_position_in_der_lohndebatte_ein+179346">said</a> a 3% raise for workers would be justified by a 1% increase in productivity and the ECB's 2% inflation goal (much higher than <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/incoherence-in-frankfurt-draghis-not.html">actual inflation</a> in Germany). </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Weidmann's intervention raised something of a ruckus. Employers were <a href="http://www.handelsblatt.com/politik/deutschland/hoehere-loehne-top-manager-vs-bundesbank-chef/10286356.html">not amused</a> and even a man who had <a href="http://www.spiegel.de/wirtschaft/soziales/wolfgang-muenchau-ueber-das-wahlprogramm-der-linken-a-919067.html">called</a> for a German government far to the left of the one now in power <a href="http://www.ft.com/cms/s/0/fb8b05e8-1968-11e4-8730-00144feabdc0.html">wrung his hands</a> about strengthening labour's bargaining position. From a different perspective, Francesco Saraceno <a href="http://fsaraceno.wordpress.com/2014/08/05/praising-the-bundesbank/">hailed this</a> as a big, positive change:</span><br />
<blockquote class="tr_bq">
<span style="background-color: white; font-family: inherit; line-height: 17px;">The call for wage increases in Germany signals, and it was about time, that even conservative German institutions are beginning to realize the obvious: there will be no rebalancing, and therefore no robust recovery, unless German domestic demand recovers. This means a fiscal expansion, as well as private expenditure recovery. Unsurprisingly, the Buba rules out the former, but it is nice to see that at least the latter has become an objective. Faster wage growth may not make a huge difference in quantitative terms, but it still marks an important change of attitude. This is a huge step away from the low-wage-high-productivity-export-led model that the Bundesbank and the German government have been preaching (and imposing to their partners).</span></blockquote>
<span style="font-family: inherit;">A shift to promotion of German domestic demand would indeed be a welcome development (<a href="http://blog.zeit.de/herdentrieb/2014/07/29/mit-hoeheren-loehnen-gegen-deflation_7623">Dieter Wermuth</a> makes a good case for it), but Weidmann's statement does not reflect such a shift.</span><br />
<span style="font-family: inherit;"><br /></span>
<b><span style="font-family: inherit;">The Bundesbank has not converted to a demand-stimulus model</span></b><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Crucial context for understanding Weidmann's statement comes from his recent <a href="http://www.bis.org/review/r140721b.htm">speech</a> in Spain</span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">In any case, deliberately weakening the competitiveness of Germany's export sector would harm, rather than benefit, the stressed countries' economies. We should bear in mind that German exports contain imported intermediate inputs from other euro-area countries amounting to 9 % of the overall added value. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: inherit;">If Germany were to accept the economic advice to excessively boost its wages in order to stimulate domestic demand, it would harm employment in Germany and, as a consequence, the economic situation in the entire euro area as simulation results show. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: inherit;">Despite this, it is clear that against the background of Germany's strong cyclical position and the tight labour market, wages will rise faster than in the rest of the euro area. We expect effective wages to rise more than 3 % this year and next year.</span></blockquote>
<span style="font-family: inherit;">Note, first, the explicit rejection of the idea that German wage policy should be based on stimulus of domestic demand--a point he repeated almost word for word in the <a href="http://www.bundesbank.de/Redaktion/DE/Themen/2014/2014_07_30_weidmann_ordnet_bundesbank_position_in_der_lohndebatte_ein.html?startpageId=Startseite-DE&startpageAreaId=Teaserbereich&startpageLinkName=2014_07_30_weidmann_ordnet_bundesbank_position_in_der_lohndebatte_ein+179346">interview</a> that set off the kerfluffle.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Note, second, the report of the 3% number as a prediction, rather than a goal. (In fact, Weidmann denied that the Bundesbank was making a suggestion about wage levels, something missed in a lot of the coverage.) If Weidmann really wanted to promote German demand to help the Eurozone, he could have pushed for a number above the trends. German Keynsian economist Peter Bofinger, for instance, <a href="http://www.spiegel.de/wirtschaft/unternehmen/peter-bofinger-wirtschaftsweiser-fordert-lohnplus-von-fuenf-prozent-a-875948.html">called</a> last year for a 5% increase in wages to promote Eurozone rebalancing.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="color: #231e20; line-height: 18px;">This year's collectively bargained wage round is producing raises of </span><a href="http://www.boeckler.de/14_50620.htm" style="line-height: 18px;">just over 3%</a><span style="color: #231e20; line-height: 18px;"> (though weighted ad personam, not ad valorem, apparently). So Weidmann's statement was hardly designed to move the trend.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">So if increasing demand wasn't Weidmann's target, what was? There seems every reason to accept his own justification--namely, that he was trying to ensure that wage negotiations were based on inflation expectations in line with monetary policy, just as the Bundesbank did in the <a href="http://www.people.fas.harvard.edu/~phall/PSGE_WP4_4.pdf">past</a>. It's simply that <a href="http://www.cicero.de/kapital/tarifpolitik-bundesbank-fordert-hoehere-loehne/58002">this time</a> the issue is inflation expectations are too low, rather than too high. There's no sign that this is based on an underlying economic model in which demand is crucial.</span><br />
<span style="font-family: inherit;"><br /></span>
<b><span style="font-family: inherit;">Collectively bargained wages are not the key issue</span></b><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;"><span style="background-color: white; color: #222222; line-height: 18px;">Germany is famous for its highly co-ordinated wage setting mechanisms. </span><span style="background-color: white; color: #222222; line-height: 18px;"><span style="color: #231e20;"> However, only <a href="https://www.destatis.de/DE/ZahlenFakten/ImFokus/VerdiensteArbeitskosten/Tarifbindung.html">half</a> of German workers are covered by coordinated wage bargaining arrangements. Furthermore, although collectively bargained wages in Germany lagged productivity before the crisis, they've done some catching up since (see chart).</span></span></span><br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCQSK9wlrfgmIzipR3nqKhpsMZI_75bxqURGyoW72k4HzJVeWFXdd7af2u1SFunpK6CLluqwz6afNVCbjiPPcyjnvSqwjjZfRhX8JlBp5M69SDc0KJUKEruR-0qYx0A9jAgdVCLmOBXGT0/s1600/productivityandwagesingermany.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCQSK9wlrfgmIzipR3nqKhpsMZI_75bxqURGyoW72k4HzJVeWFXdd7af2u1SFunpK6CLluqwz6afNVCbjiPPcyjnvSqwjjZfRhX8JlBp5M69SDc0KJUKEruR-0qYx0A9jAgdVCLmOBXGT0/s1600/productivityandwagesingermany.png" height="390" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="text-align: start;">Source: productivity from Eurostat, converted by me from GDP deflator to HICP deflator, whole-economy hourly compensation from OECD, bargained wages from </span><span style="text-align: start;"><a href="https://www.destatis.de/DE/Publikationen/Thematisch/VerdiensteArbeitskosten/Tarifverdienste/TarifverdiensteHj2160400135324.pdf?__blob=publicationFile">Statistisches Bundesamt</a></span></td></tr>
</tbody></table>
<br />
<span style="color: #231e20;"><span style="line-height: 18px;">The chart reveals that it's clearly the non-unionised workers that have been dragging German wage levels down. And Weidmann in fact has <a href="http://www.bundesbank.de/Redaktion/DE/Reden/2014/2014_07_03_weidmann.html">argued against</a> recent measures to introduce a minimum wage in Germany. It's clear that he continues to view wages primarily as determinants of costs rather than determinants of demand. </span></span><br />
<span style="color: #231e20;"><span style="line-height: 18px;"><br /></span></span>
<span style="color: #231e20;"><span style="line-height: 18px;">In sum, for all that we should welcome the Bundesbank's willingness to countenance wage rises, it's still a long way from backing the sort of demand-led policy that could turn the Eurozone's economic crisis around. </span></span><br />
<blockquote class="tr_bq">
</blockquote>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-16642964669744178132014-08-07T23:34:00.000-07:002014-08-07T23:34:38.652-07:00Draghi's duplicity on the relative importance of structural reform and demand for investmentMario Draghi once again cited the importance of structural reform at <a href="http://www.ecb.europa.eu/press/pressconf/2014/html/is140807.en.html">yesterday's ECB press conference</a>, suggesting weaknesses in structural reform (his examples had to do with the ease of opening businesses) explained weak investment. <br />
<blockquote class="tr_bq">
...one of the components of the low GDP figure for Italy is the significantly low level of private investment, while one would observe a rebound in private consumption. As far as private investment is concerned, one observes a very low figure, especially low figure of private investment. This isn’t unique in the euro area. <b>The levels of private investment for the euro area as a whole is low</b>, and certainly much lower than it is in other parts of the world, like in the United States. </blockquote>
<blockquote class="tr_bq">
Then <b>we ask ourselves why this is so</b>. Now, certainly it’s not the cost of capital, because interest rates, nominal and real interest rates, have been low. And in some parts of the euro area they are negative, and have been negative for quite a long time.</blockquote>
<blockquote class="tr_bq">
So the answers are: <b>one has to do with expected demand</b>. But the second answer has to do with the reforms, uncertainty, the general uncertainty the lack of structural reforms produces a very powerful factor that discourages investment. </blockquote>
<blockquote class="tr_bq">
There are stories of investors who would like to create, to build plants and equipment and create jobs, but it takes them months to get an authorisation to do so. There are stories of young people who tried to open their business, and it takes 8 to 9 months before they can do so. That has nothing to do with monetary policy. </blockquote>
<blockquote class="tr_bq">
So<b> it’s mostly the lack of structural reforms. </b>I keep on saying the same thing, really – reforms in the labour market, in the product markets, in the competition, in the judiciary and so on and so forth. These would be the reforms which actually have and have shown to have a short-term benefit.</blockquote>
<div>
Ok, so here's a very simple test of that claim. If low investment mostly has to do with the lack of structural reform, rather than demand, we ought to see no significant variation in investment levels during periods of high versus low demand. </div>
<div>
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgF_ysLMKBuoWDXgioeP5uaiSRH3Q_s31nH7up7th6smAShv0L4SwC4xDjQSrsZhpVPpHPTYMcSRKaiwr1jCnOlgxjavIC_jJqIScjqBjgpWLX-__kbGG67B96Od4G5IcBf0lMjAouWivfO/s1600/investment.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgF_ysLMKBuoWDXgioeP5uaiSRH3Q_s31nH7up7th6smAShv0L4SwC4xDjQSrsZhpVPpHPTYMcSRKaiwr1jCnOlgxjavIC_jJqIScjqBjgpWLX-__kbGG67B96Od4G5IcBf0lMjAouWivfO/s1600/investment.png" height="390" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: Eurostat, defining investment loosely as gross capital formation</td></tr>
</tbody></table>
<div>
To say low post-crisis investment is explained "mostly [by] the lack of structural reforms," is, not to put too fine a point on it, to lie. That arranging investment is harder than it should be is bad. But it's blatantly obvious that these difficulties were compatible with much higher levels of investment in the recent past.</div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-51023700855989957022014-07-28T08:44:00.000-07:002014-08-08T12:17:52.814-07:00Competitiveness, unit labour costs, and the class struggle<span style="font-family: inherit;">It's hard to spend much time reading about the Eurozone crisis without coming across the term "unit labour costs" (ULC). There's a common narrative (see <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/background-germanys-government-is.html">this post</a>) that says that the Eurozone peripheral countries let their ULCs get out of control before the crisis, losing competitiveness, and now they have to get those costs back down. For instance, <a href="http://www.bis.org/review/r140228b.htm">here</a>'s Mario Draghi earlier this year:</span><br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #372f32;"><span style="font-family: inherit;">...most of the stressed euro area countries have made remarkable progress in gaining competitiveness. Over the past five years, the cumulative unit labour cost differential vis-à-vis the euro area have fallen by more than 20 percentage points in Ireland, around 15 percentage points in Greece and Spain, and almost 10 percentage points in Portugal. This was accompanied by substantial improvements in the export dynamics of these countries.</span></span></blockquote>
This narrative is illustrated with charts like this one:<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjM1XOY4JATXWhRvX0wYkqSkHeKIIrSCw0qGhTWZ4RUxIBFxB13CtiRC-mvU2gAnlvuz7gfYDMZYwZeMPHni0NYx1JPku-ZFrU0g8bg0LvpzapzJ0tDXUhpIiijUKfBQELtli-n2XHuxfwv/s1600/ulc+280714.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjM1XOY4JATXWhRvX0wYkqSkHeKIIrSCw0qGhTWZ4RUxIBFxB13CtiRC-mvU2gAnlvuz7gfYDMZYwZeMPHni0NYx1JPku-ZFrU0g8bg0LvpzapzJ0tDXUhpIiijUKfBQELtli-n2XHuxfwv/s1600/ulc+280714.png" height="390" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><a href="http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/dataset?p_product_code=TIPSLM20">Source</a></td></tr>
</tbody></table>
<span style="color: #231e20;">However, there's somewhat more to this than meets the eye. Unit labour costs are a unitless ratio--the share of labour compensation (including non-wage costs) in total value added in the economy, also known as GDP. What's compared on this chart is actually something known as <i>nominal </i>unit labour costs (NULC; all this is explained in this <a href="http://www.levyinstitute.org/pubs/wp_651.pdf">paper</a>, which I wasn't sure I believed at first, but I've checked against the official <a href="http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/dataset?p_product_code=TIPSLM20">definition</a> from Eurostat, confirmed that the calculation is done as I describe below, and that the <a href="http://sdw.ecb.europa.eu/browse.do?node=2120786">numbers</a> the ECB reports as unit labour costs are these same ones) that are meant to have a monetary significance. Here's the formula for calculating nominal unit labour costs, with some algebra done</span><br />
<blockquote class="tr_bq">
<span style="color: #231e20;">NULC = (labour compensation/GDP) * price index * correction for self-employment</span> </blockquote>
<blockquote class="tr_bq">
For simplicity's sake, let's ignore the last term, and call the first term "labour's portion," meaning the portion of value-added that goes to labour, rather than profits. So the formula becomes</blockquote>
<blockquote class="tr_bq">
NULC = labour's portion * price index</blockquote>
In the presence of inflation, all a rising NULC means <b>labour's portion is not falling as fast as inflation is rising. It does <i>not </i>necessarily mean that wage gains are outstripping inflation, productivity, or anything like that. </b>The chart below is based on exactly the same underlying data as the first chart (including the same correction for self-employment), but without the effects of inflation.<br />
<div style="text-align: left;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyl-NNwnix6oCHrRdwQ3kbYdYPwEhrof2sUxPen4WDr4_XwuJQ9Ly1CSgPiWSonSZS0smTkGeWRjvNwesQorwZ9gUQPEgdQR28iY8ReksPpn_zyg6VGemo-GzuFnanjTFrT58wdSg9FVB_/s1600/labours+portion.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyl-NNwnix6oCHrRdwQ3kbYdYPwEhrof2sUxPen4WDr4_XwuJQ9Ly1CSgPiWSonSZS0smTkGeWRjvNwesQorwZ9gUQPEgdQR28iY8ReksPpn_zyg6VGemo-GzuFnanjTFrT58wdSg9FVB_/s1600/labours+portion.png" height="390" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><a href="http://ec.europa.eu/economy_finance/db_indicators/ameco/zipped_en.htm">Source</a>; I assumed no change from 1999-2000 in Greece due to missing data.</td></tr>
</tbody></table>
Note how different this chart looks from the previous one! In the run-up to the crisis, there was absolutely no general redistribution to employees in the PIIGS. As of 2007, in fact, in all of them save Ireland, employees were getting a smaller portion of value-added than in 2000. Wage restriction in Spain was almost identical to that in Germany. (The spike in Ireland in 2008-2009 is largely due to the rapid fall in GDP, with compensation growth falling more slowly; I take it that GDP is generally a weird number for Ireland due to domiciling issues, so that might have something to do with it as well.) <br />
<br />
So, the differences in NULC reflect to some extent slower redistribution of value-added away from employees in Portugal, Italy, Ireland, and Greece than in Germany, but mostly national differences in inflation. And at a first glance, it's hard to make the case that these national differences in inflation themselves stem from excessive worker bargaining power outside of Germany. I'm still a neophyte in working with these figures, but this seems to me to be a problem for the position often taken by political scientists that NULC outcomes reflect institutional differences across the Eurozone. For instance, Peter Hall <a href="http://www.tandfonline.com/doi/pdf/10.1080/09644008.2012.739614">claims</a> that <span style="font-family: inherit;">"<span style="color: #231e20;">industrial relations institutions promote the co-ordinated wage bargaining that can be used to hold down labour costs." </span></span><br />
<span style="font-family: inherit;"><span style="color: #231e20;"><br /></span></span>
<br />
<div>
<span style="color: #231e20;">In any event, the NULC these days has become the de facto operationalisation of "competitiveness" for the ECB and dominant elite Eurozone opinion. On this definition, "become more competitive" translates into "labour should be receiving a smaller portion of value-added." Promotion of competitiveness has become class struggle (or distributional struggle, if you prefer) by another name. Promotion of competitiveness so defined is also identical to suppression of domestic demand, worsening the problem of the Eurozone's <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/europes-missing-demand-model.html">missing demand model</a>. </span></div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-87648162086123706592014-07-24T07:57:00.001-07:002014-07-24T07:57:46.641-07:00Europe's missing demand model<b>I. Keynes - the very quick version</b><br />
<br />
Keynes had lots of important insights, but I think the most crucial one is underplayed in my field of comparative political economy. The crucial insight is this: in a capitalist economy, workers can't afford to buy everything they make. Since to be profitable, the price of a good must equal its cost plus a mark-up, and wages are costs, aggregate wages must be less than the aggregate price of goods offered for sale. Thus, the only way for everything to be bought would be if the people drawing profits spent all of them (in addition to wage-earners spending all their wages). But they don't. Let's call this the "<a href="http://en.wikipedia.org/wiki/Underconsumption">underconsumption</a> problem."<br />
<br />
The rest of his theory can be viewed as an answer to the question of how, then, can everything be bought? How can the underconsumption problem be solved? Keynes emphasised (a quick version of his key points is <a href="http://www.jstor.org/stable/1882087">here</a>) above all that some people draw wages for investment projects that do not lead to immediate sales, which they can then use to purchase consumer goods (or services). Thus, how easy it is to keep people employed to make stuff for immediate sale depends on how much investment is going on.<br />
<br />
Investment depends on the mood of investors, which, Keynes convincingly argued, can vary wildly for no particularly good reason. If investment is too low to keep people employed, we should do something about it. Central banks, for instance, can lower interest rates, making borrowing cheaper and hopefully prompting more investment. However, interest rates are subject to the "zero lower bound"--central banks can't pay people to borrow money. When even interest-free lending doesn't prompt enough investment to keep people employed, monetary policy is "<a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/ecb-string-pushing.html">pushing on a string</a>."<br />
<br />
If investment isn't doing the job, then to buy up all the consumer goods on offer and keep people employed there needs to be some other source of spending, or demand, in particular <i>spending in excess of income </i>(spending just your income means you buy only as much as you sell, and thus you can't help make up for the fact that people in general don't want to buy everything they sell)<i>.</i> This is why Keynesians advocate government "deficit spending" as a form of "demand stimulus." But consumers, not just government, can spend in excess of income via borrowing. <a href="http://pubman.mpdl.mpg.de/pubman/item/escidoc:1232424:3/component/escidoc:2030504/BJPIR_11_2009_Crouch.pdf">Colin Crouch</a> made a seminal contribution by coining the term "privatized Keynesianism" to refer to a systematic effort to get consumers to play this role.<br />
<br />
For the individual country, another option is (net) exports. However, it's not possible for every country to export more than it imports.<br />
<br />
<b>II. Does the Eurozone have a demand model?</b><br />
<b><br /></b>
Different nation-states have found very different solutions to the underconsumption problem, or what you might call different demand models. Demand models seem to be quite enduring (see Monica Prasad's <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674066526">recent book</a> and this <a href="http://ser.oxfordjournals.org/content/early/2010/08/18/ser.mwq017.short">article</a> from Fred Block; also <a href="http://www.tandfonline.com/doi/pdf/10.1080/09644008.2012.739614">Peter Hall</a> and <a href="http://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780199206483.001.0001/acprof-9780199206483-chapter-3">David Soskice</a> who have supplemented their initially exclusively supply-side Varieties of Capitalism approach with more attention to demand-side factors.)<br />
<br />
However, Germany is <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/background-germanys-government-is.html">promoting</a> its famously (or <a href="http://www.ft.com/cms/s/0/291a5ca6-42ec-11e3-8350-00144feabdc0.html#axzz38NMOBUAv">notoriously</a>) export-focused demand model for the Eurozone as a whole. I've made the following excellent chart to help us consider how that's working out. (Data from <a href="http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nama_gdp_k&lang=en">here</a>; I'm using the term investment slightly imprecisely to refer to gross capital formation.) Below the line we can see elements of the GDP--which are just the Keynesian sources of demand described above.<br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDYoM-ZnGMHFLcoZIchuJbrZfK2tdNAonU8P3vvpZ3z7nGUJlleS6XRvHiEfoXO-u_TvfycTJJMq1_6u6OmFEZw5n4hyphenhyphenuK9WuGmSm_uO5CeWPQhlllBde60HbC6mjF36hkh6mN4FOvbdmB/s1600/GDP+and+components+2009-2013.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDYoM-ZnGMHFLcoZIchuJbrZfK2tdNAonU8P3vvpZ3z7nGUJlleS6XRvHiEfoXO-u_TvfycTJJMq1_6u6OmFEZw5n4hyphenhyphenuK9WuGmSm_uO5CeWPQhlllBde60HbC6mjF36hkh6mN4FOvbdmB/s1600/GDP+and+components+2009-2013.png" height="387" width="640" /></a></div>
<br />
Some conclusions:<br />
<br />
<ul>
<li>Five years from the onset of the crisis, the Eurozone has recovered only a bit more than half its lost GDP.</li>
<li>This is despite a staggering tripling in the trade surplus.</li>
<li>Export growth slowed dramatically in 2013.</li>
<li>There is no sign that export growth is feeding through to investment or household consumption.</li>
</ul>
<br />
So the answer is no--Europe does not have a sustainable demand model. All the sources of demand other than exports are stagnant or falling, and exports cannot be relied upon to replace them.<br />
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-65393231255033994532014-07-24T05:03:00.000-07:002014-07-24T05:03:00.514-07:00Weidmann's deceit on Spanish export growth<div>
Bundesbank Chief Jens Weidmann gave a <a href="http://www.bis.org/review/r140721b.htm">speech</a> in Madrid on Monday. He followed Draghi in <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/why-draghi-put-lipstick-on-piigs.html">putting lipstick on the PIIGS</a>, or the S anyway:</div>
<blockquote class="tr_bq">
<span style="background-color: white; color: #372f32; font-family: 'Segoe UI', Arial, Geneva, Helvetica, sans-serif; font-size: 13px;">Thanks to improved competitiveness, Spanish exports have risen by 8 % over the past 12 months. Since the cyclical trough in 2009, exports have even risen by more than 50 %, with intermediate goods showing particularly strong growth.</span></blockquote>
Hmm. When I look at ECB stats <a href="http://sdw.ecb.europa.eu/browseTable.do?REF_AREA=143&node=9484523&sfl2=4&DATASET=0&DATASET=1&sfl3=3">here</a>, I get only a 36.1% rise in Spanish exports since 2009. I presume heads are already rolling in Weidmann's office.<br />
<br />
But the stats do show 8.1% growth in exports over the past 12 months. So maybe I was <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/07/why-draghi-put-lipstick-on-piigs.html">wrong</a> about slowing Spanish export growth? No, actually Weidmann's doing a spectacular job of lying with statistics. Look at this chart:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3257Txzh3YFIGN4oS3Lzjzw4vlZSoKl625qHFxfyBNwHhDHWe2XMLshvxHeKyP9ePCoD7iSqPTbhNJ6bDonbceQwKHOhQumOm1qZVWshfbJGVNdUhm11VcjuvUGFEV6P27dlHU054ewxr/s1600/Untitled.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3257Txzh3YFIGN4oS3Lzjzw4vlZSoKl625qHFxfyBNwHhDHWe2XMLshvxHeKyP9ePCoD7iSqPTbhNJ6bDonbceQwKHOhQumOm1qZVWshfbJGVNdUhm11VcjuvUGFEV6P27dlHU054ewxr/s1600/Untitled.png" height="390" width="640" /></a></div>
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<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: left;">
As you can see, the 8.1% figure stems from a big drop-off in Q1 2013. There's no acceleration against the recent trend--if anything the <a href="http://www.ft.com/cms/s/0/3e68de94-10e5-11e4-812b-00144feabdc0.html?siteedition=uk#axzz38NMOBUAv">opposite</a>. Weidmann's cherry-picking to make his case look good. Even with this help, the case that there's a significant "competitiveness" component to export growth is hard to make:</div>
<div class="separator" style="clear: both; text-align: left;">
</div>
<ul>
<li>Export growth was much faster in 2009-2010, <i>before</i> the competitiveness improvements Weidmann's touting--presumably because Spanish companies had rapidly to find ways to export things Spaniards couldn't afford any more.</li>
<li>If the economy were becoming generally more competitive, imports should be capturing a smaller share of domestic demand. In fact, their share has risen continuously since 2009 and reached what was at least a 10-year high in 2013. </li>
</ul>
<br />
<div class="separator" style="clear: both; text-align: left;">
Why are figures about export growth so important that Weidmann and Draghi feel compelled to be deceptive about them? The reason is that they want to make the case that their preferred policy of austerity plus structural reform (which involves holding down wages) is a reasonable model of growth. For this to be so, exports must be able to drive growth. Consider what their policies do to the other sources of demand:</div>
<div class="separator" style="clear: both; text-align: left;">
</div>
<ul>
<li>Government final consumption - restricted by austerity </li>
<li>Household final consumption - restricted by austerity and structural reform</li>
<li>Investment (Gross capital formation) - so far held down by anaemic growth prospects </li>
</ul>
<br />
<div class="separator" style="clear: both; text-align: left;">
This leaves just the trade surplus as a possible source of growth. For this reason, if advocates of austerity and structural reform want to be optimistic about the future, they have to trumpet--and sometimes exaggerate--export performance. Stay tuned for another post about the weaknesses of this demand model.</div>
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<div class="separator" style="clear: both; text-align: left;">
PS: The Spanish export growth numbers are a bit different than in my previous post, presumably due to some combination of the facts that these are real rather than nominal figures and quarterly rather than annual ones, but that doesn't change the big picture.</div>
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<a href="https://www.blogger.com/"></a>David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-65553444800282159102014-07-10T12:02:00.001-07:002014-07-10T12:33:26.257-07:00Why Draghi put lipstick on the PIIGS<span style="font-family: inherit;">In London yesterday, Draghi made a <a href="http://www.ecb.europa.eu/press/key/date/2014/html/sp140709_2.en.html">speech</a> in which he advocated more centralised control over "structural reform" (liberalizing labour and other markets) for members of the Eurozone. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">In making the case that structural reform would be a good idea, Draghi implicitly relied on the <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/background-germanys-government-is.html">badly misguided</a> idea that it's feasible to generalise the German model of wage suppression and export-led growth. And to make this case, he said something demonstrably misleading:</span><br />
<blockquote class="tr_bq">
<span style="background-color: white; text-align: justify;"><span style="font-family: inherit;">[W]e have seen the improvement that has taken place when governments implemented reform. The change in current account positions in stressed countries ranges from an almost 11 percentage point correction of GDP in Spain to a 16 percentage point improvement in GDP in Greece [clearly since <a href="http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&language=en&pcode=tec00043">2008</a>-DW], only part of which is explained by lower imports in the context of a recession.</span></span></blockquote>
<span style="font-family: inherit;">So, "current account positions" is exports minus imports (trade balance) plus some other stuff not very important for these countries. Draghi is claiming that trade balance in the "stressed countries" (<a href="http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&language=en&pcode=tec00043">presumably</a> the <a href="http://en.wikipedia.org/wiki/PIGS_(economics)">PIIGS</a> minus Italy) is improving not just because imports are sinking because people are too poor to afford them, but also because exports are increasing. This is supposed to substantiate the idea that export-led growth is a reasonable model.</span><br />
<span style="font-family: inherit;"><br /></span>
It's not, and a closer look at the two countries Draghi cited proves it. (Data for the claims below come from <a href="http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nama_gdp_c&lang=en">here</a> and you can find my calculations <a href="https://www.dropbox.com/s/5ro9ef7r3p7adj1/lipstick%20on%20piigs.xlsx">here</a>.)<br />
<br />
For Greece, Draghi's claim is not even true. Greek exports are still below what they were in 2008, even in nominal terms. Greece's trade balance in 2008 was -14.5% of GDP; if there had been no fall-off in imports it would been -20% of GDP instead of the -2.6% it actually was in 2013. (It's a tiny bit less misleading if you were to start in 2009 instead of 2008, but even over this period the rise in exports was less than a third of the fall in imports).<br />
<br />
For Spain, what Draghi said was true. The rise in Spanish exports over this period was more than double the fall in imports. But the idea that this is a promising sign of a shift to a new sustainable model is laughable.<br />
<ul>
<li>Over the last five years, increased exports have replaced only 40% of Spain's loss of domestic demand</li>
<li>Since 2008, Spain's exports have increased in nominal value at 4.91% per year. At this rate, even assuming domestic demand stops falling, Spain can expect to have replaced its lost domestic demand half way through 2020. </li>
<li>Most of the gains in Spanish exports were actually in 2010-2011. More recently exports have been growing at 4% a year -- fast enough to replace lost domestic demand in the first quarter of 2022. </li>
</ul>
<div>
Even in the better case for him, Draghi is touting as vindication trends that amount to a recipe for not just a lost decade, but a lost 12-14 years (even in nominal terms). Impressive.</div>
David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-80725054826186774482014-07-04T06:49:00.001-07:002014-07-16T07:04:00.799-07:00Commons, Hale, Polanyi, and, naturally, Piketty<div>
<b>I. Commons and Hale: Capitalism is a bargaining power economy in which coercion is omnipresent</b><br />
<br />
The great institutional economist <a href="http://en.wikipedia.org/wiki/John_R._Commons">John R. Commons </a><a href="http://socserv2.socsci.mcmaster.ca/econ/ugcm/3ll3/commons/LegalFoundationsCapitalism.pdf">specified</a> (see pages 65-69) that to understand any apparently bilateral transaction one must actually look at five parties:<br />
<ol>
<li>the buyer</li>
<li>the seller </li>
<li>the buyer's next best option</li>
<li>the seller's next best option</li>
<li>the state, which shapes what the parties are allowed to do, what they are allowed to agree to, and whether and how agreements will be enforced. </li>
</ol>
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This is the minimal information one needs to understand bargaining power in the individual transaction, and thus the determinants of prices and wages.<br />
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One consequence of this, especially clearly set out by <a href="http://www.utexas.edu/law/journals/tlr/sources/Volume%2092/Issue%206/Rogers/Rogers.fn091.Hale.CoercionDistribution.pdf">Robert Hale</a>, is that it's not useful to think about market economies as eliminating coercion by enabling people to engage in voluntary transactions. As soon as you realise parties to transactions have to choose between available options what counts as "voluntary" becomes entirely a matter of taste. "Your money or your life," "Accept my wage offer or starve," "Accept my wage offer or live on the dole," "Accept my wage offer or the one 10% lower at an easier job," "Buy this candy bar for £1.10 or walk to the next shop and buy an identical one for £1.05" are all choices. I've arranged them in rough order of how much subjective sense of coercion we might feel, from most to least, but there's no point at which you can draw a line and say: here's where the coercion starts. </div>
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<br />
<b>II. Polanyi: The meaninglessness of self-sufficiency in the net of bargained prices</b></div>
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Now, dear, patient reader, please consider the following passage from <strike>the sacred writ</strike> Polanyi's <i><a href="http://www.beacon.org/productdetails.cfm?PC=1310">The Great Transformation</a>:</i><br />
<blockquote class="tr_bq">
<blockquote class="tr_bq">
Liberal economy gave a false direction to our ideals. It seemed to approximate the fulfillment of intrinsically utopian expectations. No society is possible in which power and compulsion are absent, nor a world in which force has no function. It was an illusion to assume a society shaped by man’s will and wish alone. Yet this was the result of a market view of society which equated economics with contractual relationships, and contractual relations with freedom. ... Vision was limited by the market which “fragmentated” life into the producers’ sector that ended when his product reached the market, and the sector of the consumer for whom all goods sprang from the market. The one derived his income “freely” from the market, the other spent it “freely” there. Society as a whole remained invisible. The power of the state was of no account, since the less its power, the smoother the market mechanism would function. <b>Neither voters, nor owners, neither producers, nor consumers could be held responsible for such brutal restrictions of freedom as were involved in the occurrence of unemployment and destitution. Any decent individual could imagine himself free from all responsibility for acts of compulsion on the part of a state which he, personally, rejected; or for economic suffering in society from which he, personally, had not benefited. He was “paying his way,” was “in nobody’s debt,” and was unentangled in the evil of power and economic value. His lack of responsibility for them seemed so evident that he denied their reality in the name of his freedom.</b> </blockquote>
</blockquote>
<blockquote class="tr_bq">
<blockquote class="tr_bq">
But power and economic value are a paradigm of social reality. They do not spring from human volition; noncooperation is impossible in regard to them.<br />
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<div style="text-align: right;">
(2001 ed., p. 266-267)</div>
</blockquote>
</blockquote>
How are we to make sense of Polanyi's implication, that "every decent individual" is entangled in power and economic value? The idea of capitalism as a bargaining power economy helps quite a bit. In such an economy, each bargain struck or contemplated involves a balancing of threats and opportunities that are part of a vast interconnected net of bargaining contexts. For example:<br />
<br />
<ul>
<li>A consumer who has paid a low price for one good may be better able to pay a higher price for another, allowing that seller to capture a higher share of the <a href="http://en.wikipedia.org/wiki/Economic_surplus#Consumer_surplus">consumer surplus</a>. </li>
<li>An employer paying high wages may be able to bargain harder with suppliers, by making them aware of the tight margins these wages imply. </li>
</ul>
<br />
To buy, to sell, to consume, to produce is necessarily to introduce ripples into this interconnected net, expanding the choices of some, narrowing those of others, redistributing, minutely or massively, coercive capacities. One pulls at the net's strings as soon as one chooses one purchase over another, helping to establish the current and prospective economic value of both. Unemployment and destitution, as prospects or realities, shape wage and price bargains, sending out their own ripples. Any state with a remotely serious claim to a monopoly of legitimate violence is in the net as well, often constituting the resources bargained over (such as money and property), employing physical coercion against some to defend the property rights of others, everywhere affecting bargaining power. <br />
<br />
Polanyi's suggesting that the language of self-reliance, "paying your way," being "in nobody's debt,"<br />
obscures the "reality of society," the reality of the net--obscures how every individual in a market economy is causally implicated in all sorts of coercion that seem quite distant from her at first glance. Going a bit further, to ascribe <i>moral </i>status to paying your way is to implicitly to ascribe legitimacy to the price system that shapes your income and spending. If you thriftily make all your purchases at Wal-Mart so you can spend less than you earn, you're "paying your way," but you're doing so by taking advantage of, and contributing to, the company's enormous bargaining power in its dealings with suppliers and workers.<br />
<br />
By the same reasoning, recognition of the net of bargaining power makes it extremely hard to give a sensible definition of a "meritocratic" income distribution. <a href="http://scholar.harvard.edu/files/mankiw/files/spreading_the_wealth_around.pdf">Some people</a> believe that in a well-functioning market economy people are paid according to their marginal product and that this is what they deserve (although the second is <a href="http://www.nybooks.com/articles/archives/1982/mar/04/just-deserts/">not</a> a logical implication of the first). But marginal product is defined as the addition to firm revenue achieved by hiring the person in question, and so again fundamentally depends on the price system. A moral defence of meritocracy along these lines would have to begin with a defence of the legitimacy of the prices shaped by the net of bargaining power (as Hale pointed out nearly a century ago). As an outstanding example of such a defence let me cite... well, actually, let me know if you ever see one; I haven't. Without such a defence, advocacy of meritocracy obscures the omnipresence of bargaining power just as the language of self-reliance does.<br />
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<b>III. Piketty, meritocracy, and bargaining power</b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq2lLXZHmJh5rqsi5KnV0NwrzssweDs1nBkZUO07SJsqLUd7e438C3gQAl1_qEhldw5kjt7QVlKoPqTWJhMmfKMyZRMw8heerehd8QGNLkAn34ZA6fLgGv8rovVtopu4WvGEENOr2yLcr8/s1600/photo-11.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img alt="" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq2lLXZHmJh5rqsi5KnV0NwrzssweDs1nBkZUO07SJsqLUd7e438C3gQAl1_qEhldw5kjt7QVlKoPqTWJhMmfKMyZRMw8heerehd8QGNLkAn34ZA6fLgGv8rovVtopu4WvGEENOr2yLcr8/s1600/photo-11.JPG" height="320" title="" width="240" /></a>One of the most interesting criticisms of Piketty, to my mind, is that he ignores the processes that give rise to profits and the rate of return on capital. Here's an influential <a href="http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/04/22/adam-smith-is-not-the-antidote-to-thomas-piketty/">take</a> from Deborah Boucoyannis, building on her <a href="http://blogs.lse.ac.uk/politicsandpolicy/archives/39622">outstanding reading of Adam Smith</a>:<br />
<blockquote class="tr_bq">
Where Smith emerges as more “radical” [than Piketty], ironically, is in his insistence that if we see high profits (a high r) it is sophistry, deception, and power that are to blame, not <a href="http://gabriel-zucman.eu/files/PikettyZucman2014HID.pdf">technology and trade increasing demand for capital</a>. He may have said, faced with Piketty’s turn to taxation to fight inequality, that this treats the symptom, not the disease; that we should not be just treating inequality as pathological and inefficient, but high profits, too. As I argued also <a href="http://blogs.lse.ac.uk/politicsandpolicy/archives/39622">here</a>, unless we start seeing high profits as a symptom of something wrong, any effort to limit them, either before or after taxes, will founder faced with the “insolent outrage of furious and disappointed monopolists.” </blockquote>
In other words, Smith is more radical than Piketty because he offers a critique of excessive bargaining power and an analysis of its origins. Galbraith also <a href="http://www.dissentmagazine.org/article/kapital-for-the-twenty-first-century">attacks</a> at the same point, arguing for a reconfiguring of the bargaining power net:<br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.</span></blockquote>
What I'd like to suggest is that one reason Piketty ignores this issue is his ambivalent, but still real, affection for the meritocratic ideal. It's very easy to start making an argument about merit and immediately assuming the moral legitimacy of the price system that is merit's metric, and this is a trap into which Piketty falls.<br />
<br />
The case is a little bit difficult to make, because Piketty really is very ambivalent. At some points Piketty comes off as an advocate of meritocracy who believes it crucial to democracy, and who fears that patterns of wealth accumulation will undermine it.</div>
<blockquote class="tr_bq">
Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents. This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. Inequalities must therefore be just and useful to all, at least in the realm of discourse and as far as possible in reality as well. <span style="text-align: right;">(p. 422)</span></blockquote>
Piketty the engineer of meritocracy on rational and universal principles is on display in his proposal for a highly progressive income tax. On the basis of his own and others' research, Piketty concludes that there is an enormous gulf between what US top executives are paid and their contribution to productivity. (He can be quite scathing on the misuse of "meritocratic extremism" as a mere cover story for vast divergences in pay unrelated to performance; p.417,487.) His diagnosis of the causes is that the top executives are winning this outrageous level of compensation from bargaining hard with "incestuous" corporate boards. And thus he proposes 80% marginal rates on high incomes, as this would reduce managers' incentive to push for high compensation, which would "drastically reduce remuneration [at the top] but without reducing the productivity of the US economy, so that pay would rise at lower levels."(p. 512).<br />
<br />
I submit that the principle of meritocracy has really limited the scope of this argument. Piketty is only able to produce his critique of managerial pay in excess of productivity by accepting the field of prices that determines productivity. He finds such a disjuncture that he decides to look at what distorted meritocracy <i>in this case</i> and comes up with a bargaining situation that he hopes to re-engineer. But he never considers the possibility that the economy is bargaining situations all the way down, presumably because this would deprive him of a meaningful standard by which to measure productivity. That he assumes that pay denied managers would pass downwards, without offering any bargaining-power argument for this claim, is a striking illustration of the problem. <br />
<br />
There's a second reason Piketty's proposals don't focus on tweaking the bargaining power net. Despite his analysis of excessive executive compensation, he doesn't seem to believe that such assessments are generally possible<br />
<blockquote class="tr_bq">
[We need to] move beyond the futile debate about the moral hierarchy of wealth. Every fortune is partially justified yet potentially excessive. Outright theft is rare, as is absolute merit. (p.443) </blockquote>
<blockquote class="tr_bq">
Broadly speaking, the central fact is that [wealth accumulation] often inextricably combines elements of true entrepreneurial labor (an absolutely indispensable force for economic development), pure luck (one happens at the right moment to buy a promising asset at a good price), and outright theft [not so rare, then?]. The arbitrariness of wealth accumulation is a much broader phenomenon than the arbitrariness of inheritance. (p. 446)</blockquote>
And this is why Piketty advocates his progressive global wealth tax. Forget about creating a fair economy; it can't be done. Just tax wealth, whatever its origins. Remarkably enough, both the attractions of meritocracy and its practical infeasibility turn out to give reasons to stay away from a restructuring of bargaining power--which is what a fairer capitalism would really need.<br />
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P.S. I've had Polanyi on the brain even more than usual thanks to a wonderful talk by and stimulating conversation with Peggy Somers this week--she and Fred Block have more on Polanyi's views on the "reality of society" in their great <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674050716">new book</a>.<br />
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David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-50978190708766653202014-06-30T02:14:00.001-07:002014-06-30T04:50:53.603-07:00The ECB and policy "blackmail"<span style="font-family: inherit;">Süddeutsche Zeitung has conducted a fun <a href="http://www.ecb.europa.eu/press/inter/date/2014/html/sp140628.en.html">interview</a> with French ECB Executive Board member Benoît Cœuré and two radical activists. Central bankers should sit down with people who think capitalism is doomed more often.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">One of the activists recalled (slightly inaccurately) an incident from August of 2011. At the time, interest rates on Italian and Spanish bonds were spiking, amid fears of a self-fulfilling prophecy about the sustainability of their debts. </span><br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiorSoZR6wYu7re6nxgpacedZVANeTkvubSC4dEonz1JStfMU8RLqfquTQer_j63WGVlaGiRsMXQbclBM6PSf171-cFUYbQ_1qoydmq193MJ01l2lSPmq6FWooq1zvShOV-0VoGa-urQnxX/s1600/Bond+rates+and+SMP.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: inherit;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiorSoZR6wYu7re6nxgpacedZVANeTkvubSC4dEonz1JStfMU8RLqfquTQer_j63WGVlaGiRsMXQbclBM6PSf171-cFUYbQ_1qoydmq193MJ01l2lSPmq6FWooq1zvShOV-0VoGa-urQnxX/s1600/Bond+rates+and+SMP.png" height="242" width="400" /></span></a><br />
<span style="font-family: inherit;"><br /></span></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: inherit; font-size: x-small;">Source: 10-year bond benchmark from Datastream; SMP purchases laboriously hand-compiled from <a href="http://www.ecb.europa.eu/mopo/implement/omo/html/communication.en.html">ECB statements</a></span></td></tr>
</tbody></table>
<span style="font-family: inherit;">On August 5th, ECB then-president Trichet sent secret letters to <a href="http://www.corriere.it/economia/11_settembre_29/trichet_draghi_inglese_304a5f1e-ea59-11e0-ae06-4da866778017.shtml">Italian PM Berlusconi</a> and <a href="http://ep00.epimg.net/descargables/2013/11/27/2b10649fe77a0775a23fb7eb465ab974.pdf">Spanish PM Zapatero</a> with a list of measures that should be urgently adopted to <span style="text-indent: 18px;">“restore the confidence of investors.” The letters were immediately understood as specifying preconditions for the ECB intervening to buy bonds. The activist referred to this as "blackmail," as the ECB was threatening to ignore the bond market panic if the measures were not adopted. </span>Cœuré replied:</span><br />
<blockquote class="tr_bq">
<span style="background-color: white; text-align: justify;"><span style="font-family: inherit;">The ECB does not blackmail anyone. The case you have mentioned refers to the purchase of government bonds under the Securities Markets Programme (SMP). What the ECB wanted to make clear was that our monetary policy can only be effective if governments themselves carry out reforms that address the root causes of the crisis. No monetary policy measure can have the desired effect if that is not given.</span></span></blockquote>
<span style="font-family: inherit;">Yes, well, if you believe that, I'm sure Monsieur Cœuré would welcome your expression of interest in purchasing the <a href="http://en.wikipedia.org/wiki/George_C._Parker">Pont d'Avignon</a>. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">On July 11th 2011, Mario Draghi (who cosigned Trichet's letter to Berlusconi), <a href="http://www.ft.com/cms/s/0/d114be22-ad2c-11e0-a24e-00144feabdc0.html?siteedition=uk#axzz366tqUu5B">praised</a> a just-passed Italian austerity package and called for a push to balance the Italian budget by 2014. Just over three weeks later, Trichet and Draghi, in their secret letter, called for the budget to be balanced by 2013. Would Cœuré care to argue that there was some change in the "root causes of the crisis" that required this acceleration? </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">If the ECB had wanted to, it could have thrown its weight behind the measures Italy had already adopted. Trichet could have said that the bond markets were displaying "<a href="http://www.zeit.de/2012/36/01-Euro-Krise-Europaeische-Zentralbank/komplettansicht">fear and irrationality</a>" about the bonds of the country with the <a href="http://blogs.wsj.com/brussels/2011/08/08/italy-pays-for-sins-of-the-past/">highest primary surplus</a> in the Eurozone, and pledged to <a href="http://www.ft.com/cms/s/0/955dcf18-fa57-11e0-b70d-00144feab49a.html">put a floor </a>under bond prices. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Instead, the ECB tried to <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/weidmann-for-one-misses-our-bond-market_10.html">use the panic to maximize its influence</a>. The chart above--which shows aggregated ECB bond purchases for all countries--suggests quite strongly that the ECB stopped trying very hard to change prices when Berlusconi proved unable to get the measures in the letter through Parliament (for this argument, see Irwin's <a href="https://kindle.amazon.com/work/the-alchemists-inside-central-bankers-ebook/B008QPCKR2/B00ABLJ1XK">The Alchemists</a>.) Blackmail is not an unreasonable term for this. </span>David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0tag:blogger.com,1999:blog-3558944449806472503.post-21220862980969651622014-06-25T09:16:00.002-07:002014-06-25T09:16:40.061-07:00Market 'discipline' and game theoryHot off the presses at the APSR, a new <a href="http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=9283390&fulltextType=RA&fileId=S0003055414000100">article</a> from Kelemen and Teo:<br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">...we argue that balanced budget rules work by coordinating </span><span style="font-family: inherit;">decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of </span><span style="font-family: inherit;">judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the </span><span style="font-family: inherit;">strength of its judicial enforcement mechanisms, determines its effectiveness.</span></blockquote>
Ok, so: bond markets are all about herd behaviour (focal points allow bond investors to <a href="https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch12.htm">guess what everyone else will do</a>, and do the same thing). Properly structured institutions are those that use herd behaviour to enforce balanced budgets, by having a well defined trigger for firing off a "stampede now" flare.<br />
<br />
The authors judge the Eurozone's <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/the-fiscal-compact-as-obsolescing.html">fiscal compact</a> by this standard and find it wanting because its rules on budget deficits are insufficiently clear, due to its effort to make room for counter-cyclical policy by referring only to a "structural" budget deficit. In addition, the possibility of bailouts via the ESM reduces incentives to maintain balanced budgets. But all hope is not lost:<br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">Nevertheless, because of the remaining uncertainty about the availability of bailouts for any given state and the extent of “private sector</span> <span style="font-family: inherit;">involvement” (including losses imposed on bondholders), bond markets can still play a constructive role in restraining excessive state borrowing. However, this will only be the case where bond markets are presented with sufficiently clear focal points.</span></blockquote>
As the authors recognize, their argument is structurally identical to the Hadfield-Weingast <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/the-rule-of-law-and-game-theory.html">argument</a> about the coordinating role of law. Like Hadfield and Weingast, they similarly dismiss the prospect of successful judicial enforcement <i>a priori</i>, implicitly suggesting that they are better informed about political realities than the leaders who haggled over enforcement rules <a href="http://www.notre-europe.eu/media/pdf.php?file=NewTreaty_V.Kreilinger_NE_Feb2012.pdf">vigorously</a>. <br />
<br />
More striking, however, is the way this framing of the issue slides into normative assertions. The equilibrium outcome (states follow budget rules because otherwise bond holders fall into a panic) is invested with a positive normative status that is not questioned. Despite quite explicitly conceptualising bond markets as driven by herd mentality, the only question they ask is the circumstances under which bond markets can be "constructive;" that is, how this herd mentality can successfully be turned into a <a href="http://www2.owen.vanderbilt.edu/mike.shor/courses/gtheory/docs/Strangelove.html">doomsday machine</a> to enforce budget rules. They simply don't consider the possibility that having doomsday machines around might not be the <a href="http://en.wikipedia.org/wiki/Stanislav_Petrov">height of wisdom</a>, nor <a href="http://politicaleconomyinpublic.blogspot.co.uk/2014/06/weidmann-for-one-misses-our-bond-market_10.html">the political implications</a> of using markets as an enforcement mechanism to override democracy.<br />
<br />
Another problem with this framing is that they evaluate fiscal rules only from the point of view of their enforceability, rather than whether or not they are a good idea for other reasons. Thus, they attack a budget rule making space for anti-cyclical spending for being unenforceable by bond markets, but never defend the idea that pro-cyclical economic policy is a good thing. Enforceability is not a useful evaluative stance in any event, because it doesn't discriminate very well among different rules: "your budget deficit must never exceed 50% of GDP, wherever you are in the business cycle" would be brilliantly clear and thus enforceable, but presumably the authors wouldn't like it very much.<br />
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<br />David Woodruffhttp://www.blogger.com/profile/05324493442439870360noreply@blogger.com0