How Trump Could Stay in Power Despite Losing the Vote -- the US Constitution and Frustrated Majorities

     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 quite unrealistic 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.

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.

In the 21^st 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^th century. 

Obama, FDR, and the Fed

Eric Rauchway has written an excellent review 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, 

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.”

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 Winter War and in less detail but larger context in his equally indispensable Money Makers—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. 

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 “governing by panic,” 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 saw its political significance as enormous precisely because it weakened the power of financiers to dictate policy by threatening a market meltdown. 

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. 

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 Monetary History 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.

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^th century. In Money Makers, 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.

The early 21^st 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.

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 arguing 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 essay, invites us to

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 ex machina 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.

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?

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. 

JS Mill on Brexit

Back in the 19^th 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 put it:

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; 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].

     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. 

     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. 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 overview of the Brexit endgame that makes use of the concept). Brinkmanship only 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.  

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 kto kogo . 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. 

Germany's trade unions and its export surplus: Streeck's mistake

In the latest LRB, Wolfgang Streeck asserts the following:

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. 

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 website of the German Trade Union Confederation (DGB), an organisation including the aforementioned pre-eminent German union IG Metall, had this to say:

Export surplus: We need more domestic demand!

...

Strengthen purchasing power, support imports 

[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 [Tarifbindung] 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.

Similarly, an economics think-tank that's part of the DGB-affiliated Hans-Bockler-Stiftung recently argued that the best policy against the export surplus would combine higher wages with increased government spending for investment purposes.

Hmm, maybe an exception? How about this, from a 2010 IG Metall analysis (page 12):

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...

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. 

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.

Update

Just one more piece of evidence, from the report adopted by the 485 delegates to IG Metall's 2015 congress ("Gewerkschaftstag"), as an authoritative a statement of official union policy as I can find (pp. 77-78):

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. ...

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. 

Constitutions, Credible Commitment, and Brexit

In a famous paper, 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. 

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 “Westminster model.” 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.

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.

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. Immigrants from the EU, 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. Prospective university students 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. Corporations sited operations in the UK, relying on its integration with the EU and access to the EU’s single market. Some people in Northern Ireland probably acquiesced in continued British rule because they relied on membership of the EU rendering the internal Irish border less significant.    

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 role of Scotland or the claim that the Government can rely on “royal prerogative” 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.

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.  


P.S.:

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 here.

Joseph Singer wrote a great article seeking to extend the notion of property rights building on the idea of reliance.

Independent central banks, democracy, and Skcolidlog

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 selection and policy goals mean there’s not too little democracy either. Just right? 

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.

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 before (and at length here). 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.

But lately, the shoe may seem to be on the other foot. Consider this exchange at Draghi’s September 2016 press conference: 

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.

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.

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 once again how low fiscal stimulus is on his list of priorities, but that is beside the point for now). 

While ECB leaders’ protestations of their limited influence in promoting austerity are unconvincing, 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.

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.  

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 likened 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. 

A very simple game-theoretic analysis (which builds on Blinder’s 1982 discussion 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.

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. 

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. 

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. 

What, then, is to be done? Some people argue 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 argued 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. 

Experiments in political science and the Cartwright critique

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 fraud or poor judgement more likely.

To the extent that bad behaviour reflects incentives, one can always try to to police against it more vigorously. But changing incentives may be more effective. In this spirit, I'd like to encourage political scientists to stop being so damned excited by experiments and offering such big reputational rewards for them!

As a reason to calm down, consider some arguments (or great lecture version) from the brilliant philosopher of science Nancy Cartwright. 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!

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.

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 (p.102), "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.

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 O of an experiment are the experimental intervention I (such as lever pushing) + the rest of the mechanism M.  

So the question becomes, why the emphasis on I rather than M?

• 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 M will function in the same way. This assumption can be criticised even in a medical context, but for social scientists the issue is orders of magnitude more significant. 
• 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 I, it's hard to remember that the M is important too.
• I will often have been chosen precisely because it's the aspect of a broader mechanism that is easiest to manipulate. If the effects of M 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 never have any basis sanctioned by their own methodological precepts to assert that the results of one experiment have any generalisable implications whatsoever.

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.

PS: Cartwright's is not the only impressive critique of experimentalism on offer; I especially recommend Dawn Teele's edited volume. 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?

Puffing the magic Draghi

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 value of the euro, which is a problem for a Eurozone demand model heavily reliant on exports.

Maybe Mario will be cheered up after Politico published a puff piece about him today. I wasn't; the article veered from the uninformative to actively misleading, reporting inter alia:  

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. ... 

He is prodding EU governments to boost spending to put the European recovery back on a path to growth. ... 

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.

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 arguments 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 key role (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 put it, "don’t blame the fire damage on the fire brigade."

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 press conference: 

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?

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.

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:

• Draghi has more than once 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.
• 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 p.11).

Can Greece escape the ultimatum game? (And no, Draghi's not trying to help them do it)

At the start of a crucial week 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 game theory a very simple diagram (yes, it is game theory, but it's very straightforward).  Here it is:

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.

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 "ultimatum game;" Greece has to take whatever the EC offers, because otherwise it's faced with the catastrophe of Grexit.

So how can the Greek government change the game?

1. 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?  
• To announce this might set off an even worse banking panic than Greece is currently experiencing.
• It only works if the EC reliably prefers compromise to Grexit.
• It might not be believed
2. 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)
• This is one way to interpret Tsipras' "defiant" speech yesterday, in which he promised very publicly and very vigorously that Greece will not accept a continuation of the present Troika. (Political scientists just love 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 this discussion by Jacques Sapir.)
• Again, this only works if the EC fears Grexit; Varoufakis is trying to make sure that they do
3. Convince the EC leaders that compromise should be be preferred to Troika terms. So far this doesn't seem to be going very well.
4. Find a way to create another possible outcome, with no compromise but also no Grexit
• 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.

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.  

PS: Was the ECB trying to help Greece by refusing to accept its bonds as collateral?

Last week, the ECB stopped accepting Greek government bonds as collateral for ECB loans. The immediate and obvious interpretation of this decision was that it continued the pattern (long version) of using the withholding of ECB emergency lending as a form of policy leverage. Paul Krugman pleaded 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 echo.  

One version of the claim that the ECB was not trying to intimidate Greece into accepting the Troika terms, proposed by Frances Coppola, 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 explicitly mentioned 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 may have been at stake), it would make sense only as an effort to coerce Greece, not to help it. 

The Russian crisis and the Eurozone: some economic context

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.

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 entirely attributable to export growth, this is not insignificant.

Source: Eurostat, OECD, EIA, own calculations. Brent prices and export/import figures nominal

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.

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):

Potential compensating factors

• Russia's demand for imports may prove inelastic (consumers may not scale back purchases proportionately to the rouble's fall).
• 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. 

Potential further dangers

• In liquidity trap conditions, consumers and businesses may not 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.
• There could potentially be serious consequences to the international financial system of Russian companies being unable to pay back dollar-denominated debt (see here for a relatively sanguine discussion of their payment prospects). Financial fragility means that relatively small events can have a big impact. 

Why Mario Draghi's ECB colleagues just kneecapped his credibility: the politics of market tripwires

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 Governing Council responsible for key decisions--have apparently co-ordinated to anonymously tell Reuters 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! 

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.

The politics of market tripwires

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.  

Financial markets, as is well-known (read Keynes 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. 

Thus, investors are especially sensitive to what I'll call "market tripwires" -- 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. 

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 could be true):

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. ...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. Indeed, Cavallo's tactic was to force the Fund to augment its lending by creating a fait accompli. 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. [Mussa, Michael. 2002. Argentina and the Fund: From Triumph to Tragedy. Washington, DC: Institute for International Economics, p. 41-42]

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.  

Draghi's tripwires

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.

A highly consequential example was Draghi's famous "whatever it takes" statement in July 2012, inserted into a prepared speech at the last minute.

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.

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 hard bargaining that concluded with the announcement of OMT 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. 

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 necessarily involve the buying Eurozone sovereign bonds (imprecisely known as Quantitative Easing, or QE), which German members of the ECB leadership oppose.

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:

• Draghi's warning in his Jackson Hole speech--like "whatever it takes," inserted at the last minute beyond the control of the rest of the ECB leadership--that deflationary expectations were spreading and a promise that the ECB would "use all the available instruments" to try to fight them.
• A statement 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) 

Members of the ECB Council are perfectly aware of what this manipulation of market expectations is intended to accomplish.  According to one of Reuters' interviewees, the balance sheet statement,

"...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." 

You say that like it's a bad thing. Draghi wanted precisely that rod as a tool of policy influence. 

No, don't believe him

Of course, market tripwires only work as a tool of policy influence if markets believe 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.

So to disable the tripwire tactic, the German members of the ECB leadership Reuters' anonymous insiders set out to tell markets that Draghi is not to believed.  

"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."

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 this point, I believe, that explains why these complaints were made in public rather than in private. In July 2012, Draghi said:

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

What his ECB colleagues are saying is: no, don't believe him. Wait to hear from us.

In particular, as becomes clear in the final paragraphs of the Reuters piece, 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. The insiders claim that without a consensus for QE in the ECB--and it's currently opposed by "at 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 Paul de Grauwe. A long as the ECB has unaccountable power, it should be used for good and not only for evil.) 

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 feature 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 avoided without reversing austerity.

Governing by panic

Readers of this blog may be interested in my new paper, "Governing by Panic: The Politics of the Eurozone Crisis."  Here is the abstract:

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. 

When is a social democrat not a social democrat?

When he's Sigmar Gabriel, head of Germany's SPD and Minister for the Economy.  Here's Mr Gabriel in an interview with the Bild newspaper, defending the so-called "black null," the plan for a balanced budget:

Bild: There's a discussion in the SPD about whether or not new [government] debts ought to be incurred.  Is budget discipline social-democratic?   

Gabriel: Yes. Workers [Arbeitnehmer] 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.

There's a major problem with this argument: as Ambrose Evans-Pritchard noted, last week German government bond interest rates were "touching levels never seen before in any major European country in recorded history." In fact, correcting for inflation, Germany can literally borrow money interest-free:  August's inflation rate was 0.8% per year, and its ten-year bonds as of today yield 0.85%.  

Anyone who cannot find a way for the state productively to invest interest-free loans cannot be characterised as a social democrat (there's certainly plenty of low-hanging fruit).  For that matter, anyone who deliberately misleads workers about the costs of borrowing doesn't deserve the title either.  

Kalecki and the ECB

In 1943, Michael Kalecki gave what has recently become a very influential 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

• Full employment raises worker bargaining power and undermines shop-floor discipline.
• Deficit spending involves allocating money to people who haven't "earned" that money (for backup for the scare quotes see here), challenging "the fundamentals of capitalist ethics [which] require that 'You shall earn your bread in sweat'--unless you happen to have private means." 
• For reasons explained here, 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'." 

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. 

• Calls for structural reform and especially competitiveness are directed primarily at reducing worker bargaining power.
• Moralised discourse about "earning" is deeply entwined with the export-led model that justifies the competitiveness emphasis.
• Some officials have voiced the idea that the "state of confidence" should determine policy quite directly (obviating Kalecki's functionalism.)

One might think that recent events--the end of growth, the fall of inflation to just .4%, the increasingly manifest 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 here).

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."

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.

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.  Here's Draghi speaking to a committee of the European Parliament yesterday.

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, no monetary – and also no fiscal – stimulus can ever have a meaningful effect without such structural reforms. 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. 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.

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 not depend on confidence in the same way--the government just spends the money.

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 country-specific policy recommendations agreed by the European Council in July ought to be followed. For Germany, the relevant recommendations actually endorse rapid movement toward a budget surplus.  

In sum, the evidence that the supposed change of tone of Draghi's Jackson Hole speech was not serious mounts.