That's how science goes: a phenomenon is observe, an hypothesis is formulated, and then it is tested. As it isn't possible to test economic policies on countries, economy often deals with hypothetical models whose limits aren't tested.
Taking in more debt to pay for old debt is not sustainable. I suspect this crisis will be deflated by some measures of default (refusing to pay back debt) and inflation. In no way can western states sustain the entirety of their assumed obligations (to bond holders, social beneficiaries and special interest). People are getting stiffed on old debt, it's only a matter of who, how much and how soon.
Debt is a symptom, not the problem. The problem is a currency union with no central fiscal agent that can assume liabilities and enable transfers from wealthier to poorer states. That's how the US works. The euro crisis has been baked in from the beginning.
Which is why it's inaccurate to generalize this problem to "western states". The US is not comparable to any EZ country. We have our own currency and have been able to run large deficits to counteract the demand shortfall caused by the financial crisis and allow the prvt sector to repair balance sheets. This is why the recovery in the US has been much better than the UK or the EZ.
More so, the economic disparities throughout the US are far less than in the Eurozone. In the US, per capita GDP between states varies by about a factor of 2 (from mid 30k to mid 60k). In the eurozone the difference is closer to a factor of 3.5 (from mid 10k to around 50k). However, even that statistic is a bit misleading due to population because a lot of the lowest per capita GDP US states also have fairly smallish populations compared to Eurozone countries. If you add up the populations of all the US states with per capita GDP's less than 40k you get a total population of about 42 million. If you do the same for the Eurozone the total population is about 140 million, or nearly half the population of the entire Eurozone. Similarly, over 30 million people are living in countries with per capita GDP less than 30k, whereas even the poorest US state is higher than that.
Also, the wealthiest Eurozone countries are not as wealthy as the wealthiest US states, by a fairly significant margin. On the whole the Eurozone ends up being on average about as wealthy, in per capita GDP, as arkansas. The whole system is in need of far greater management than the US dollar but lacks the power to do so, and in total has far less wealth to be able to spend their way out of the problem.
"The US is not comparable to any EZ country. We have our own currency"
Qualitatively, I would see no difference between the US monetizing debt (and devaluing the value thereof) or something like Greece switching to a new currency which they can print (and devaluing the value thereof). Of course, the amount of devaluation (or default) Greece has to do is much greater. But in either case, some debtors are getting stiffed
Strictly, Greece has no money to pay back debtors, let alone fulfill their social obligations. But even the US obligations: debt + social security + medicare/medicaid etc. are now at an unsustainable level.
The comparison between states of a country and countries in europe is in no way as straight forward. The marcoeconomics is way more complicated when you're talking about highly varied countries, each with their own governments.
Besides the eurozone is already trying to adopt a central bank style system:
> Taking in more debt to pay for old debt is not sustainable.
Of course it is. Rolling over debt securities is everyday practice for both governments and private companies.
> In no way can western states sustain the entirety of their assumed obligations (to bond holders, social beneficiaries and special interest).
That depends on what kind of economic growth we have going forward. Your statement is certainly true if countries keep auteritizing themselves into deflationary death spirals. It is probably true if countries keep relying on upper-income tax breaks and labor market "liberalization" for growth - arguably worked 30 years ago, but returns on that strategy seem to be diminishing. It is not necessarily true under all circumstances.
> People are getting stiffed on old debt, it's only a matter of who, how much and how soon.
It's generally been the case that inflation + economic growth have made old debts shrink as % of GDP. When both of those are negative, debt-holders make a lot of real money, but risk of default goes way up.
The trick is growing the debt slower or at the same rate than the economy. But political incentives accelerate debt acquisition when the consequences are not going to hit for a couple of mandates. It's surprising that governments have not been more profligate than they were. But eventually, someone's going to be in charge when the bills come due.
As for the austerity 'death spiral', we can have some sympathy for those social beneficiaries being promised payments. Bond contracts weigh heavier than political commitments (once defaulted, people stop buying debt titles, but once lied to people keep voting).
Mm. I'm sure Greece could have theoretically cut more deeply into its government spending and improved the economy. Unfortunately, the people doing these sorts of cuts aren't a committee of neutral, emotionally detached economists, they're a bunch of politicians, and they have an electorate to answer to.
(And they say that the premise of democracy is the belief that said electorate knows what it wants, and deserves to get it good and hard. :P)
Basic economists' definition: opportunity cost. If the government spends a dollar and gets a worse result than the dollar would have gotten if it stayed in the private sector, then the economy is worse off. (That includes what the dollar would have bought, and any damage to incentives to work/save/innovate/invest/buy capital/take risks/etc that came from collecting that dollar from its previous owner.)
Of course, if you want to reinvigorate the economy, you'd do better to do something about the bureaucracy first - you know, the bureaucracy that requested stool samples from the guy who wanted to run a (bottled-)olive-oil export website.
No doubt there is plenty of wasteful and inefficient government spending. But I don't think the opportunity trade off works like you suggest.
It's not as if the government is removing otherwise productive dollars out of the economy to fund its deficits. Treasuries are generally purchased with excess reserves from the primary dealer banks that would otherwise just sit there. Or foreign governments, corporations, institutional buyers looking to stash their cash holdings where they will accrue risk free interest.
We can quibble about multipliers, but deficits represent a net income flow into the private sector and hence have an expansionary effect on demand (even if, unfortunately, those dollars are flowing into the pockets of crony defense contractors and what not).
Deficit-financed credit to expand demand sounds great, just like using credit card debt to finance an expansion in my own personal spending power sounds great: there are some times it makes sense but by and large you're fooling yourself if you think it leaves you more financially sound.
But... Treasuries? Another day, I'd contest your zero-opportunity-cost suppositions (cf. "crowding out") but more importantly, Greece's bonds don't have anywhere near the credibility of Treasuries, and they're having real problems issuing new ones. You can't finance expansion with deficits if no one will lend you money.
Agreed re: Greece. Greece's bonds don't have the credibility because they aren't denominated in a currency that Greece controls.
There's no reasonable analogy between the US running a deficit and anyone's credit card. Again, like the commenter at the top of the thread, public and private finance are two different things. The US has infinite spending power. The constraint is not "affordability" but inflation. That's it. A "financially sound" budget for the US is one that maximizes employment with the minimal amount of inflation. It has nothing to do with deficits or surpluses.
You need to look at the federal budget as part of a closed loop of spending and income flows with the private, public and foreign sectors. Just like every country can't run a trade surplus, the public private and foreign sectors can't all run a surplus or a deficit. It has to net out. If the private sector runs a surplus (spends less than it earns) of 4% GDP and we have a current account deficit of 4% GDP, the gov't deficit will be 8%. It's just accounting.
The point of the "multiplier" discussion in the article is to explain to you that if Greece had cut more, it would have been in an even worse position. Democracy isn't the problem, it's power concentrated in the hands of people who think they can get by on pure ideology and an ignorance of macroeconomics.
The size of the cuts in Greece could not avoid damaging the economy. No serious person debates this; the only debate that ever was, to the degree there was one, was over how much damage the cuts would do, and how quickly Greece could bounce back. This article is arguing that the damage was worse than anticipated, a lot worse.
Many public sector jobs have no private analogue (so people fired from the bureaucracy would be relatively unskilled in the private sector, i.e. likely to become unemployed), and cuts to welfare programs reduce the income of the very people who are most likely to spend all their income, i.e. poor people, with knock-on effects in the rest of the economy. Are you seriously suggesting that this effect could not only have been avoided, but the cuts could have been even deeper?
Shut out of international bond markets, Greece had little choice but to begin bringing its public finances into line or face a catastrophic default. Financing wasn’t available to sustain prior spending levels.
I'm confused. If Greece couldn't borrow money to sustain its prior spending levels what choice did they have? How is a Keynesian-style stimulus possible if no one will lend you the money to implement it? It also doesn't make any sense to me why a stimulus plan would have worked. Lending Greece more to perpetuate its already unsustainable expenses doesn't make much sense. It seems the Keynesian argument here is that they need to do stimulus - i.e. borrow and spend - even more then the pre-austerity level just to get the economy back to the previous (and unsustainable) debt levels. It's running to stand still.
This conclusion was immediately obvious to anyone in 2009 who had ever picked up a basic macroeconomics textbook. The funny thing to me is not how Germany continues to lead the charge for more austerity -- it's in their banks' best interests. Rather, it's funny how this 'new' argument of austerity-driven recovery seems to be taken as somehow valid or relevant for macroeconomic analysis in other countries.
For instance, the Debt Ceiling crisis of 2011 [1] is a perfect example of how these kind of psuedoscientific ideas can cause real harm to a country. Especially given how readily certain groups (coughrepublicanscough) are willing to accept these ideas with virtually zero backing or acceptance from established economists.
See also: Everything Paul Krugman has ever written.
I think part of the problem is the popular perception that a nation's economy is just like a household economy: i.e. in a household if credit card debt is high, you gotta pay that off before you can spend more; or if you're earning $1000 per month but spending $2000, you gotta cut down on your cable bill and nights out.
That's a tantalizingly simple and intuitive comparison that everyone can understand and relate to. Unfortunately a nation's economy is so utterly unlike a household economy that the comparison is downright dangerous, because it leads to harmful false assumptions like "national debt is always a bad thing", "a nation must always 'earn' more than it spends at all times", and "an economy can never grow in a nation with debt".
I'm no economic wizard but it really surprised me that how everyone in Europe and many in the States are prescribing austerity, when basic history from this very century frequently demonstrates that austerity can lead to economic damage. Yes you can always find programs that can and should be cut back in any developed society, but considering debt to be the central and only problem in a situation where the debtor defines the very money it "owes" seems a little shortsighted to me.
Austerity in europe is essentially the only politically viable option at the moment. On one side you have Germany and a bunch of nations who refuse point blank to essentially write a blank check for the nations who need it, on the other you've got public opinion which is in no way ready to take the quantum leap of political integration necessary to make fiscal transfers meaningfully possible within the eurozone.
So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe.
Politically viable, sure – but it’s also the wrong way to go. It’s not sustainable since it won’t lead to forward progress. It only delays the catastrophe, while at the same time options do exist (as outlined in your first paragraph) – but the European leadership cowardly refuses to fight for them.
Making something that is not politically viable is a politician’s job – and they refuse to do it.
>So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe.
Additionally, a 3rd option worth consideration: letting individual countries default.
Does Greece really need anyone's permission to default? Iceland didn't. Defaulting on the national debt is almost an act of war, but there is historical precedent.
No, Greece could have defaulted completely on its bonds - which were held by the German banks.
Then Greece would be OK, and the German banks about to fall like dominoes. Then the Germans might have become more reasonable about a bailout.
After all, they would really be bailing out not the Greek people, but German banks that shouldn't have bought bonds from crooked Greek politicians and Goldman Sachs.
I don't see how any of that is the Greek people's fault, and in the mythical "free market" said German banks would have been allowed to go bust years ago.
I'm not sure where you're pulling those harmful false assumptions from, but surely a nation should at least occasionally earn more than it spends? Because the US has only managed that trick 8 times since 1931, of which only one time was since 1960.
And sure, unlike households, nations have the option of printing more money to pay off their debts. Unfortunately that doesn't generally work too well (see also: Zimbabwe, Weimar Germany).
As a pure logical matter, just because hyper inflation is possible does not mean it's the inevitable result of an inflationary monetary policy. Zimbabwe and Wiemar Germany are extreme examples. Both had their infrastructure devastated by war, and Wiemar Germany was subject to crushing, externally-imposed war indemnities.
Zimbabwe's war ended in the 70's. Horrific mismanagement by Mugabe and his cronies is the biggest culprit of the hyper-inflation now affecting the country.
If you look, you'll notice that a recession followed nearly every reported government budget surplus.
This is not surprising: a surplus means that the government is removing more money from the economy than it's adding, something which is rarely warranted absent a large current account surplus and/or an economy operating at full capacity.
You need to understand the sector financial balances.
It sounds like you're suggesting that America should more often earn more than it spends. (Correct me if I'm wrong.) Again I'm not a student of economics, but the fact that America in the 80 years since has become the most powerful economy in the world's history, while only being in the black 8 times, suggests to me that earning more than you spend isn't really as important as many think. Rather, it's the flow of money in and out of the economy and other factors that really matter.
That's why my original comment is about: Assuming that a nation is like a household--i.e., that at some point it obviously should earn more than it spends, because that's how a household operates--leads to conclusions that aren't always supported by history.
Weimar Germany's situation partly mirrors the one today. To deal with hyperinflation and a collapsing economy, in '31 Chancellor Brüning cut spending by 30%. It eventually led to a budget surplus but at the cost of 30% unemployment. Those events helped set the stage for what followed in WW2. Obviously the comparison is tangential, but it's interesting to think about nonetheless.
I see you're point about America's economy being the most powerful, but isn't that perhaps a bit like a marathon runner who sprints full speed the first mile and says "Whoa! Look at how much I'm ahead of everyone else!".
You may be right, but it seems there is more than just our current situation to consider. There are long-term ramifications of that debt. At some point, we can't just keep borrowing. It might be working for us today, but like the sprinting marathon runner, eventually it will catch up to us.
No, I'm simply suggesting that once you're sufficiently indebted, there's a limit beyond which people stop lending to you. And if you're getting further and further into real debt (adjusted for inflation and growth), you'll hit that limit eventually.
And yes, America is currently the most powerful economy in the world's history, and that's why it has an AAA credit rating despite its fairly disastrous finances. But barring total implosion, China'll be the top dog within a decade or so, and what happens then?
The way I understand it, a nation's economic standing as a borrower is based basically on trust. A lender nation trusts that the borrower nation can eventually repay its debt. That trust isn't so much related to the raw number of the current debt, but rather how the lender believes the borrower will behave and evolve in the coming years. Today nobody has a reason to believe the US will do anything but continue to grow (in the long run).
If in a hypothetical alternate universe the US had a civil war tomorrow, it could have a massive budget surplus and yet it'd probably find that nobody would be willing to lend to it regardless, because the climate of repayment would be so uncertain.
In today's real world, the US has the power to print its own money. In very real terms it can define the very term "debt" as whatever it pleases. That, combined with its status as a massive buyer of foreign goods, history of entrepreneurship and growth, history of corrective action by the Fed, insanely powerful military, and so on, means that it could owe 100x times as much as it does today, and nations would probably still happily lend.
A nation is not a household. It doesn't reach some magic number "lending ceiling" where everyone else says, "you owe 100 trillion and 1 dollars, we're not gonna lend any more" like might happen to a regular person with a credit card. A "AAA" rating is just some label that some private company makes up.
So the issue isn't some dollar amount drawn out of an economist's hat, but rather the real trust inferred from a nation's geopolitical position.
Any real students of economics please do correct me, as I have no doubt my reasoning is flawed somewhere. But this is how I currently understand it.
Well the interesting measure is the dept to GDP ratio, and as long as this ratio stays constant, the government is not really getting into financial trouble. Running the numbers, I find that the ratio stays constant for
D'=g*D,
where D' is the new dept, g the GDP growth and D the total dept. Additionally this just need to hold on average, that is a government should bring down the dept/GDP ratio in the boom ( when multipliers are low anyhow) so that it can spend during the bust ( when the multipliers are higher). But note that the government can run deficits all the time.
About your examples, the first sentence of the Wikipedia article for Zimbabwe is: [1]
"Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in Zimbabwe's civil war and confiscation of private farms."
While in Weimar Germany the French occupation of the Ruhr valley, the at that time most important industrial region of Germany, directly preceded the hyperinflation. ( And arguably the Beer Hall Putsch [2], Hitlers first attempt to seize power, was the more important event in '23.)
I mean, not everything Krugman has written is true, but I think that he makes the best case for returning to sane macroeconomic policy that has, for all of its faults, at least some historical backing.
I'm definitely pro-Krugman.
If you're interested, there are some particular blog posts about the history of the austerity movement and why it's ridiculous:
I think the real pseudoscientific idea is that debt-financed stimulus is the cure all for any economic ill. The argument that Greece needs to get further into debt to solve it's debt crisis seems insane to me. At this point how much good could a stimulus really do (even if they could find someone to lend them the money to do it). I know the standard Krugman/Keynsian style argument here but it doesn't seem to make much sense in Greece. As another poster said it seems the only real cure for Greece is going to be inflation, probably and unfortunately similar to what happened in Argentina.
Greece needs to start throwing millionaires in dingy prisons to make any headway with its problems. The Greek crisis, more than anything, is the result of massive tax evasion.
That's a hypothesis, but it seems unlikely since there are four other European economies facing identical problems - Spain, Italy, Portugal, and Ireland. Spain in particular was a very reasonably managed economy before the crash, running surpluses and growing. So, your hypothesis would require that you attribute the problem in each of these economies to separate causes, which is probably wrong.
This is not to say that there wasn't gross economic mismanagement on the part of the Greek government, but focusing on that distracts from the real solution.
UPDATE: I'm in complete agreement with everyone pointing out that the problems aren't identical. Perhaps the question is whether, if you were to summarize the causes Euro crisis in broad terms, you ought to mention Greece's economic mismanagement first or the overall crash of the financial markets as the more important factor. My assertion is the latter, mostly echoing Stglitz's analysis here:
The problems aren't identical. They may appear so because some of the symptoms are the same, but the root causes in Ireland, for instance, are far different than in Greece.
Spain is closer to Ireland in terms of housing market effects on economic downturn, but ultimately each economy functions on a different system, so it's not entirely wrong to attribute economic problems to separate causes. There is some overlap, of course, but it's definitely not identical.
I agree the situations aren't identical, but what theory do you think best explains all the observations?
Just to be clear, my answer is: Each country's problems are rooted in the collapse of the US housing market and the resulting financial crunch. The country-to-country variations are there and they're significant, but secondary.
I don't think the four are all the same, although there are obviously some common elements. Chief among them the easy money from the center during the boom years. But I think Greece's inefficiencies and mismanagement made a bad problem worse.
> The Greek crisis, more than anything, is the result of massive tax evasion.
[Greek/US dual citizen here]
Having lived in Greece for upwards of a decade, during the particularly transitional time from ~1988-2004, this is not in line with my experience. Hear me out before writing me off as an apologist :)
Greece has a large problem with collecting the taxes they claim citizens owe but not a large problem with collecting a large fraction of GDP. According to the World Bank, they are right in line with Sweden and France (http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS). These numbers are corroborated by the OECD (PDF warning http://www.oecd.org/newsroom/41498733.pdf). [Edit: I wrote Sweden and France when I meant to write Spain and France; I apologize for the error but I have left it lest someone think I am trying to whitewash :-)]
Greece has collected plenty of money; we overspent, and we spent stupidly i.e. in ways that obtained either votes or kickbacks, and not in ways that improved the economy or the life of the common person. As just one example, look at the paltry investment of the Greek government in its only competitive advantage, the tourism business. The cast and crew of "Mamma Mia" did a better job promoting tourism in Greece than any Ministry of Tourism effort. Spain, Italy, and Turkey are eating our lunch.
We also got used to almost five decades of "free" foreign money through the Marshall plan, post-communist hysteria leading to US military aid and military bases, EEC/EU growth funds, and having our debt priced as if it were of German quality.
In my opinion, the tax evasion is a serious social justice problem, but it is not a serious budgetary problem. The bulk of Greece's public budget is supplied by ordinary people making ordinary incomes, and it is a travesty that the wealthiest manage to dodge contributing proportionately. But that does not mean the government does not have enough money to do a good job.
I would love to believe that the government has failed due to being starved of resources; at least then a solution like taking on more debt would be plausible. With the situation as it stands, I can only respond with our poet laureate Seferis' exasperated lament, "Everywhere I go, Greece wounds me".
"but not a large problem with collecting a large fraction of GDP. <links>"
Part of my problem with the statistics you link is that the measure is limited because it's known that US revenues are in the 16-19% range but they are listed here at 9%. Loathe as I am to cite the Heritage Foundation they are the most complete figures on wikipedia and show Greece heavily lagging France and Spain.
Finally, it really doesn't matter that they collect some nebulous "large share of gdp". What matters is that the scale of evasion is far greater than Greece's immediate problems.
But Nikos Lekkas, the head of the Greek tax inspectorate, the SDOE ... insisted that Greece could easily pay off its debts if taxes due for payment were paid into the Greek state's coffers.
”Tax evasion in Greece has reached 12 to 15 per cent of the gross national product... That is €40 to €45bn per year. If we could recover even half of that, Greece would have solved the problem.
> Part of my problem with the statistics you link ...
You raise an interesting question, to which I don't have a conclusive immediate response. I'll have to dig deeper to really know. The numbers on the US do seem out of line with well-known facts. However, here's another ~30% estimate from Eurostat (http://epp.eurostat.ec.europa.eu/statistics_explained/index....). Given the conflicting reports, I can only say that it's theoretically possible that Heritage is right and OECD/Worldbank/Eurostat are jointly wrong. If I had to weigh Heritage's ideology and their likely expertise on European economic statistics, as compared to lined-up answers from OECD/WorldBank/Eurostat I know where I'd bet. Still, the 9% reported for the US does seem troubling. I have a research project for the evening.
As for the scale of tax evasion and whether it could plug the hole: it's really, really hard to have an objective opinion here. My inner Greek is saying of course SDOE claims that tax evasion is the main problem. I can't prove that they're wrong, and I don't want to pollute the discussion with personal anecdotes. I'll only add that the SDOE claims don't link to any examinable research.
Thank you for an interesting counterpoint :)
[Edit: the Eurostat data shows Greece parallel to Spain but way behind France... so at this point I'm going to tentatively retract the comparison to France pending further research, but I think I am still persuaded that Greece has a tax base that commands a significant-enough fraction of GDP for them to manage responsibly]
I don't think that's what Krugman et al are saying. You can make arguments for and against stimulus being the correct answer for a particular country's recession. There are valid points in both camps. However, cutting spending during a recession is another matter entirely -- this fix goes against some of the core things we've come to believe about aggregate demand.
I don't think Keynes' model is perfect. I'm excited to see what new kinds of models emerge after this depression -- we have a lot more data to play with. However, at this stage, it makes a lot more sense to stick with models that have kind of worked sometimes rather than to just operate off of pure, baseless speculation.
The problem isn't Keynes model. It predicts that when governments stop deficit spending, the economy slows. It says that if governments don't replenish those deficits in good times they'll build unsustainable economies.
The problem is ignoring the reality that at some point the government cannot issue more debt. The US government has been in structural deficit for all but a few of the past 40 years. If we look at the funny money of state and local pension assumptions there's even more stimulus. OF COURSE when that's withdrawn the economy slows.
It doesn't matter if the fiscal multiplier is 0.5 or 1.5 when the government simply can't issue more debt. Multipliers matter when a government has decisions to make, when it can't issue more debt there are no decisions to be made.
In theory, you have a good point. However, I think even at our ridiculous levels (> 100% of debt-to-gdp), there's still quite a ways to go before our major creditors stop buying US bonds entirely. If we can somehow pursue policies that could return us to constant positive growth in the next 2-5 years, then the benefits of getting there faster will give us a much greater ability to reduce our long-term liabilities.
The primary dealer banks will always be a ready funding agent for the US government--why wouldn't they be? Treasuries offer a risk free place for excess reserves to earn interest. It's literally free money.
It's instructive to remember that we match our deficit spending with debt issuance by legal fiat and not for any real operational reason. We could just as well deficit spend freely with no debt issuance (and no, it would not be more inflationary.
Of course, treasuries are a risk free savings vehicle for the private sector and world at large, and they play an important role in managing the payments system (though not one that couldn't be replace), so I'm not suggesting that we stop issuing debt. But it's important to understand how the system works so we can stop with the silly notion that we are just scraping by on the good graces of Treasury buyers.
What's the mechanism for this spending through legal fiat?
It seems to me that any spending that doesn't come from taxes or debt would probably have some adverse affects on the economy. I'm still a student of institutional economics, so I'm eager to learn more about this whole process.
Go read zerohedge.com. There is a fair chunk of tinfoil hat baloney and traders talking their book, but they have some serious analysis on the government debt / banking / monetary system.
It sounds great. But when fiscal stimulus plays such a large and persistent role, and you're clearly nearing the end of the road for more borrowing / more stimulus, the expectation of stimulus withdrawal starts to play an ever larger role in forecast expectations. E.g. at some point businesses stop thinking about additional demand today and the demand shrinkage in the future. They start develering and stop taking chances. And the more the government counters with short-term stimulus, the more expectations anticipates the end of stimulus in the mid-term.
And, "constant growth" depends on a structurally sound economy. Well, if the economy has been shaped to meet demand from a necessarily contracting customer -- the government -- its structure gets distorted. Add in the distortions from crazy federal credit policy (Fannie / Freddie). Now we have an economy that must reallocate productive resources to meet real demand -- but no one has a clue where that demand actually will be because we're so distant from the environment supporting it.
tldr; 40 years of government stimulus, in various dimensions, has fundamentally detoriated the economy's ability to deliver "constant positive growth." We've gone past the point where we can outgrow the debt growth needed to fuel this government stimulus growth model.
Who is proposing massive stimulus for Greece? Obviously they can't do it themselves because their credit rating is shot and they don't have the resources to do it without borrowing hugely. That doesn't mean their economy could not have been helped by stimulus, just that it wasn't feasible. It also certainly doesn't mean that austerity was the answer.
You're correct about inflation but unfortunately their in the Euro so they either have to leave it or suffer a very long and painful internal deflation.
You're arguing against a straw man. The only one size fits all ills argument actually being widely pursued is tax cuts.
The only thing that would probably help Greece is massive debt foregiveness (bankruptcy if applied to individuals or companies) which isn't a "stimulus" so much as a gift. Again if it worked like a regular bankruptcy they'd agree to pay off part of their debt on a plan, but be forgiven a bunch of it, and their credit would suck for many years to follow.
Really? Than tell me what other non-austerity policy is being proposed.
We're not talking about what is being pursued. The discussion is about the merits of the alternatives to austerity. Massive debt forgiveness is one although at this point it's a complete fantasy. What else have you got?
My understanding is that Greece is different because they don't have their own currency. The real cure for unemployment and low production in Greece is a decrease in real wages, which happens very slowly without higher inflation or a fall in the currency (these are basically equivalent, but that's not especially obvious so I'll be redundant). Since they use the Euro, Greece can't choose either policy, hence a long and deep slump.
Intl macro isn't really my field, so there may be errors in that description.
The standard Krugman/Keynsian style argument is, that Greece should use inflation (but can not, since they do not have control over their money). And note, the more a country is indebted, the harder it becomes to get the deficit under control using austerity. The reason is, that you need to cut expenses in such a way, that GDP is not stronger affected by the cuts. For example, a country which has a dept/GDP ratio of 50% needs to cut its expenses such that the GDP is not reduced by more than twice the cuts in order to reduce its dept/GDP ratio. ( The multiplier for the austerity program needs to be smaller than two.) On the other hand, if it manages to have a stimulus program with a multiplier larger than two, then it can reduce its dept/GDP ratio using this stimulus program. For 100% the critical multiplier is 1 and in general it is 1/R, where R is the dept to GDP ratio.)
So you need less and less effective stimuli programs, the higher the dept to GDP ratio is. ( And I do not know if anyone does claim that dept-financed stimulus is the cure for any economic ill. But if not enough money is the problem, one can simply print that stuff.)
The thing is: Greece is NEVER going to repay its debts. NEVER. The sooner this reality is acknowledged and dealt with, the sooner the Greek people will be able to get on with their lives.
Completely agree. If Paul Krugman isn't enough to sway people, Joseph Stiglitz, another Nobel laureate, has echoed his analysis. So has Dean Baker, who is the first economist to my knowledge to predict the housing bubble and the resulting crisis. Basically, this was easy to see and well-known to economists that aren't neo-liberal demagogs.
About the entire Austrian economics school predicted the housing bubble. Peter Schiff is famous for getting blasted on TV about it. Krugman, on the other hand, was calling for another bubble like the housing bubble: http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip...
I find it funny when Keynesians talk about bubbles. What do you think happens when you set interest rates absurdly low? You could make the argument it stimulates the economy, sure, but at what cost?
I don't think I follow. Isn't the idea that you weigh the cost of doing so with the cost of a prolonged recession? I have a general ignorance of exactly what Keynesian economics actually means, but from what I gather, it's not one thing.
No doubt that Austrian's avoided some of the neoclassical blind spots that caused many economists to miss the crisis, but then again Austrian's are always predicting crises and they certainly offer no crystal ball--see Peter Schiff's hilarious prediction of soaring inflation every year since 2009.
Schiff's misfire is especially relevant to this discussion, because it demonstrates the Austrian school's grossly flawed understanding of public finance and our monetary system (despite having valuable things to say at times).
Schiff also predicted a hyperinflation that never came, actually he just repeated what Rothbard said in some books. He was wrong when he wrote that and still remains wrong, maybe sometime in the eternity he will be right.
Actually for me from the point of view of Mises and his praxeology everyone who uses his methodology to advise a policy is just guessing and expecting that his views are coherent with reality.[1]
Austrian school is very deep, and not a monolithic bloc like mises.org loves to say, there were Austrian economists who were not Mises and disagreed with his methodology, including Machlup and Wieser who were Mises student and teacher respectively.
Where's the apology part? Oliver Blanchard was not an austerity hawk before, so still not being one is not some sort of shocking turn.
edit: to be specific, he claims to be a non-fairweather Keynesian: stimulus on the downturn, austerity in good times. They seem to have a cyclical lifecycle and are all off somewhere spawning when it's time for the cuts.
Why can't all of these countries take a page from Iceland? I mean, in 2008 it defaulted on the ridiculous amount of debt they had, and now, 4+ years later, are improving their international credit rating, and building their economy. I would speculate from articles that I've read that they're at least back to where they were prior to the collapse.
I recently came across this blog post from an Icelander that paints a more complicated picture of the Iceland financial story. Long, but worth a read for a different perspective.
Iceland is a blip, it's irrelevant to the global economy. If it were a city in Europe it would be something like the 92nd largest city. As a country it's even smaller and less relevant than Luxembourg.
When a country of 320,000 people defaults on their debt it doesn't have significant global consequences. When you start defaulting on debt on behalf of 50, 100, or 150 million people then it starts having very serious consequences on the creditors, on financial markets, and so forth.
So you'e saying this approach wouldn't have worked? Too bad a larger country didn't try. You're also neglecting the fact that, while Iceland is unique, they had unique challenges that other nations wouldn't, like importing a lot of stuff.
I'd like to see some explanation as to why this wouldn't work with a larger nation and not simply, because.
Argentina (pop. 40m) did, and seemed to get away with it for a while thanks to the commodities boom and dodgy statistics, but after a decade the chickens are coming home to roost.
If you are talking about the Argentine economic collapse around the turn of the century then I would suggest that's not the best example. There are some serious horror stories about total loss of civil authority and rule of law there during that period, in addition to the riots bordering on outright revolution.
The problem I have with this argument is that while everybody suggests Iceland is too small, nobody is brave enough to suggest at what the magic line that cannot be crossed is. Is Ireland too big? What about Greece? Japan? the UK?
I fail to see how a credit writedown for both debtor and creditor suddenly becomes unworkable when it crosses an imaginary population or gross debt line. Plenty of very large companies have undergone debt restructuring and survived to tell the tale. GM was one of the largest companies in the world and the debtors and creditors + equity holders all got wiped out or were given a severe haircut. If the same argument was followed someone would point to a smaller company and say ; well, they are small, it's OK to default. But that big company, no, that's too big.
Nobody pretends that calling an unsustainable and unpayable debt defaulted is a pleasant experience, but it's better to put zombies to the death rather than have them zombie-walking around the economies of the world. If the debt can't be paid back, adding more debt to it is never going to get solved. Anyone who suggested that fixing GM with another set of super-sized loans would have been laughed out of the room - they couldn't make the payments as it was. Yet someone this makes the magic jump from company to country and it's considered sound advice.
Oh, I'm not saying that default isn't an option, it might even be the best option. But the idea that it's a good or even "ok" option is a faulty one. The game right now is finding the best bad option to work with.
Two reasons: 1) Iceland has its own currency, so it has a lot more discretion over its monetary policy. 2) If Greece defaults, investors would assume that Spain, Portugal, etc. will also default. Hence their borrowing costs will almost certainly skyrocket, forcing them to default. This would probably cause bank failures. Being part of the Euro magnifies the contagion immensely. The Economist has had a few articles about default and they've recommended it, but managing the process so that it doesn't cascade is tricky.
Other people have said it better but the basic gist seems to be that austerity is wealth transfer from the poor and medium class to the wealthy.
"The result is ever greater levels of social inequality, as wealth is funnelled from the bottom to the top.
Big business, the banks and the super rich are being increasingly relieved of paying taxes.
The resulting deficits in state budgets, exacerbated by the hundreds of billions awarded to the banks in government rescue packages, are now being addressed through a combination of increased consumption taxes, which fall most heavily on the working class, and savage cuts in social programs and public sector jobs and wages."
That is part of it, but I think there's another piece to the puzzle.
The private sector in general is in crisis because the banks won't lend. They won't do that because of the problems on their financial sheets - they know they hold toxic assets and they know everyone else does, so they cannot trust anyone to pay off their debt, including other banks. This means that private investment has decreased severely, which puts enormous downward pressure on the economy.
Since the private sector won't invest, the only source of investment big enough to fill the hole (which might be as big as $8 trillion), is government. Austerity is a problem because it limits the governments ability to invest, which means that you have a shrinking economy trying to make up ground, which is a losing battle, especially for the poor as you point out, since they do not have the assets to absorb the economic hit.
I should say none of this is my opinion, I'm merely summarizing Krugman, Stiglitz, and Baker, who are the three economists whose work I've followed on the matter.
The paper also looks at taxation in a crisis, and has this interesting part:
"For example, based on U.S. data, Romer and Romer (2010) find that, in response to a tax increase, GDP, investment and consumption all decline, but investment growth falls by about four times more than consumption growth does."
Let me summarize the paper's main finding in plain English: the more spending cuts economists predicted, the worse were their predictions of a country's economic growth.
Slightly more technically: there is a correlation between (a) the magnitude of economists' forecasts of cuts in government spending and (b) the quality of their forecasts of economic growth.† The higher the forecast of spending cuts for a particular country, the farther from reality was the growth forecast.
The paper concludes: expected reductions in government spending cause bigger drops in economic output. I leave it to the reader to consider alternative explanations.
† — In 26 European countries. Recently. On average.
It seems that the IMF's statement fails to take into account the many measures Greece didn't implement, namely pertaining to labor laws.
In the context of countries like Greece and Portugal, austerity just means that the governments can't spend more money than they earn, simply because they don't have access to it on international financial markets; the only money they have now is the Troika's. More money from the Troika means more debt, more interests to pay, and longer dependency on outside help.
Also, the main cause for the recession is that the governments want to correct the deficit by raising taxes, that is, by imposing austerity on their people, not on their spending. These countries avoid structural changes, which should target things like labor laws, the unsustainable Social State, the judicial systems, and create conditions to attract foreign investment.
I don't really understand how people can advocate for government stimuli in these countries when that's the sole reason they're in this mess to begin with.
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[ 5.0 ms ] story [ 143 ms ] threadWhich is why it's inaccurate to generalize this problem to "western states". The US is not comparable to any EZ country. We have our own currency and have been able to run large deficits to counteract the demand shortfall caused by the financial crisis and allow the prvt sector to repair balance sheets. This is why the recovery in the US has been much better than the UK or the EZ.
Also, the wealthiest Eurozone countries are not as wealthy as the wealthiest US states, by a fairly significant margin. On the whole the Eurozone ends up being on average about as wealthy, in per capita GDP, as arkansas. The whole system is in need of far greater management than the US dollar but lacks the power to do so, and in total has far less wealth to be able to spend their way out of the problem.
"The US is not comparable to any EZ country. We have our own currency"
Qualitatively, I would see no difference between the US monetizing debt (and devaluing the value thereof) or something like Greece switching to a new currency which they can print (and devaluing the value thereof). Of course, the amount of devaluation (or default) Greece has to do is much greater. But in either case, some debtors are getting stiffed
Strictly, Greece has no money to pay back debtors, let alone fulfill their social obligations. But even the US obligations: debt + social security + medicare/medicaid etc. are now at an unsustainable level.
Besides the eurozone is already trying to adopt a central bank style system:
http://www.nytimes.com/2012/12/14/business/global/eu-leaders...
Of course it is. Rolling over debt securities is everyday practice for both governments and private companies.
> In no way can western states sustain the entirety of their assumed obligations (to bond holders, social beneficiaries and special interest).
That depends on what kind of economic growth we have going forward. Your statement is certainly true if countries keep auteritizing themselves into deflationary death spirals. It is probably true if countries keep relying on upper-income tax breaks and labor market "liberalization" for growth - arguably worked 30 years ago, but returns on that strategy seem to be diminishing. It is not necessarily true under all circumstances.
> People are getting stiffed on old debt, it's only a matter of who, how much and how soon.
It's generally been the case that inflation + economic growth have made old debts shrink as % of GDP. When both of those are negative, debt-holders make a lot of real money, but risk of default goes way up.
As for the austerity 'death spiral', we can have some sympathy for those social beneficiaries being promised payments. Bond contracts weigh heavier than political commitments (once defaulted, people stop buying debt titles, but once lied to people keep voting).
(And they say that the premise of democracy is the belief that said electorate knows what it wants, and deserves to get it good and hard. :P)
Of course, if you want to reinvigorate the economy, you'd do better to do something about the bureaucracy first - you know, the bureaucracy that requested stool samples from the guy who wanted to run a (bottled-)olive-oil export website.
It's not as if the government is removing otherwise productive dollars out of the economy to fund its deficits. Treasuries are generally purchased with excess reserves from the primary dealer banks that would otherwise just sit there. Or foreign governments, corporations, institutional buyers looking to stash their cash holdings where they will accrue risk free interest.
We can quibble about multipliers, but deficits represent a net income flow into the private sector and hence have an expansionary effect on demand (even if, unfortunately, those dollars are flowing into the pockets of crony defense contractors and what not).
But... Treasuries? Another day, I'd contest your zero-opportunity-cost suppositions (cf. "crowding out") but more importantly, Greece's bonds don't have anywhere near the credibility of Treasuries, and they're having real problems issuing new ones. You can't finance expansion with deficits if no one will lend you money.
There's no reasonable analogy between the US running a deficit and anyone's credit card. Again, like the commenter at the top of the thread, public and private finance are two different things. The US has infinite spending power. The constraint is not "affordability" but inflation. That's it. A "financially sound" budget for the US is one that maximizes employment with the minimal amount of inflation. It has nothing to do with deficits or surpluses.
You need to look at the federal budget as part of a closed loop of spending and income flows with the private, public and foreign sectors. Just like every country can't run a trade surplus, the public private and foreign sectors can't all run a surplus or a deficit. It has to net out. If the private sector runs a surplus (spends less than it earns) of 4% GDP and we have a current account deficit of 4% GDP, the gov't deficit will be 8%. It's just accounting.
Many public sector jobs have no private analogue (so people fired from the bureaucracy would be relatively unskilled in the private sector, i.e. likely to become unemployed), and cuts to welfare programs reduce the income of the very people who are most likely to spend all their income, i.e. poor people, with knock-on effects in the rest of the economy. Are you seriously suggesting that this effect could not only have been avoided, but the cuts could have been even deeper?
I would qualify and expound upon my statement in defense, but hey, why bother. Clearly only people who already agree with you are serious.
I'm confused. If Greece couldn't borrow money to sustain its prior spending levels what choice did they have? How is a Keynesian-style stimulus possible if no one will lend you the money to implement it? It also doesn't make any sense to me why a stimulus plan would have worked. Lending Greece more to perpetuate its already unsustainable expenses doesn't make much sense. It seems the Keynesian argument here is that they need to do stimulus - i.e. borrow and spend - even more then the pre-austerity level just to get the economy back to the previous (and unsustainable) debt levels. It's running to stand still.
(FYI, I'm not saying I think this is a good idea; I'm trying to explain what they could, theoretically, do.)
For instance, the Debt Ceiling crisis of 2011 [1] is a perfect example of how these kind of psuedoscientific ideas can cause real harm to a country. Especially given how readily certain groups (coughrepublicanscough) are willing to accept these ideas with virtually zero backing or acceptance from established economists.
See also: Everything Paul Krugman has ever written.
[1] http://en.wikipedia.org/wiki/United_States_debt-ceiling_cris...
[2] http://krugman.blogs.nytimes.com/
That's a tantalizingly simple and intuitive comparison that everyone can understand and relate to. Unfortunately a nation's economy is so utterly unlike a household economy that the comparison is downright dangerous, because it leads to harmful false assumptions like "national debt is always a bad thing", "a nation must always 'earn' more than it spends at all times", and "an economy can never grow in a nation with debt".
I'm no economic wizard but it really surprised me that how everyone in Europe and many in the States are prescribing austerity, when basic history from this very century frequently demonstrates that austerity can lead to economic damage. Yes you can always find programs that can and should be cut back in any developed society, but considering debt to be the central and only problem in a situation where the debtor defines the very money it "owes" seems a little shortsighted to me.
So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe.
Making something that is not politically viable is a politician’s job – and they refuse to do it.
Additionally, a 3rd option worth consideration: letting individual countries default.
Then Greece would be OK, and the German banks about to fall like dominoes. Then the Germans might have become more reasonable about a bailout.
After all, they would really be bailing out not the Greek people, but German banks that shouldn't have bought bonds from crooked Greek politicians and Goldman Sachs.
I don't see how any of that is the Greek people's fault, and in the mythical "free market" said German banks would have been allowed to go bust years ago.
http://whereistheoutrage.net/domestic-issues/budget/budget-d...
And sure, unlike households, nations have the option of printing more money to pay off their debts. Unfortunately that doesn't generally work too well (see also: Zimbabwe, Weimar Germany).
This is not surprising: a surplus means that the government is removing more money from the economy than it's adding, something which is rarely warranted absent a large current account surplus and/or an economy operating at full capacity.
You need to understand the sector financial balances.
That's why my original comment is about: Assuming that a nation is like a household--i.e., that at some point it obviously should earn more than it spends, because that's how a household operates--leads to conclusions that aren't always supported by history.
Weimar Germany's situation partly mirrors the one today. To deal with hyperinflation and a collapsing economy, in '31 Chancellor Brüning cut spending by 30%. It eventually led to a budget surplus but at the cost of 30% unemployment. Those events helped set the stage for what followed in WW2. Obviously the comparison is tangential, but it's interesting to think about nonetheless.
See: http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-ger... http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Re...
You may be right, but it seems there is more than just our current situation to consider. There are long-term ramifications of that debt. At some point, we can't just keep borrowing. It might be working for us today, but like the sprinting marathon runner, eventually it will catch up to us.
And yes, America is currently the most powerful economy in the world's history, and that's why it has an AAA credit rating despite its fairly disastrous finances. But barring total implosion, China'll be the top dog within a decade or so, and what happens then?
If in a hypothetical alternate universe the US had a civil war tomorrow, it could have a massive budget surplus and yet it'd probably find that nobody would be willing to lend to it regardless, because the climate of repayment would be so uncertain.
In today's real world, the US has the power to print its own money. In very real terms it can define the very term "debt" as whatever it pleases. That, combined with its status as a massive buyer of foreign goods, history of entrepreneurship and growth, history of corrective action by the Fed, insanely powerful military, and so on, means that it could owe 100x times as much as it does today, and nations would probably still happily lend.
A nation is not a household. It doesn't reach some magic number "lending ceiling" where everyone else says, "you owe 100 trillion and 1 dollars, we're not gonna lend any more" like might happen to a regular person with a credit card. A "AAA" rating is just some label that some private company makes up.
So the issue isn't some dollar amount drawn out of an economist's hat, but rather the real trust inferred from a nation's geopolitical position.
Any real students of economics please do correct me, as I have no doubt my reasoning is flawed somewhere. But this is how I currently understand it.
About your examples, the first sentence of the Wikipedia article for Zimbabwe is: [1]
"Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in Zimbabwe's civil war and confiscation of private farms."
While in Weimar Germany the French occupation of the Ruhr valley, the at that time most important industrial region of Germany, directly preceded the hyperinflation. ( And arguably the Beer Hall Putsch [2], Hitlers first attempt to seize power, was the more important event in '23.)
[1]https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
[2]https://en.wikipedia.org/wiki/Beer_Hall_Putsch
I'm definitely pro-Krugman.
If you're interested, there are some particular blog posts about the history of the austerity movement and why it's ridiculous:
http://www.nytimes.com/2010/07/02/opinion/02krugman.html -- is a good place to start.
But I'm not in the mood to argue about it, so have a pleasant day.
This is not to say that there wasn't gross economic mismanagement on the part of the Greek government, but focusing on that distracts from the real solution.
UPDATE: I'm in complete agreement with everyone pointing out that the problems aren't identical. Perhaps the question is whether, if you were to summarize the causes Euro crisis in broad terms, you ought to mention Greece's economic mismanagement first or the overall crash of the financial markets as the more important factor. My assertion is the latter, mostly echoing Stglitz's analysis here:
[1] http://www.youtube.com/watch?v=GdP-Fab8JX8
[2] http://www.youtube.com/watch?v=4Ezn8Sgzxd8
Spain is closer to Ireland in terms of housing market effects on economic downturn, but ultimately each economy functions on a different system, so it's not entirely wrong to attribute economic problems to separate causes. There is some overlap, of course, but it's definitely not identical.
Just to be clear, my answer is: Each country's problems are rooted in the collapse of the US housing market and the resulting financial crunch. The country-to-country variations are there and they're significant, but secondary.
[Greek/US dual citizen here]
Having lived in Greece for upwards of a decade, during the particularly transitional time from ~1988-2004, this is not in line with my experience. Hear me out before writing me off as an apologist :)
Greece has a large problem with collecting the taxes they claim citizens owe but not a large problem with collecting a large fraction of GDP. According to the World Bank, they are right in line with Sweden and France (http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS). These numbers are corroborated by the OECD (PDF warning http://www.oecd.org/newsroom/41498733.pdf). [Edit: I wrote Sweden and France when I meant to write Spain and France; I apologize for the error but I have left it lest someone think I am trying to whitewash :-)]
Greece has collected plenty of money; we overspent, and we spent stupidly i.e. in ways that obtained either votes or kickbacks, and not in ways that improved the economy or the life of the common person. As just one example, look at the paltry investment of the Greek government in its only competitive advantage, the tourism business. The cast and crew of "Mamma Mia" did a better job promoting tourism in Greece than any Ministry of Tourism effort. Spain, Italy, and Turkey are eating our lunch.
We also got used to almost five decades of "free" foreign money through the Marshall plan, post-communist hysteria leading to US military aid and military bases, EEC/EU growth funds, and having our debt priced as if it were of German quality.
In my opinion, the tax evasion is a serious social justice problem, but it is not a serious budgetary problem. The bulk of Greece's public budget is supplied by ordinary people making ordinary incomes, and it is a travesty that the wealthiest manage to dodge contributing proportionately. But that does not mean the government does not have enough money to do a good job.
I would love to believe that the government has failed due to being starved of resources; at least then a solution like taking on more debt would be plausible. With the situation as it stands, I can only respond with our poet laureate Seferis' exasperated lament, "Everywhere I go, Greece wounds me".
Part of my problem with the statistics you link is that the measure is limited because it's known that US revenues are in the 16-19% range but they are listed here at 9%. Loathe as I am to cite the Heritage Foundation they are the most complete figures on wikipedia and show Greece heavily lagging France and Spain.
http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenu...
Next, the black market in Greece is estimated at 25% of GDP which inflates official collection percentages even more.
http://en.wikipedia.org/wiki/Tax_evasion_and_corruption_in_G...
Finally, it really doesn't matter that they collect some nebulous "large share of gdp". What matters is that the scale of evasion is far greater than Greece's immediate problems.
But Nikos Lekkas, the head of the Greek tax inspectorate, the SDOE ... insisted that Greece could easily pay off its debts if taxes due for payment were paid into the Greek state's coffers.
”Tax evasion in Greece has reached 12 to 15 per cent of the gross national product... That is €40 to €45bn per year. If we could recover even half of that, Greece would have solved the problem.
http://www.telegraph.co.uk/finance/financialcrisis/9319799/G...
You raise an interesting question, to which I don't have a conclusive immediate response. I'll have to dig deeper to really know. The numbers on the US do seem out of line with well-known facts. However, here's another ~30% estimate from Eurostat (http://epp.eurostat.ec.europa.eu/statistics_explained/index....). Given the conflicting reports, I can only say that it's theoretically possible that Heritage is right and OECD/Worldbank/Eurostat are jointly wrong. If I had to weigh Heritage's ideology and their likely expertise on European economic statistics, as compared to lined-up answers from OECD/WorldBank/Eurostat I know where I'd bet. Still, the 9% reported for the US does seem troubling. I have a research project for the evening.
As for the scale of tax evasion and whether it could plug the hole: it's really, really hard to have an objective opinion here. My inner Greek is saying of course SDOE claims that tax evasion is the main problem. I can't prove that they're wrong, and I don't want to pollute the discussion with personal anecdotes. I'll only add that the SDOE claims don't link to any examinable research.
Thank you for an interesting counterpoint :)
[Edit: the Eurostat data shows Greece parallel to Spain but way behind France... so at this point I'm going to tentatively retract the comparison to France pending further research, but I think I am still persuaded that Greece has a tax base that commands a significant-enough fraction of GDP for them to manage responsibly]
I don't think Keynes' model is perfect. I'm excited to see what new kinds of models emerge after this depression -- we have a lot more data to play with. However, at this stage, it makes a lot more sense to stick with models that have kind of worked sometimes rather than to just operate off of pure, baseless speculation.
The problem is ignoring the reality that at some point the government cannot issue more debt. The US government has been in structural deficit for all but a few of the past 40 years. If we look at the funny money of state and local pension assumptions there's even more stimulus. OF COURSE when that's withdrawn the economy slows.
It doesn't matter if the fiscal multiplier is 0.5 or 1.5 when the government simply can't issue more debt. Multipliers matter when a government has decisions to make, when it can't issue more debt there are no decisions to be made.
It's instructive to remember that we match our deficit spending with debt issuance by legal fiat and not for any real operational reason. We could just as well deficit spend freely with no debt issuance (and no, it would not be more inflationary.
Of course, treasuries are a risk free savings vehicle for the private sector and world at large, and they play an important role in managing the payments system (though not one that couldn't be replace), so I'm not suggesting that we stop issuing debt. But it's important to understand how the system works so we can stop with the silly notion that we are just scraping by on the good graces of Treasury buyers.
And, "constant growth" depends on a structurally sound economy. Well, if the economy has been shaped to meet demand from a necessarily contracting customer -- the government -- its structure gets distorted. Add in the distortions from crazy federal credit policy (Fannie / Freddie). Now we have an economy that must reallocate productive resources to meet real demand -- but no one has a clue where that demand actually will be because we're so distant from the environment supporting it.
tldr; 40 years of government stimulus, in various dimensions, has fundamentally detoriated the economy's ability to deliver "constant positive growth." We've gone past the point where we can outgrow the debt growth needed to fuel this government stimulus growth model.
i.e. stimulus, in Keynesian terms.
(Thinking about economics in terms of common sense and morality is generally unhelpful.)
You're correct about inflation but unfortunately their in the Euro so they either have to leave it or suffer a very long and painful internal deflation.
The only thing that would probably help Greece is massive debt foregiveness (bankruptcy if applied to individuals or companies) which isn't a "stimulus" so much as a gift. Again if it worked like a regular bankruptcy they'd agree to pay off part of their debt on a plan, but be forgiven a bunch of it, and their credit would suck for many years to follow.
Really? Than tell me what other non-austerity policy is being proposed. We're not talking about what is being pursued. The discussion is about the merits of the alternatives to austerity. Massive debt forgiveness is one although at this point it's a complete fantasy. What else have you got?
Intl macro isn't really my field, so there may be errors in that description.
So you need less and less effective stimuli programs, the higher the dept to GDP ratio is. ( And I do not know if anyone does claim that dept-financed stimulus is the cure for any economic ill. But if not enough money is the problem, one can simply print that stuff.)
I find it funny when Keynesians talk about bubbles. What do you think happens when you set interest rates absurdly low? You could make the argument it stimulates the economy, sure, but at what cost?
Schiff's misfire is especially relevant to this discussion, because it demonstrates the Austrian school's grossly flawed understanding of public finance and our monetary system (despite having valuable things to say at times).
Actually for me from the point of view of Mises and his praxeology everyone who uses his methodology to advise a policy is just guessing and expecting that his views are coherent with reality.[1]
Austrian school is very deep, and not a monolithic bloc like mises.org loves to say, there were Austrian economists who were not Mises and disagreed with his methodology, including Machlup and Wieser who were Mises student and teacher respectively.
[1]: More of that in here: http://mises.org/mofase/ch4.asp It's just my interpretation of his view.
http://gregmankiw.blogspot.com/2012/12/a-krugman-puzzler.htm...
edit: to be specific, he claims to be a non-fairweather Keynesian: stimulus on the downturn, austerity in good times. They seem to have a cyclical lifecycle and are all off somewhere spawning when it's time for the cuts.
A Link: http://www.independent.ie/business/irish/dan-white-the-econo...
http://studiotendra.com/2012/12/29/what-is-actually-going-on...
When a country of 320,000 people defaults on their debt it doesn't have significant global consequences. When you start defaulting on debt on behalf of 50, 100, or 150 million people then it starts having very serious consequences on the creditors, on financial markets, and so forth.
I'd like to see some explanation as to why this wouldn't work with a larger nation and not simply, because.
I fail to see how a credit writedown for both debtor and creditor suddenly becomes unworkable when it crosses an imaginary population or gross debt line. Plenty of very large companies have undergone debt restructuring and survived to tell the tale. GM was one of the largest companies in the world and the debtors and creditors + equity holders all got wiped out or were given a severe haircut. If the same argument was followed someone would point to a smaller company and say ; well, they are small, it's OK to default. But that big company, no, that's too big.
Nobody pretends that calling an unsustainable and unpayable debt defaulted is a pleasant experience, but it's better to put zombies to the death rather than have them zombie-walking around the economies of the world. If the debt can't be paid back, adding more debt to it is never going to get solved. Anyone who suggested that fixing GM with another set of super-sized loans would have been laughed out of the room - they couldn't make the payments as it was. Yet someone this makes the magic jump from company to country and it's considered sound advice.
Well, not to me.
"The result is ever greater levels of social inequality, as wealth is funnelled from the bottom to the top.
Big business, the banks and the super rich are being increasingly relieved of paying taxes.
The resulting deficits in state budgets, exacerbated by the hundreds of billions awarded to the banks in government rescue packages, are now being addressed through a combination of increased consumption taxes, which fall most heavily on the working class, and savage cuts in social programs and public sector jobs and wages."
The private sector in general is in crisis because the banks won't lend. They won't do that because of the problems on their financial sheets - they know they hold toxic assets and they know everyone else does, so they cannot trust anyone to pay off their debt, including other banks. This means that private investment has decreased severely, which puts enormous downward pressure on the economy.
Since the private sector won't invest, the only source of investment big enough to fill the hole (which might be as big as $8 trillion), is government. Austerity is a problem because it limits the governments ability to invest, which means that you have a shrinking economy trying to make up ground, which is a losing battle, especially for the poor as you point out, since they do not have the assets to absorb the economic hit.
I should say none of this is my opinion, I'm merely summarizing Krugman, Stiglitz, and Baker, who are the three economists whose work I've followed on the matter.
Yet somehow per-capita government spending keeps going up: http://www.usgovernmentspending.com/spending_chart_1990_2017....
"For example, based on U.S. data, Romer and Romer (2010) find that, in response to a tax increase, GDP, investment and consumption all decline, but investment growth falls by about four times more than consumption growth does."
The reference is to this paper: http://emlab.berkeley.edu/~dromer/papers/RomerandRomerAERJun...
Slightly more technically: there is a correlation between (a) the magnitude of economists' forecasts of cuts in government spending and (b) the quality of their forecasts of economic growth.† The higher the forecast of spending cuts for a particular country, the farther from reality was the growth forecast.
The paper concludes: expected reductions in government spending cause bigger drops in economic output. I leave it to the reader to consider alternative explanations.
† — In 26 European countries. Recently. On average.
In the context of countries like Greece and Portugal, austerity just means that the governments can't spend more money than they earn, simply because they don't have access to it on international financial markets; the only money they have now is the Troika's. More money from the Troika means more debt, more interests to pay, and longer dependency on outside help.
Also, the main cause for the recession is that the governments want to correct the deficit by raising taxes, that is, by imposing austerity on their people, not on their spending. These countries avoid structural changes, which should target things like labor laws, the unsustainable Social State, the judicial systems, and create conditions to attract foreign investment.
I don't really understand how people can advocate for government stimuli in these countries when that's the sole reason they're in this mess to begin with.