Alexandria

Our good blog master has pointed me to this account, suggesting, as he puts it, that “austerity may only be a windmill in La Mancha.” So I will pause from my plans of blogging about the current collapse of the Greek political system, and what it means for Greece’s future that both its formerly large centrist parties now stand discredited (I hope to have that post tomorrow or Thursday, depending on how badly post-chemotherapy side effects are hitting me then), and instead discuss austerity and structural reform, and how they apply to the US and to the EU. But first, let me reproduce the quote that H. M. Stuart excertped from the article (you can follow my link for his full comment):

The only problem: The idea of EU austerity is a myth.

In fact, despite a lot of wailing, very few cuts have actually been made in Europe. Austerity? Starting in 2008, most governments enacted large stimulus packages.

Sadly, stimulus in Europe, as in the U.S., didn’t work. As proof, the EU has now entered into its second recession in four years, with soaring debt, rising unemployment and few prospects for future growth.

Austerity? Spending has boomed in the EU over the last decade. During the 2000s, EU member nations collectively boosted government outlays by 62%. Average government spending by EU nations today stands at about 49.2% of GDP — vs. 44.8% in 2000.

On its own website, the EU itself ridicules the notion of government austerity as a “myth.”

“National budgets are NOT decreasing their spending, they are increasing it,” the EU says, noting that in 2011, 23 of the 27 nations in the EU increased spending. This year, 24 of 27 will do so.

And now I want to talk about deficit hawks, doves, and owls. This distinction has been drawn, recently, by self-described deficit owls, who picked the bird that symbolizes wisdom, to express their view that people like Paul Krugman are too hardline on the deficit. Or, to put it another way, that you not only should be doing a deficit fueled stimulus in hard times, as Keynesian economics suggests you should, you also needn’t worry all that much about deficit fueled spending in good times, because the government can print money. And it can, say the owls, get away with a lot more expansion of the money supply than most people think it can. Deficit owls appear to be way outnumbered, both in politics and among economists, by deficit hawks like Merkel, who want austerity now and plenty of it, and by deficit doves like Hollande, who want austerity eased a bit and accompanied by some sort of growth measures, but agree that deficits should be reduced over the long haul. (Whether the leftist Greek SYRIZA party, currently trying to form a government in Greece after jumping to a second place finish in the polls, would agree that deficit doves have a better case than deficit owls is less clear to me.) Paul Krugman is a deficit dove; his railing against current austerity is routinely accompanied by assertions that deficits in recessions should be countered by surpluses in good times. But it’s easy to miss the distinction between him and a deficit owl, since he’s being much louder about his opposition to austerity now than about his support for more or less balancing the budget over the long haul. Alice Rivlin has a long history as a deficit hawk, though in the face of the current recession she makes enough concession to deficit dovishness to argue that, as long as we have a firm deficit reduction plan now, we can backload some of the actual deficit reduction to allow the economy to improve. Even so, her take on the deficit remains considerably more hawkish than Krugman’s.

Here are a few links on deficit hawks, doves, and owls:

Blogger letsgetitdone, who identifies with the deficit owls, explains the deficit owl position here:

Deficit owls, believe that there is no structural deficit, and that most of the present deficit will go away when the recession ends. They also believe that in times of unused productive capacity like these, deficits are caused by the state of the economic system and that explicitly managing them by taxing more or spending less will not improve its condition, but only result in a downward economic spiral making conditions still worse. On the other hand, if real economic problems like unemployment, alternative energy capacity and production, infrastructure renewal, education, and industrial innovations are addressed through Government spending, then aggregate demand spurring private sector business activity ending the recession will result, and the deficits will largely go away except for those resulting from excessive private sector saving in the economy. In addition deficit owls believe that in a fiat money system, where there is no debt in foreign currencies, and no “peg” to such currencies, solvency is never a problem for the Government, and that while inflation partly caused by Government deficit spending can become a problem in such a system, this can only happen when full employment is achieved.

Here he compares deficit doves and deficit owls. I think that his comparison, which favors the owls, isn’t fair in some points to the doves (for instance, he seems to be arguing that doves don’t have any opinion about what sorts of stimulus work better, but owls do, which seems to me flatly wrong – deficit doves will gladly tell why some sorts of stimulus stimulate more than others). But I’ll quote just one of his distinctions (you can see his full post for the rest):

2. Government fiscal policy over the business cycle — Keynesian deficit dove position: deficit spend in bad (less than full employment) times; have government surpluses in good (full employment) times.

MMT position: Government surpluses withdraw net financial assets from the private sector. Therefore, they should only be run when the private sector is over-heated and demand-pull inflation exists. Since the size of the Government deficit, without explicit Government attempts to raise taxes, is determined by 1) the level of savings of the private sector; and 2) the level of the trade deficit (surplus), it is perfectly possible that the Government may have to run deficits continuously to maintain full employment, if there is demand leakage from a trade deficit and/or private savings that the Government must make up for by deficit spending.

Here’s another deficit owl.

Ezra Klein discusses the deficit owls and their critics:

A key split among Keynesians dates to the 1930s. One set of economists, including the Nobel laureates John Hicks and Paul Samuelson, sought to incorporate Keynes’s insights into classical economics. Hicks built a mathematical model summarizing Keynes’s theory, and Samuelson sought to wed Keynesian macroeconomics (which studies the behavior of the economy as a whole) to conventional microeconomics (which looks at how people and businesses allocate resources). This set the stage for most macroeconomic theory since. Even today, “New Keynesians,” such as Greg Mankiw, a Harvard economist who served as chief economic adviser to George W. Bush, and Romer’s husband, David, are seeking ways to ground Keynesian macroeconomic theory in the micro-level behavior of businesses and consumers.

Modern Monetary theorists hold fast to the tradition established by “post-Keynesians” such as Joan Robinson, Nicholas Kaldor and Hyman Minsky, who insisted Samuelson’s theory failed because its models acted as if, in Galbraith’s words, “the banking sector doesn’t exist.”…

And while Modern Monetary Theory’s proponents take Keynes as their starting point and advocate aggressive deficit spending during recessions, they’re not that type of Keynesians. Even mainstream economists who argue for more deficit spending are reluctant to accept the central tenets of Modern Monetary Theory. Take Krugman, who regularly engages economists across the spectrum in spirited debate. He has argued that pursuing large budget deficits during boom times can lead to hyperinflation.

Paul Krugman has been critical of deficit owls :

It’s really not relevant to current policy debates, but there’s an issue that’s been nagging at me, so I thought I’d write it up.

Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate.

But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone….

OK, I don’t think that’s right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough….

And also here

In a way, I really should not spend time debating the Modern Monetary Theory guys. They’re on my side in current policy debates, and it’s unlikely that they’ll ever have the kind of real — and really bad — influence that the Austrians have lately acquired. But I really don’t feel like getting right back to textbook revision, so here’s another shot….

The point is that there are limits to the amount of real resources that you can extract through seigniorage. When people expect inflation, they become reluctant to hold cash, which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.. Do the math, and it becomes clear that any attempt to extract too much from seigniorage — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed. This would not happen, even with the same deficit, if the government can still sell bonds.

The point is that under normal, non-liquidity-trap conditions, the direct effects of the deficit on aggregate demand are by no means the whole story; it matters whether the government can issue bonds or has to rely on the printing press. And while it may literally be true that a government with its own currency can’t go bankrupt, it can destroy that currency if it loses fiscal credibility….

I am neither a deficit hawk nor a deficit owl; I am a deficit dove. So why do I devote so much of this post to the deficit owl position? Because, under current conditions, it can be easy to confuse with the deficit dove position. Paul Krugman agrees with Jamie Galbraith in many of his current policy positions. Both Krugman and Galbraith think that now is not a good time for austerity, that a recession is not the time to sharply cut spending. And, since Krugman is loud and firm in his denunciations of austerity now, the other part of the message, that you do take some care about deficits over the long haul by running surpluses in good times, may not come across so loudly. But a Keynesian approach to the business cycle isn’t about having a high spending government no matter what, it’s about scheduling your spending such that it’s done when labor’s just waiting to be hired, and scheduling your collecting to pay for that spending so that it’s done when there’s a good supply of gainfully employed people to pay those taxes. You can do that kind of cyclical adjustment to your taxes and spending whether you have a relatively small government or a regularly large government. That the two issues are separate can be seen by the case study of Germany, which doesn’t appear to believe in Keynesian economics, but where even the conservative party supports a degree of social safety net that you’d never get Republican support for here.

As a deficit dove, not hawk nor owl, I believe that, in times of recession, governments should use whatever means are at their disposal to stimulate the economy, to the degree that they can. There may be reasonable debate about how much of that should be done through monetary policy, such as adjustment of interest rates or quantitative easing or even seignorage, how much should be done by tax cuts (and on what sorts of taxes), and how much through spending (and how that spending is directed). But, when we get high cyclical unemployment, I don’t think that doing nothing about the cyclical unemployment issue is the right thing.

Now, obviously, the degree to which your government can do these things matters. In the US, we have a government that has fewer structural issues than the more debt ridden of the European countries, that can still get good interest rates on its bonds, that controls its own money supply, and whose current deficit is sufficiently cyclical that we probably don’t need sharp spending cuts right away. We also have a country that tends to want to ignore its deficit issues in good times (or at least, only use them as a convenient political talking point for the party that’s out of power), and that has a looming long term deficit problem in the form of increasing health care costs (combined with an aging Baby Boom). So the right approach here seems to me to be a combination of listening to people like Paul Krugman about the danger of austerity right now, and listening to people like Alice Rivlin about the need to agree on deficit reduction over the long haul while there’s some actual political will to do it (if, indeed, there is actual political will to do it now – as opposed to political will to pose deficit reduction proposals that the other party will never accept). Greece, though has fewer options.

Watching the disaster in Greece confirms me in my deficit dove position, for two reasons. The first, the one that’s repeated again by critics of EU austerity, is the way the economy has spiraled into recession as austerity measures are implemented. It’s simply not true that austerity hasn’t been tried in the EU. The article with which I began this post makes the case by using a time frame long enough that it includes the spending boom before the austerity, and then including the whole continent (which hasn’t been equally rigorous at implementing austerity). But, for all that Greece hasn’t done nearly as much austerity as Germany wishes it to, it’s done plenty enough austerity for Greeks to feel the bite. Spending is down. Public employees have real pay cuts. The public health system is really more strapped than before. And what Greeks have seen to show for this is a spiraling unemployment and a debt burden that only declined when Greece finally persuaded its creditors to write off a chunk of the debt (“voluntarily,” but because they weren’t likely to get it anyway).

The second, though, is that Greece also makes me dubious of the deficit owl position. It’s true that Greece would have more options for dealing with its debt problem if it controlled its currency. But, frankly, it got into this mess by running a primary deficit (that is, the kind where you still have a deficit even when you eliminate debt payments) for years, and I don’t see how even a government that controlled its own currency could manage that level of deficit while maintaining a currency that people can trust. Indeed, I think a realistic anti-austerity position as applied to Greece is not “don’t do austerity during a recession,” (I see no practical way for Greece, in or out of the EU, to get the money not to need to do some degree of austerity), but rather “try to find a way to do the austerity as gently as you can, while somehow doing things to promote growth.” Spain’s another matter; as a country that had a fairly balanced budget before the current crisis, spiraled into trouble after the mortgage market crashed, applied the recommended austerity measures more assiduously than many European countries, and is only getting worse. If you want a case study for the deficit dove position (combined with an object example of the risks of being tied to a currency that isn’t being managed to suit your economy), Spain is it. But it seems to me that the deficit owl position requires more trust in the government than I’m willing to have. My government may be, in fact is, more fiscally trustworthy than Greece’s, but even if it might be possible to somehow run a chronic deficit to boost employment, while keeping inflation modest, I don’t actually trust my government to do this. Balancing the budget over the course of a business cycle, but not over the course of a year, running deficits and surpluses when appropriate to deal with cyclical unemployment, seems to me a simpler rule, and one that doesn’t require me to assume that, even if I could be convinced the deficit owl proposal would work in theory, I’m being governed by people wonkier and more skilled than the people who in fact run the government.

And here I come to the next economic argument, the one about cyclical vs. structural unemployment. Here are a few links about that debate:

David Brooks argues for attention to structural factors:

… The cyclicalists rail against what they see as American austerity-mongers who resist new borrowing. They really rail against the European ones. They see François Hollande’s victory in France as a sign that, in Europe at least, the pendulum might finally be swinging from austerity to growth.

Other people — some on the left but mostly in the center and on the right — look at the cyclicalists and shrug. It’s not that they are necessarily wrong to bash excessive austerity. They’re simply failing to address the core issues.

The diverse people in this camp — and I’m one of them — believe the core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt….

Ezra Klein argues for a more aggressive approach to cyclical unemployment than Brooks promotes.

… This time, however, there has been an unusual role reversal: It is Summers who is trying to rouse an economics profession that has settled into a kind of complacency, and Rajan whose argument is more comfortable to much of the political and economic establishment….

But as Summers sees it, the short run has a nasty tendency to become the long run. “The evidence is that cyclical problems harden into structural problems,” he says, “because people who have been out of work for a year lose their ability to work.”…

Brad DeLong argues that we’ve already seen cyclical unemployment convert into structural unemployment.

Jared Bernstein argues that “If ever there was a false choice, this is it. Of course we have to do both, and if anything, they’re complements, not substitutes.”

Ryan McCarthy rounds up further arguments on both sides.

Now, I think that Jared Bernstein is right that “Of course we have to do both,” but it’s clear that the mix of structural to cyclical, and the structural issues, are different in different countries. Given that the US is doing well relative to much of Europe, I’d presume that the structural issues are worse there, or, in particular, worse in the EU countries that are most in crisis (though the US should still take the opportunity to address structural issues revealed by the crisis). Even there, though, the reasons that countries in crisis differ. Ireland’s debt crisis came from a banking collapse and a government decision to bail out the banks. Spain had debt levels that were fine until its mortgage market collapsed; evidently its economic was particularly vulnerable to the mortgage boom and bust. Both Italy and Greece seem to have long term structural issues of governance, debt management, and regulations that don’t promote economic growth, though Italy has more strengths and Greece more weaknesses. I’m not entirely sure what Portugal’s specific issues are, since most of the articles I read pay less attention to its crisis than several of the others, for various reasons: Greece is the worst basket case, Italy and Spain are the biggest economies, and Ireland is alternately a grand example that austerity actually can work, and a grand example that austerity is failing even in Ireland. Still, it seems to me that Greece, for example, even if it could somehow get someone to give it enough money for a Keynesian countercyclical stimulus (not bloody likely), couldn’t afford to ignore its long term structural issues. The argument for moderating austerity in the PIIGS isn’t so much that stimulus will get them out of trouble (not all of them, at any rate); it’s that some measure of short term relief (even if it’s just the limited relief of being given a longer time frame to implement austerity) may allow structural reforms time to work before voters rebel.

Which brings me to the Greek election. Voters sure have rebelled. Given that they’ve rebelled all over the place, it’s not at all clear what the policies of the ultimate government will be. I don’t know who I would have voted for, if I were there. Maybe the Democratic Left (PASOK and ND have not inspired confidence). I sympathize with the rejection of austerity, as Greece is surely suffering now, but worry that a lurch to the left may make structural reform less likely. From all that I’m reading, Greece really does seem to be overregulated in business unfriendly ways, and to have an inefficient and clientelist public sector. And a lurch to the right would be still worse, if a lurch to the right means Golden Dawn rising.