The Euro: A perfect case study in political economy: Krugman vs the other Gordon

One of the problems with economics is that it tends to narrowly parse its objects of inquiry. That is, it suffers from a deranged elegance: too few factors are considered and the ones that are get so rendered that they rarely resemble the original beast. It is curios in this respect that Paul Krugman should play the church mouse and Stephen Gordon the Scrooge. But hey I come from an Anabaptist tradition so what do I know. Between simply getting for free through a culture of potential heresies in the margins and a culture of perfecting the reformed holy writ something almost always creeps in.

Shit happens and in this, the Euro, Gordon is closer to the mark than Krugman.

As Gordon (Stephen not to be confused with the other venerable Gordons: different breed I gather) argues:

The euro project had much more to do with advancing the goal of promoting an ever-close political union than implementing a sensible monetary policy. As the current crisis has shown, a common currency is hard to sustain without a central government that is able to redistribute income from one region to the other. It seems to me as though the people who pushed the common currency hoped that by the time the euro was put under pressure, the central government with the necessary powers of redistribution would be in place.

I think Mr. Gordon is on to something but he does not go far enough. Both right and left in Europe feared the Euro was part of a broader project of cajoling EU countries towards a more neo-liberal policy paradigm (perhaps one which Gordon would support). The point was to force an independence between the central banks and potential or actual “political” interference (again something Gordon would probably support). Note that in Sweden the fight over the adoption of the Euro played itself out in somewhat this way. Interestingly, both the social democrats and the “bourgeois” parties wanted the Euro. The popular left did not because despite the functional independence of the SCB the popular left wanted the possibility of a bank that could be capable (if forced) of taking everything from exchange to inflation rates into consideration.

The other side of the Euro debate was the desire to make sure that the EU was not plagued by beggar-thy-neighbour monetary policy–reasonably understanding that a race to the bottom could be negative sum. And I think this is why the putative left establishment in Europe supported and continue to support the Euro.

Krugman is thus naive; the Euro was never a mere technocratic exercise designed to reduce transaction costs. Yet Gordon is equally naive for different reasons. The Euro was only in part about transaction costs and only in part about redistribution (although as Gordon notes redistribution is the spoonful of sugar that was supposed to make the medicine go down) it was also in large measure a plan to take the perceived candy jar away from the children–politically accountable national central banks.

In this regard Canadian central banking works because politically speaking it is free to rest just above whatever the FED decides. Thus this why the BOC never goes offside: it takes its cues and dues from the FED not parliament. The EC could not guarantee this unless all were brought to heel: thus the Euro.

If we had a less independent central bank in Canada I suspect Gordon would be singing a different tune.

The Ignoble and Noble Prizes for Economics

For Immediate Release

The Real-World Economics Review Blog is holding polls to determine the awarding of two prizes:

The Ignoble Prize for Economics , to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC), and
The Noble Prize for Economics , to be awarded to the three economists who first and most cogently warned of the coming calamity.

It is accepted fact that the economics profession through its teachings, pronouncements and policy recommendations facilitated the GFC. We also know that danger signs became visible long before the event and that some economists (those with their eyes on the real-world) gave public warnings which if acted upon would have averted the human disaster.

With other learned professions entrusted with public confidence, such as medicine and engineering, it is inconceivable that their professional bodies would not at the very least censure members who had successfully persuaded governments and public opinion to ignore elementary safety measures, so causing epidemics and widespread building collapses.

To date, however, the world’s major economics associations have declined to censure the major facilitators of the GFC or even to publicly identify them. This silence, this indifference to causing human suffering, constitutes grave moral failure. It also gives license to economists to continue to indulge in axiom-happy behaviour. Nor has the economics establishment offered recognition to those economists who were not taken in by fads and fashion and whose competence, if listened to, would have prevented the collapse.

These two silences reveal a continuing moral crisis within the economics profession . The Ignoble and Noble Prizes for Economics are being offered as small first steps towards a cure.

Poll Procedures for the Ignoble Prize for Economics

Stage One: Nominations and Evidence

Nominations for both prizes are open to the international community of economists, rather than limited to a closed and secret shop. For each nominated economist an evidence page will be opened on to which people can leave evidential comments. In this way a documented case for (and against) each candidate will be built up.

I don’t know maybe we should have a prize for ignoble ideas. Efficient markets and rational expectations were pretty much baked into the reform and conservative wings of the profession. To single out Fama or Friedman seems odd. What about Krugman? He has authored how many papers with rational expectations sitting TDC? Progressive liberal economists need to take some blame for having played and purged along to get along. Economists, for the majority, were a pretty cozzy lot before the GFC. I am glad that after the GFC (and for one a faux noble) that some decided to break ranks ATF, but they enabled the general ideological climate as much as any putatively right-wing protagonist of the profession.

Selected Central Government Debt Ratios: An image begs a thousand questions

When discussing with my undergrad students why I thought Japan Inc. was bust I trotted out the graph below.  However, this morning while looking at the graph several questions came to mind.

1) From 1998 – 2008 what was average real interest rate in Japan and how does that compare to the ten years previous to 1998?

2) What has been the average level of inflation in Japan since 1998?  Again how does that compare to the 10 years previous to 1998?

I already know the answer to those questions but I would have not arrived there by any HAT (highly accepted theory).

3) Why are we even talking about programs cuts in Canada before it is clear that the world economy and the US economy has started a robust recovery? And why especially when Canada is way below the advanced capitalist curve (in terms of debt to GDP)?

Click for larger image

Today’s Big Question

Today’s big question is will bond holders take an equity stake in GM or risk a severe hair cut in bankruptcy court. I have no particular experience in Corporate US bankruptcy law so I am hard pressed to see the angles. It strikes me though that given the union has already accepted a swap and the Government the Bond holders are in a precarious state as the major principles have agreed to make the swap. Yet in this ideological climate where the non-governmental financial sector in the US has a huge sense of entitlement and there still exists tremendous ideological support for a certain noblesse oblige in official quarters when it comes to private finance I just can’t come to good sense of what the bondholders know that the rest of us don’t.

Canadians have a particular interest in all this because both the feds and the provinces have stepped in to provide financial support and the unions at Chrysler in any event are posed to take it on the chin. I personally find a debt for equity swap appealing; or in the case of workers a concessions for equity alternative more appealing than the gun of bankruptcy court.

It does beg the question, from a strategic point of view, if the CAW would not be smart to be making a concessions for equity play so that in the event that Chrysler did end up in bankruptcy they would appear to have already been willing to take on the risk and cast the bondholders in a dim light.

In some corners workers taking equity stakes in a context in which they do not enjoy control is a sticky wicket. I am sympathetic to this position, but I think with a little savvy they could play their equity stakes for bigger control. And the sticky wicket argument assumes that if workers take a stake they end up over-identifying with the company and its future viability as a capitalist enterprise and thereby internalise the boss’ voice in their head. That is likely true, but they do so independent of an equity stake in times such as these. So the real question becomes are auto workers capable of running a car company? I think the answer is yes and further I think they are capable of running better car companies than management. Line workers in tandem with engineers could do incredible things from better product design to better assembly design.

There is the argument to be made that when workers take the step towards managing themselves they take a step towards managing their economy.  And I can’t help but think that workers with better sense of how things work at each stage of finance production and distribution would be a useful paliative to today’s malaise and the glib attitude of our ruling class.

Perhaps a more aggressive stance around the bargaining table would enhance the opportunities for workers self control and direction. Perhaps not…but that is the really big question for today.

Bank of Canada Beats a Retreat on Optimism

Well I do not mean to brag but I did argue at the time, along with others, that Mark Carney and the BOC were being overly optimistic to which the usual suspects countered that the BOC had super superior models and modelling acumen. So it was, as it is now that Super Mark and the BOC are beating a hasty retreat from their rosy optimism. The globe reports:

The Bank of Canada cut its benchmark lending rate to the lowest possible, and promised to leave it there for as long as a year in order to fight a recession that is deeper and will last longer than previously thought……

The central bank now predicts that Canada’s gross domestic product will shrink by 3 per cent in 2009, compared with a January estimate for a 1.2-per-cent contraction.

The Bank of Canada also abandoned its relatively optimistic estimate that the economy would rebound to expand 3.8 per cent in 2010. The recovery will be far more muted, with an expansion of 2.5 per cent in 2010, the central bank said.

Mr. Carney and his chief advisers on the governing council are trying to restore confidence amid Canada’s first recession since 1992. Employers have shed more than 270,000 jobs since the country fell into a recession in the fourth quarter, a period during which factories produced at only 75 per cent of their capacities, the lowest rate on record…..

Hmm…maybe we start taking fiscal policy a little bit more seriously now and not its faux ami tax cuts?


Erin Weir on BoC rate cut.  Better Late Than Never

Alternatives for Autos?

The Auto Crisis:
Placing Our Own Alternative on the Table

Sam Gindin

Deep economic crises violently interrupt daily lives and force more radical responses onto the public agenda. In the case of the North American auto industry however, that radicalism has been remarkably one-sided. Absent an alternative of their own, workers were (and remain) trapped by their dependency on ‘their’ corporations becoming stronger. On the one hand, corporations and governments have aggressively attacked auto workers and effectively ended their status as the trend-setters for working class gains; on the other, there has been virtually no work interruptions or effective political response from the auto unions.

In the now 100 years since Henry Ford first introduced the assembly line (1908), only the Great Depression matches the present crisis in terms of its impact on the U.S.-based auto companies, their suppliers, and the workers and communities involved. At that time, workers responded with the breakthrough of industrial unionism. Can auto workers respond as creatively today?

The Road to Nowhere

At his first press conference after replacing the former head of General Motors, GM’s new Chief Executive Officer seemed to offer some relief to Canadian auto workers. The new collective agreement in Canada, Fritz Henderson declared, made the Canadian workforce “fully competitive with the UAW” (Globe and Mail, March 31, 2009).

The catch of course was that this was not the end of the story. Soon Henderson was warning that, “We need to go further, you can’t really afford to take anything off the table” (CNN’s “State of the Union”). Part of shunting Richard Wagoner, the former head of GM aside was to put more pressure on the UAW to reopen their agreement and make even more concessions. And as that occurs, GM will surely return with more demands on the CAW.

It used to be that corporations promised jobs for concessions; now they aggressively demand more concessions alongside fewer jobs. That earlier trade-off was of course always a myth. Concessions don’t save jobs because in a capitalist economy, corporations driven by profits and limited by competition or consumer demand won’t or can’t deliver on job guarantees…..Continue reading

Last in First out: Harper contradicted again

The FP reports that The CEO of TD bank directly contradicted Harper’s rosy prediction that Canada would be the first country out of the recession.  What is more, he argued that Canadian Banks would not be leading the way as they were going to be forced to deal with the collapse of securitization and foreign funding.

Canada can’t lead global recovery: Clark

Mr. Clark said he did not agree with the U. S. government’s two-pronged approach of addressing the financial crisis and the recession. “They have the view that you can’t have the economy work if the banks don’t; I would say the banks won’t work if the economy doesn’t work,” he said. He added this period of reintermediation, which was fuelled by a “false boom” in consumer demand by artificially inflated credit markets, would hurt Canada, and he did not believe the country could lead the world in recovery.

“Just because our banks didn’t collapse, Canadians are running around saying, wow, aren’t we terrific. But the reality is this economy is going to get whacked just as hard as economies around the world.”

I am not sure that Canadians were running around talking about how terrific our national banks were and drawing the conclusion that we would experience a mild recession and be the first to recover but I do know it has been the Cons talking points for the last month.

Delong is Wrong Again

What is up with Brad Delong?  It is like he is itching for a job in the Obama administration.  By his own admission he is no macro-economist but surely he knows the difference between effective demand at the level of the grass roots and supply push.  Then again maybe he is a macro-economists…of the fresh water variety.  Just read the following:

Even after central banks have pushed government bond prices as high as they can go, they should keep buying government bonds for cash, in the hope that people whose pockets are full of cash will spend more of it, and that this will directly pull people out of joblessness and into employment.

Here is a rather old fashioned idea: temporarily beef-up both the number of those covered by UI and the level of the replacement wage so that unemployed workers will have cash to spend on things like mortgages, rents, food and transportation.  Surely this seems better than hoping those who already have pockets full of cash will spend more of it and pull people out of employment.  And while unemployed workers are spending their UI, the Obama administration can find a little bit of breathing room to come up with a coherent plan to the financial mess instead of playing hanky panky ad hocery with the Fed, the Treasury and Wall street.

Dude trickle down is so like…the eighties.

Krugman is getting closer

In his latest Op-ed Krugman seems to be getting closer to the nub of it.  Just a little further Paul you are almost home.

Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.

To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

Once krugman integrates some notion of stagnant wages and the privatization of debt via the massive extension of consumer credit he will arrive at an indictment of a growth model that goes well beyond a bloated financial sector.  He will, in short, end up indicting the very neoliberal growth model he once so proudly shilled for.

Brad Delong is Wrong

It would appear that Brad Delong is the only prominent independent “liberal” economist (that is not on the Obama bank role) that is willing to shill for the Geithner-Obama cash for trash program.  All the liberal Nobel (in memorial) Laureates have lined up against the plan not to mention Robert Reich and Jeff, Mea Maxima Culpa, Sachs.

Apparently the fact that Geithner has never won a multi-million dollar bonus is sufficient proof for Delong that little Timmy is no tool of Wall Street.  Well neither has Obama, but both men are surely acting as though they are the tools of Wall Street (click the Reich and Sachs links above).  Indeed, it is the overwhelming opinion that it is not just the Obama administration but that much of the senate and congress is also under regulatory capture by Wall Street:

Brad is quoted in the FT as saying:

“We have to ask ourselves: Do we want to revive our economy, or do we want to punish the bankers?” says Mr DeLong. “I don’t agree that we can do both.”

Sure you can Brad it is called nationalization.  And if you and much of the congress and senate were not so captivated by your ideology (and their self-interest) the banks would have been nationalized, the bankers and their shareholders wiped-out and thereby punished, and the tax-payers’ would eventually have some nice banks on their collective balance sheets which they could later sell back to the investment community.

When the most simple, most elegant and most effective policy is not being pursued it begs the question of why not?

And only three answers seem plausible: it is vested interests, ideology, or both.