Robert's Stochastic thoughts: 7/1/15

Monday, July 27, 2015

Daniel Davies and Brad DeLong Debate Deutschland

As usual the posts to which I link are more interesting than this post. Brad DeLong discusses German economics and totally fair uses Kevin Baker's excellent explanation of the origins and nature of Ordoliberalism (please click the link to Baker's post).

Davies discusses one vigorous striking sentence in Brad's post

Just consider what the state of Germany’s export sector would be right now if Germany were not part of the euro, and had the real exchange rate of Switzerland.

Davies writes

I’ve considered it, and I think the answer is actually “more or less the same”.
Looking at the actual current account of Switzerland suggests that a Germany which had fixed to CHF wouldn’t have necessarily done any worse …
[figure skipped]
And the story of the 00s in German exporting (the 90s, of course, were when Germany ran quite sizeable deficits) is one of the bilateral trade between Germany and China. German industry makes “the thing that makes the thing that makes the thing”, notoriously, which makes its exports very price-insensitive to a country like China, which has a huge export market for things, which ensures a massive domestic market for thing-making things, and a consequent import demand for thing-making-thing-making things.

The "any" in "wouldn’t have necessarily done any worse worse" is clearly rhetorical hyperbole .

Davies convinces me that Brad's focus on the export sector was unfortunate. I would ask what the state of Germany's current account would be. Even if German exports were totally price insensitive, Germany can import more. If Germans had spent the money they get from China on Mediterranean goods and services rather than lending it to Mediterraneans, things would be different.

> Germany was very good at making things which make things which make things back in the 90s when they had a current account deficit. World wide demand for such things has not growth extraordinarily (it doesn't matter for the German export sector whether they export to China or some other country). Also, German firms were building factories in other countries to avoid paying the enormous German real wages. The equipment making technology is German, but the production doesn't have to be. Germany's strength in this sector doesn't make total German exports insensitive to real exchange rates and has no effect on imports -- it is a statement about the level of exports not the slope of net exports/GDP as a function of exchange rates.

Davies also wrote

Everyone wants to find a version of history under which all the problems of the Eurozone are Germany’s fault, because everyone knows that all the solutions involve Germany paying. But it’s not really true; Germany spent the early years of ERM/EMU paying far more than anyone else was prepared to in order to smooth the adjustment path for the former Communist states. And after fifty years of structuring everything in Europe to prevent German hegemony, is it really a big surprise that Germany isn’t well set up to act as a hegemon? Imagine if the USA had lost the war in the Pacific and was today being blamed for its failure to ensure the economic development of the Phillippines.

Here both "all"s in the first sentence are, again, hyperbolic. I would say that the Eurozone has two huge problems. One is that Greece has debts it can't and won't repay. The other is that aggregate demand is too low. One perfectly fine solution to the aggregate demand problem would be for Germany taxpayers to grit their teeth and accept a tax cut. This would stimulate German demand including demand for imports. If Germans were feeling incredibly generous, they might also consider accepting an increase in wages. What the Euroblock needs most is higher aggregate demand -- self indulgence, the illusion of wealth of those who think government bonds are net wealth and all that. What we need is less German self sacrifice not more.

There is nothing about the efforts to prevent German hegemony which would interfere with this policy. It is banned by rules which the German government demanded.

Even on Greek debt, Germany isn't the only Euroblock country which won't get its money back, and they won't get their money back no matter what (even with flows discounted at an interest rate far below market rates). The debate on debt is over how long the Troika should extend and pretend and how much Greeks should be punished and humiliated.

Finally I think that, while the DeLong Davies debate is brilliant, it is tainted by mixing economics and moralism. German's huge contributions to smooth the adjustment path for former Communist states were very admirable, but they are not affect the currently optimal German budget deficit.

Wednesday, July 08, 2015

The "Structural Problems" Ideology is not Superstructure.

Brad DeLong notes that Friedman has few disciples and that Hayek has many in spite of the utter failure of Hayekian macro theory to fit any fact. He blames US hegemony

At the level of economists' nationality it is equally clear what is going on: German (and French) economists grew up and lived in a world where somebody else--the benevolent Kindlebergian hegemon of the United States--took on the task of maintaining a stable level of aggregate demand in the North Atlantic as a whole. With the possibility of large hemisphere-wide demand shortfalls ruled out, it made intellectual, pragmatic, and policy sense to focus on the "structural".

I think that this is both patronizing and too kind. First, most US economists have never worked at the Fed or the Treasury -- they are spectators just like Germans and Frenchmen. But more importantly, there was a massive prolonged European demand shortfall from the late 70s through the early 90s. Enormous unemployment rates are not new.

The focus on the structural is free floating ideology not a superstructure carried on the patient back of any hegemon. In 1985-6, the UK was the prime example of Eurosclerosis in "Hysteresis and the European Unemployment Problem" Blanchard & Summers (1986). Then the stock market crashed in 1987 and the lady who was not for turning turned to monetary stimulus. This caused increased inflation and an actual shortage of skilled labour (I type the u as it was in the UK -- I read papers about how firms couldn't fill vacancies).

Then the border of the stagnating swamp of structural stupidity shifted from the Atlantic to the English channel. The good tough rigorous market based structure became anglophone not American. The case of an inadvertant shift to excess aggregate demand and the long lasting consequences had no effect on the conviction that Europes problems were structural.

French and German technocrats can ignore aggregate demand, because they have learned to ignore double digit unemployment, not because the USA benevolently hegemonically prevented it. A German wrote "only the rational is real" before a German wrote "only the real is rational". Both were fact resistant ideologues. Neither Hegel nor Marx has many more disciples than Friedman, but Brad DeLong won't quite give up on the Marxist faith that ideology must have some basis in someone's material interests somehow.

Tuesday, July 07, 2015

Greek Options.

Now that they have voted no to the Troika's plan, what can Greeks do next ?

I see three possibilities.

First they can reach an agreement with the rest of the Eurogroup. I think this would be essentially equivalent to voting yes on the referendum. I don't see any reason why the other 18 in the Eurogroup will make significan concessions. Creditors have good reason to make an example of Greece. The governments of debtor countries have a much better reason to make an example of Greece -- otherwise they will lose the next election to the party most like Syriza (which in Spain is at least Podemos -- a party like Syriza -- while in Italy it is the moviment 5 stelle which is a bunch of angry people who shout a lot but don't have a program and who are responsible for the fact that Berlusconi can bring down the Renzi government and I hate ... sorry back to Greece).

I do not think this is an acceptable choice. The problem is that the rest of the Eurogroup refuses to accept Keynesian economics in spite of the overwhelming evidence. Their proposed solution to the Greek mess is not a solution at all. The problem isn't just that they are demanding even huger sacrifices from the Greeks. The problem is that their approach will not work on its own terms (see Austerity Arithmetic).

Second, they can stick with the 60 euro limit on ATM withdrawals until their banks run out of Euros. Notably this includes trying to stay healthy without pharmaceuticals.

This is clearly not an acceptable solution. It also seems likely that they will try.

Third they can reintroduce their own currency. They absolutely don't want to do this. I'm not sure why. The cost of introducing a lower status currency is that Greece would have to declare a banking holiday -- oh it has already done that.

Now if they don't like the word "drachma" they don't have to call it the new currency the drachma. I propose they introduce a new currency initially worth 50 Euro cents and call it the Deutsche Mark.

They certainly have the sovereign right to do this, and I think the threat might be useful.

Saturday, July 04, 2015

The East is Red ... Ink ?

I have no idea. The Chinese kept growing at an amazing rate while developed work economies crashed then stagnated. Of all the scary thoughts, the most frightening was that China might be in a bubble which would burst. This fear was supported by the rapidly rising debt to GDP ratio, the incredible rate of construction (as much cement as poured in US history has been poured in China in the past ... five minutes or something). The fear is that everything looks fine then just falls down.

I am reminded of this photograph from Shanghai

To me, the really alarming part is the still standing apartment building in the background. It is identical to the one which fell over. I now wonder if the still standing building has any tenants. Was it condemned or was the unfortunate posture of its twin considered no big deal.

I think this is the key question about China. We might consider the recent crash of stock prices to be a mere correction, a minor stumble on the People's Republic's march to the glorious workers' paradise of capitalism. Or it might be the beginning of a crash that dwarfs the US in 2008 or the rest of East Asia in 1997.

I think it depends on whether the twin office tower in the background of the photo has tenants. If the shock of not everything always going up up up kills the Chinese confidence fairy we are in trouble.

If the people not personally bankrupted decide it was no big deal which has nothing to do with them, we will be OK for a while.

EC screwing Greek Banks

This seems to be important http://www.thepressproject.gr/details_en.php?aid=78892