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The Greek Experiment

from Peter Radford

Let me congratulate the Greeks for taking the first, but only the first, step towards a more civilized economic policy. I am intrigued by the prospect of Yanis Varoufakis as economic minister deep in argument with any of the large number of radicals that infest European economic posts. And, yes, they are the radicals. The notion that aggressive austerity measures can engender growth and can be mostly benign with respect to employment, wages, and other immediate aspects of economic life is a radical, almost extreme, idea honed most recently to protect wealthy elites from having to engage with the rest of the societies inside which they exist. Against this form of radicalism people like Varoufakis, despite being smeared as radicals themselves, are more orthodox than not. At least they realize that economies are not mere models to manipulate, but are collections of people whose futures and dignity are surely worthy of consideration alongside such abstractions as markets or efficiency. 

Any economy that is suffering 28% unemployment and which has experienced a drop of about 25% in GDP is a candidate for a shift in economic policy because it is evident that the existing policy – the one that produced those levels of unemployment – is not working. The experiment of imposing extreme austerity in order to protect the Greek banking system, which is what the Greek crisis resolves to, is an absurd and inhuman failure.

The austerity imposed on Greece in return for financial support was supposed to achieve a twofold result: Greek debts were targeted to decline as the government’s budget was brought into balance; and the Greek economy’s competitiveness was expected to recover making it possible to eliminate Greece’s chronic trade account deficits.

While it is true that Greek competitiveness has recovered somewhat – the trade balance now has a modest positive balance – the recovery is an illusion: it is more a function of the collapse of Greek demand for imported goods than it is a sudden recovery for Greek exports.

What about that collapse of an appetite for imports?

When your economy sheds nearly one million jobs in the space of a few years, demand is bound to plummet.

And when you deliberately create such an implosion all sorts of other bad things happen. Such as the pernicious decline in prices called deflation. Whilst the notion that prices are declining may seem attractive to those of us still living with memories of 1970’s double digit inflation, they are, in fact, a very bad phenomenon. The most obvious nasty outcome being that it makes the repayment of debt more difficult: since, under deflation, the real purchasing power of wages has risen [you can buy more goods with the same amount of cash], and since the debt is denominated as a fixed quantity at the moment it is created, the implication is that the inflation adjusted value of debt also rises. The result being that someone has to forgo more goods in future to pay down the same amount of debt as in the past. Not only this but cashflows for businesses diminish – they are selling the same number of things but at lower prices – this forces employers to reduce wages and/or employment, which, in turn reduces the purchasing power within the economy and hence demand.

It is easy to think through why deflation is so harmful potentially.

Yet those who seek to impose austerity blithely ignore the deflationary threat. Indeed they often imagine that they are fending off the precise opposite. The delusion is extraordinary.

More to the point the entire construct of austerity fueled growth is an imaginary one that is both novel and bizarre. All the evidence suggests it being a total illusion, yet it has a grip on the minds of key policy makers, especially in Europe.

So the Greek experiment is not what Varoufakis might start to suggest as sound economic policy, but what has been enforced on Greece these past few years.

We are not entering a period of economic experimentation, we are exiting one.

It is a lesson we ought to learn here in the US where the experiment of extreme economics has, for the past thirty years, resulted in a whole host of bad outcomes for average American families. It is time to return to an economics that acknowledges the purpose of policy being to enhance the lives of those who comprise the economy, and not to treat those lives as just one variable in an elegant equation where the ultimate goal is efficiency and not dignity.

People will choose dignity over efficiency more often than orthodox economists want to believe. This does not mean people will avoid tough trade-offs, it means that people need to be assured that policy makers take them into account when prescribing policies that have life damaging outcomes.

In a nutshell: if we had more unemployed economists we might, possibly, have an economics more sensitive to the human condition than that which now dominates policy. Perhaps the Greeks can lead the way.

Peter Radford

  1. January 31, 2015 at 8:23 am

    The problem is that, e.g. Ireland, if free from the Fiscal Pact could borrow and reverse austerity. Greece could not. Would the author advise his pension fund to buy Greek bonds?

  2. Ton Notermans
    January 31, 2015 at 11:42 am

    Right. What Greece needs, apart from and end to austerity, is a debt default, and devaluation. The latter will be useful for improving competitiveness and countering deflation. A reversal of austerity, i.e. more public spending would seem out of the question since the government would have no way of financing the deficits. And, that leaves default and devaluation to stimulate growth.
    I am not entirely sure though if this insistence of the Troika on austerity is mainly inspired by the ideological rigidity of what you rightly call the radical (i.e. orthodox) economists. Greek public debt to a considerable part is held abroad. What Merkel & Co might be primarily guided by is the wish to protect investors in their own countries and their domestic political popularity, even if that means destroying Greece and splitting the European Union.

  3. January 31, 2015 at 6:27 pm

    “Such as the pernicious decline in prices called deflation.”

    Even among liberals you frequently see discussions occurring partially in the conservative frame. One of the big examples of the conservative frame is that you can think of price deflation first and then any wage deflation is merely an offshoot that can be ignored. However I think the opposite approach yields more insight.

    Supply and demand as it is usually taught is a pretty tidy phenomenon. You have an upward-sloping supply curve and a downward-sloping demand curve in a graph that puts quantity on the Y axis and price on the X axis. However labor is a commodity with a very unique property: humans actually provide more labor hours to the marketplace under two conditions: 1) increased greed, and 2) increased fear. Increased greed corresponds to the standard upward-sloping supply curve. As long as income is comfortably above fixed costs, the standard model at least is a realistic setup. But when income moves below fixed costs (and a worker moves into the domain of fear), the supply curve goes up and to the left, the same direction as labor demand. Of course, when a large portion of society moves into this left side of the labor supply “V”, you get movement down in labor prices fueled by both supply and demand pushing quantity offered in the same direction in response to lower prices. The only end to this process is set by the nation’s bankruptcy laws, or in extreme examples, when people decide it’s better to live with a relative or on the streets.

    If we accept the model of conservatives, which states that deflation is primarily a process of decreasing prices of consumer goods with the accompanying results of that, we have already ceded the largest part of the argument.

  4. Ack Nice
    January 31, 2015 at 6:55 pm

    is this man correct about who did and didn’t get the loot, how they pulled it off, the Mundell and company fore-knowledge and intent..?

    Greg Palast, Jan 20 updated Jan 26:

    … The horror of austerity is not the consequence of Greek profligacy: it was designed into the euro’s plan from the beginning.

    This was explained to me by the father of the euro himself, economist Robert Mundell of Columbia University. (I studied economics with Mundell’s buddy, Milton Friedman.) Mundell not only invented the euro, he also fathered the misery-making policies of Thatcher and Reagan, known as “supply-side economics” – or, as George Bush Sr. called it, “voodoo economics.” Supply-side voodoo is the long-discredited belief that if a nation demolishes the power of unions, cuts business taxes, eliminates government regulation and public ownership of utilities, economic prosperity will follow.

    The euro is simply the other side of the supply-side coin. As Mundell explained it, the euro is the way in which congresses and parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system. “Without fiscal policy,” Mundell told me, “the only way nations can keep jobs is by the competitive reduction of rules on business.”

    Greece, to survive in a euro economy, can only revive employment by reducing wages. Indeed, the recent tiny reduction in unemployment is the sign that Greeks are slowly accepting a permanent future of low wages serving piña coladas to Germans on holiday cruises.

    It is argued that Greece owes Germany, the IMF and the European Central Bank for bail-out-billions. Nonsense. None of the billions in bail-out funds went into Greek pockets. It all went to bail out Deutsche Bank and other foreign creditors. The EU treasuries swallowed 90% of its private bankers’ bonds. Germany bailed out Germany, not Greece.

    Nevertheless, Greece must pay Germany back, Mr. Tsipras, if you want to continue to use Germany’s currency, that is.

    Greece: Goldman Sacked

    Greece’s ruin began with secret, fraudulent currency swaps, designed a decade ago by Goldman Sachs, to conceal Greek deficits that exceeded the euro zone’s 3%-of-GDP limit. In 2009, when the truth came out, Greek debt holders realized they had been cheated. These debt buyers then demanded usurious levels of interest (or, if you prefer, a high “spread”) to insure themselves against future fraud. The compounding of this interest premium brought the Greek nation to its knees. In other words, the crimes committed to join and stay in the euro, not Greek profligacy, caused the crisis.

    The USA, Brazil and China escaped from depression by increasing their money supply and government spending and taking control of currency exchange rates—crucial tools Greece gave up in return for the euro.

    Worse, once the Trojan hearse of the euro entered Athens, tourism, Greece’s main industry, drained to Turkey where hotels and souvenirs are priced in cheap lira. This allowed Dr. Mundell’s remorseless wage-lowering machine, the euro, to do its work, to force Greece to strip all its workers of pensions and power.

    Greece fell to its knees, with no choice but to beg Germany for mercy.

    But there is no mercy. As Germany’s Schäuble insists, democracy, this week’s vote, means nothing. “New elections change nothing in the accords struck with the Greek government,” he says. “[Greeks] have no alternative.”

    Ah, but they do, Mr. Schäuble. They can tell you to take your euro and shove it up your Merkel.

    the rest of the article is at http://www.gregpalast.com/trojan-hearse-greek-elections-and-the-euro-leper-colony/#more-10311

    and while I’m asking questions – How come the ratings agencies aren’t in prison for facilitating robbery? Wasn’t it their job and duty to prevent just what has happened? Do I fail to understand something? Isn’t it practically their very reason to exist to prevent cheaters snowballing bad debt? We’ve since learned that they knew what they were doing and did it anyway – right? How is it even possible they all skated away free and clear – “whew! We might have been held accountable for all sorts of egregious harms, or held to our responsibilities!” – after they lied the world into this mess…this bizarro freaking banker’s strike the world’s working families are complaining about but still tolerating suffering?

    you know, as myopic, unscrupulous, greedy, relentless and high-caliber ruthless as wealthpower giants have always been (clue phone ringing, Humanity), at least those of past times weren’t too thick to grok that you have to leave a little wool on the sheep or give them time to regrow it, if you want and plan to fleece them again. Duh. In comparison, today’s wealthpower giants appear to be the dumbest crop of drooling monomaniacs for overfortunes the human species ever threw up… ever erected over themselves to have to beg their rights from endlessly…utterly and absolutely needlessly.

    Good god what a world

    And the answer to it all is so unbelievably simple it boggles the mind

  5. January 31, 2015 at 7:29 pm

    “Systems were made for men, and not men for systems, and the interest of man which is self-development, is above all systems, whether theological, political or economic.”
    C. H. Douglas

  6. Ken Besse
    January 31, 2015 at 11:07 pm

    Hi Morgan,

    How’s it going?

    This is a good short economic blog that backs up my statement at dinner the other night how our society and societies all around the world are affected by government economic policies and not the fact that we buy lots of gadgets, leave lights on, buy unnecessary items. etc.( that we all do) but policies driven by ideologies that enhance the wealth of the few and cause others to suffer. That is why I don’t feel a twinge of middle class guilt or whatever we want to call it, that we as individuals are responsible for the poverty around the world because we buy things. It’s the policies of governments that cause the economic problems of third world and first world. Amen and hope that your shoulder is still healing successfully.

    No more blogs, I promise. At least for awhile.

    Ken

  7. Susan Feiner
    February 1, 2015 at 12:06 am

    Peter: the University of Southern Maine fired 3 economists … but they were the kind that would love to work for Greece. This unemployed economist thing may not be the ticket.

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