Thursday, August 20, 2015
Tuesday, August 18, 2015
Paul Romer, Paul Krugman and Brad DeLong are having a polite inside baseball discussion of what went wrong with Macro in the 70s and early 80s. I agree with all three that it is probably time to move on to how to fix macroeconomics in the 2010s. Also civility is good. In particular, I think it would be useful to the reality based community to make sure Paul Romer feels welcome (I note that I get paid largely for trying to explain Paul Romer to students). However, I feel free to be as rude as I want to be on this blog. I don't share Romer's beliefs about the history of thought including his beliefs about the very recent thoughts of Paul Krugman and Brad DeLong.
I am to comment Romer's post brilliantly entitled "Solow's Choice".
update 2: Paul Romer himself was kind enough to answer my question for Paul Romer in a comment on that post ! I am thrilled.
Re your question, I hope that my posts about Solow's remarks in 1978 answer your question. But to be specific, I think that Solow did depart from the role of the scientist by using debating tactics to dismiss the critique by Lucas and Sargent. And I suppose he did not live up to Feynman's mandate in the sense that he does not acknowledge the problems that the big simulation models suffered from. But so did Lucas and Sargent, I suppose, by pushing the policy ineffectiveness result prematurely. Feynman integrity sets a pretty high bar.
end update 2
update: Romer has uploaded the conference volume here so you can read Solow's chapter as I just did.
Before wasting the time of the reader (if any) I state my conclusions.
1) I think that Solow made the right choice. It is true that academic macroeconomists (including those at MIT) almost all disagreed. I think subsequent events show that Solow was right.
2) I think that Brad DeLong absolutely agrees with Solow. I don't know much about much, but I know a lot about the thought of Brad DeLong. I think Romer's guesses about DeLong's beliefs are incorrect.
3) Romer makes guesses about Solow's motivation. I make different guesses (knowing much less).
In the summer of 1978, Lucas and Sargent were making three claims:
(a) Existing multi-equation macro simulation models were not identified. That is, these models summarized correlations in the data but did not yield reliable statements of the form “if the government does X, this will cause Y to happen.”
(b) It was time to use SAGE models to address such fundamental questions about economic fluctuations as why changes in the supply of money influence economic activity; and
(c) SAGE models will imply that an active monetary policy cannot stabilize economic fluctuations.
Solow thought that Lucas and Sargent were wrong about the policy ineffectiveness claim (c). DeLong, Krugman, and I all agree. In the 2013 introduction to his collected papers, Lucas uses some asides about the Great Depression and the Great Recession to admit that now even he agrees. Claim (c) is what DeLong and Krugman have in mind when they say that Solow was right and Lucas was wrong.
Romer agrees with (b) but doesn't explain why he thinks that macroeconomic models must be SAGE models. I don't know if he considers the assumption that the economy is in general equilibrium a falsifiable hypothesis or not. I think if he thinks it is, he must consider the possibility that it shall be falsified (he wrote that theories must bow to facts). If it isn't, I don't see what is gained by assuming it. I think that GE implies the assumption of rationality. this is certainly true of the DSGE model presented by Arrow and Debreu 1954 and it is also assumed in all contemporary applied DSGE models of which I am aware. But this is an assumption which we can be sure is false and which is defended because it might be useful. I have never understood how anyone can argue that one must assume something because it might be useful. Lucas certainly insisted on the assumption of rational expectations. Solow certainly thought that it was a very bad idea to make that assumption (as did Friedman).
Personally, I think that the new Keynesian SAGE program has been sterile and that it was a mistake to start on it back in the 1970s.
I am quite sure that DeLong thinks Solow was right in rejecting (b). I am not expert on much, but I am quite expert on the thought of Brad DeLong. In 1983 he said that he was going to do fields exams in economic history and econometrics and not macroeconomics because he thought that macroeconomics had headed down a blind alley which it wouldn't leave for decades. I think subsequent events suggest he was right. Importantly, he knew about early new Keynesian work at MIT. He didn't like the rational expectations hypothesis (he is quite famous as a critic of it). Also more recently he wrote
But then Mike Woodford and company lost sight of the goal. Yes, New Keynesian models with more or less arbitrary micro foundations are useful for rebutting claims that all is for the best macro economically in this best of all possible macroeconomic worlds. But models with micro foundations are not of use in understanding the real economy unless you have the micro foundations right. And if you have the micro foundations wrong, all you have done is impose restrictions on yourself that prevent you from accurately fitting reality.
Thus your standard New Keynesian model will use Calvo pricing and model the current inflation rate as tightly coupled to the present value of expected future output gaps. Is this a requirement anyone really wants to put on the model intended to help us understand the world that actually exists out there? Thus your standard New Keynesian model will calculate The expected path of consumption as the solution to some Euler equation plus an intertemporal budget constraint, with current wealth and the projected real interest rate path as the only factors that matter. This is fine if you want to demonstrate that remodel can produce macroeconomic pathologies. But is it a not-stupid thing to do if you want your model to fit reality?
Krugman recently wrote
I’m actually mainly with Waldmann on this one, although Wren-Lewis’s analysis is nonetheless very useful. For the point he makes about the implications even of perfectly well-informed and rational consumers was and as far as I know still is totally misunderstood by freshwater economists [skip]
But aside from exposing the intellectual decline and fall of the Chicago School, is this the way we should go about modeling such things? Well, yes, sometimes, because rigorous intertemporal thinking, even if empirically ungrounded, can be useful to focus one’s thoughts. But as a way to think about the reality of spending decisions, no. Ordinary households — and that’s who makes consumption decisions — have no idea what the government is spending, whether it is temporary or permanent, whatever.
This is absolutely a critique (indeed a contemptuous dismissal) of claim (b) and not at all a comment on claim (c) .
I note that Wren Lewis agrees
I think it is clear that DeLong rejects the SAGE program and not just the policy ineffectiveness proposition. I don't claim to completely understand Krugman's view, but it seems to me to be very different from Lucas's and quite different from Romer's
Romer guesses that Solow dismissed Lucas and Sargent because he was worried that policy makers would take the policy ineffectiveness proposition seriously. I must stress that this is just a guess. Solow might have just had the impression that Lucas's approach was crazy. I my experience, most people do have that reaction.
Romer criticizes Solow for not writing down a model where fear of worker's anger prevents employers from cutting wages. In particular, he asks for a SAGE model with downward nominal wage rigidity. Solow did re-introduce the idea of efficiency wages and explicitly motivated the assumption that wages affect productivity through morale. I think Romer criticized Solow for failing to do what, in fact, Solow did (or perhaps for failing to work out a model during a conference).
Another possible source of wage stickiness
A number of hypotheses have been advanced to explain wage stickiness. This article explores another reason why wage stickiness might be in an employer's interest: the relationship between productivity and the wage rate. If the wage enters the short-run production function, a cost-minimizing firm will leave its wage offer unchanged, no matter how its output varies, if and only if the wage enters the production function in a labor-augmenting way.
A free pdf is available here
In the text of the paper, Solow explicitly refers to morale
Romer's problem might be that Solow didn't put his model of wage stickiness in a SAGE model but cited Malinvaud instead. Note the article is published in 1979 a very brief delay after 1978. Solow did send it to a low ranking journal (it wasn't rejected by a higher ranking journal -- decades later Solow had not ever had a manuscript rejected).
really pointless stuff after the jump
Saturday, August 08, 2015
“It’s somewhat dangerous, because there’s a kind of a dog whistle here that some people are going to hear as ‘it’s time to go after people,’ and not just rhetorically,” said David MakovskyThat is criticism (without naming people or groups) is an incitement to violence. Or what else can "not just rhetorically" mean. Makovsky directly said that it is unacceptable to criticize AIPAC (what other interpretation is there ?). and
Words have consequences, especially when it’s authority figures saying them, and it’s not their intent, perhaps, but we know from history that they become manipulated,” said Malcolm Hoenlein, executive vice chairman of the Conference of Presidents of Major American Jewish Organizations, repeating a concern he had raised directly with Mr. Obama during the closed-door session. “Of all political leaders,” Mr. Hoenlein added, “he certainly should be the most sensitive to this.”How can this be interpreted as other than the claim that it is not acceptable for Obama to participate in a debate about his policy by saying that criticisms of his policy are inaccurate ? The cheek the gall the arrogance faccia di bronzo prepotente haughty and you know the word I am not willing to type in this context.
Wednesday, August 05, 2015
Larry Summers opened with a joke
Larry Summers: You know I was tempted to blast off at Dynamic-Stochastic General-Equilibrium models. That is, actually, my inclination. But on the other hand it occurred to me to ask the question: "What wouldn't be a Dynamic-Stochastic General-Equilibrium model?" That would be a Static-Certain Partial-Equilibrium model. It is hard to see how that represent any kind of an improvement. So I can't be against DSGE on principle.
I have a sense of humor, but I am going to suppress it and pretend to take the joking answer literally. I note that the diametric opposite of a Dynamic-Stochastic General-Equilibrium model would be a Static-Certain Partial-Disequilibrium model. Even in jest, even Summers has trouble separating the concepts of model and equilibrium -- which in context means Nash equilibrium. Also the joke is a joke, a Dynamic-stochastic-partial equilibrium model is not a Dynamic-Stochastic General-Equilibrium model. It is also easy to answer the question, because there are models older than any DSGE model -- Summers can propose we go back to using those models. For one thing, he clearly does use those models (as do DeLong and Krugman). They weren't equilibrium models. Bernanke and Blanchard (who have made huge contributions to Reconstructing Macroeconomics) assume in their answers that they are required to start with a standard new Keynesian DSGE model and modify it to reconcile it with reality. Blanchard said
Suppose you are writing two textbooks, one undergrad, one grad. In the undergraduate textbook, it seems to me that when teaching the IS-LM, [skip]Blanchard is not joking. He takes it as a given that the IS-LM model is for undergraduates and that graduate teaching and research should be based on new Keynesian DSGE models. He also notes a problem -- current DSGE models do not clarify thought, because we don't understand what is going on in the computer as it simulates them. He neglects another problem -- DSGE models are based on extremely strong assumptions (including rational expectations but also including say the assumption that there is no housing sector or inventories) which we are all sure aren't literally true. The only defense of the approach is that we should think about simple things which we understand which might give us insights into the much more complex real world. I find it hard to accept the assumption that macroeconmics must be based on incomprehensible models which fundamentally rely on assumptions we are sure are false in ways which seem to have been critically important and which yield, at best, mediocre forecasts.
At the graduate level, we now have this explosion of DSGE models which put one friction and another into the model. Again, targeting pedagogy, it seems to me that there are two mechanisms which are central. The first is leverage, which starting with Ben [Bernanke's] work and earlier work we have, I think we know how to deal with it. The second is liquidity. And I think there we are much less far along the way. Again, I am hoping that someday we will put it together and have a simple way of thinking about leverage and a simple way of thinking about liquidity. These two things will come into our New Keynesian model, and we will be able to tell a simple story. We are at the stage at which the DSGE models have much too much in them to be fully understood.
I'd like to see a debate where Summers (or Krugman or DeLong) argues for the resolution "Old Keynesian models from the 60s and 70s are a more promising starting point for macroeconomic research than New Keynesian DSGE models". Someone would have to argue contra. Oddly, I find it extremely difficult to think of (and impossible to find) anyone willing to do this. I can't recall hearing or reading a defense of the NK DSGE approach. It is just assumed that this is what macroeconomics is and must be, but I honestly can't recall an argument for why it should be (hmmm am I too young to be senile?).
Starting this post, I had planned to argue for the resolution, but this is getting long and I want to type about how we got where we are. Senile or not, I am too young to remember, Old-Keynes had been abandoned already when I arrived in economics in 1985. But this is a blog.
Tuesday, August 04, 2015
I quote and question "Lucas and his colleagues interpreted the hostile reaction they received from such economists as Robert Solow to mean that they were facing implacable, unreasoning resistance from such departments as MIT."
Whatever Lucas thought, I wonder if Romer thinks that Solows resistance was "unreasoning". He used humor as did Stigner (and Lucas) but does that mean he felt "Stigler Conviction".
Now it is certainly possible for someone to dismiss the rational expectations hypothesis and without serious thought as soon as he hears what it is and to consistently consider it absurd from then on (I am an example). I heard of the concept of Nash equilibrium when I was 17 and immediately thought that some related idea might be useful, but the hypothesis that actual play is in Nash equilibrium is clearly false.
Since then, I have never doubted that the Nash equilibirum hypothesis is fundamentally wrong. I am a methodological individualist, so I have no time at all for the idea that it is useful to characterize the set of Nash equilibria, because an outcome being a Equilibrium tells us anything about how likely it is.
Update: Paul who seems to be Paul Romer himself kindly took the time to answer my question. The answer is no as indeed I guessed from his post "Solow's choice"
Robert, Re your question, I hope that my posts about Solow's remarks in 1978 answer your question. But to be specific, I think that Solow did depart from the role of the scientist by using debating tactics to dismiss the critique by Lucas and Sargent. And I suppose he did not live up to Feynman's mandate in the sense that he does not acknowledge the problems that the big simulation models suffered from. But so did Lucas and Sargent, I suppose, by pushing the policy ineffectiveness result prematurely. Feynman integrity sets a pretty high bar.
Monday, August 03, 2015
I think a very interesting contribution to this discussion is an interview of Sargent by Evans and Honkapohja.
"my recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expectations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to. But after about five years of doing likelihood ratio tests of rational expectations models, I recall both Bob Lucas and Ed Prescott telling me that those tests were rejecting too many good models. The idea of calibration is to ignore some of the probabilistic implications of your model, but to retain others. Somehow, calibration was intended as a balanced to professing that your model, though not correct, is still worthy as a vehicle for quantitative policy analysis."
So they took the wrong turn after about five years. I note two things -- Sargent said this soon after being awarded the Nobel memorial prize.
The other is that the Lucas critique is a critique of exactly what Lucas did after "about five years". assuming that a model is useful as a vehicle for quantitative policy analysis by looking only at the fit of the variables policy makers care about. http://bit.ly/1OYDK1R
I am going to treat his post as a challenge. Romer wrote
1) There is a crucial distinction between human capital (stored in neurons), and codified information (stored in some external form, such as printed text or bits on a hard drive.) 2) Anything stored in neurons is a rival good. 3) A person’s human capital is fully excludable as long as people have legal control over their own bodies. So there are no human capital “spillovers” and no human capital “externalities.”
His discussion goes on, but I want to challenge the third claim.
For one thing, I think the post is, for the purposes of growth theory, just like a human capital spillover. I learned from the post. I didn't pay for it (nore did Romer expect any payment). The fact that something is excludeable doesn't mean that others are, in fact, excluded. People voluntarily share knowledge as Romer did in his post including the claim that there are no human capital spillovers.
I agree with Romer that ESP doesn't exist, so we can't steal knowledge from each other's brains. We don't learn just by being around someone who knows something. But I think there are human capital spillovers and externalities.
The reason is that we can learn by watching someone use their human capital (I really mean watch with our eyes).
This is a very inefficient way to learn. It is much more efficient for the knowledgeable person to explain things, sometimes it is necessary for the learner to attempt a task and be critiqued by the teacher or coach. But "no" is a strong word.
Someone who wants to prevent this can use knowledge only in private and prevent others from watching (as someone can lock up a document). But someone who is indifferent about the knowledge of others will use skills when being watched and the others will learn (slightly) more than nothing.
Human capital is invisible when it just sits there, but more than exactly none of it can be inferred by watching someone use it.
I think there are much more important processes which aren't true spillovers but which can be usefully modeled as if they were spillovers.
1) altruism. In standard models agents are selfish but actual people aren't. People teach other people without demanding payment or negotiating. The effect on the spread of information is like a spillover. Pretending it just happens while using standard utility functions is an almost harmless shortcut.
2) Gift exchange. People can have a norm or custom that they teach each other (so long as it isn't too hard). This is an exchange not a spillover. However, I think in the real world there is a lot of this going on without cash payment, negotiation or checking how much each is teaching and how much each is learning. The macro effects are similar to those of a spillover and quite different from purchasing of education. This is not a spillover, but modeling it as a spillover is a more useful approximation than modeling it as a market exchange.
3) people with complementary skills work together in teams. In the process, with the sole aim of getting the task done, they explain what they are doing. This is learning and teaching by doing. The fact that both end up learning from the others is a by product of the effort to perform a task together.
4) some people enjoy teaching. I had a lot of knowledge pretty much forced on me by people I knew in college. This is a case of how you can get models to do anything by playing with utility functions. But it is reality. Consider blogging. Some people do it without expecting any reward. Romer is very clear that he expects costs not benefits from his posts on mathiness. This is not at all like market exchange of education services. The post on how human capital doesn't spill over is a human capital spillover.
5) When learning it is best to expose ones imperfect knowledge to criticism. One kind of non spillover teaching is the lecture where someone knowledgeable talks and learners listen. Another is the presentation with criticism, the problem set with correction etc where someone who is learning talks or writes and someone knowlegeable comments critiques and corrects. In the real world, the roles are not always clear. If I think I understand something but am not sure, it is useful to me to try to explain it to a critical listener who doesn't know about it already. Who is the teacher and who is the student? This isn't a spillover (we are both expending effort) but it is better modeled as a spillover than as a market exchange.
So I think there are minor unimportant human capital spillovers and also extremely important social interactions which spread knowledge which aren't spillovers but which have similar implications for the spread of knowledge and economic growth and all that, while they don't have anything like the same implications as the purchase of teaching services with tuition.
So I think models with human capital spillovers are useful even if actual human capital spillovers are unimportant.
Monday, July 27, 2015
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”.The "any" in "wouldn’t have necessarily done any worse worse" is clearly rhetorical hyperbole .
Looking at the actual current account of Switzerland suggests that a Germany which had fixed to CHF wouldn’t have necessarily done any worse …
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.
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
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
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
I am reminded of this photograph from Shanghai
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.
Monday, June 29, 2015
Athens’ final counterproposal to its trio of bailout monitors would re-impose many of the large-scale corporate taxes and pension contributions that creditors demanded be stripped out amid concern it would plunge Greece into a deeper recession.
According to a copy, distributed to eurozone finance ministers Thursday and obtained by the Financial Times, Athens has stuck with its demand for a one-time 12 per cent tax on all corporate profits above €500,000, a measure the government estimates will raise nearly €1.4bn by the end of next year.
In addition, it would raise employer contributions to Greece’s main pension fund by 3.9 per cent and would more slowly implement measures to raise the country’s retirement age to 67 and “replace” rather than phase out a special “solidarity grant” to poorer pensioners.
We have posted a copy of the Greek counterproposal here.
Greece’s bailout creditors – the International Monetary Fund, European Central Bank and European Commission – eliminated the one-time profits tax and the increase in employer contributions to the pension system in their offer to Athens yesterday, arguing that such heavy levies on companies would severely hit economic growth. It also pushed for more aggressive timeline for raising the retirement age and cutting the special top-up for poorer pensioners.
Still, the Greek plans contain some key concessions from the original proposal submitted by Alexis Tsipras, the Greek prime minister, to creditors in an offer made on Monday. Although legislation raising the retirement age would not be implemented until the end of October – creditors want it to kick in immediately – it accepts the 67-year retirement age should be hit by 2022. Originally, Athens was proposing 2025.
So no further austerity, oh except for the 67-year retirement age.
A very key sticking point was the proposed one-time 12 per cent tax on all corporate profits above €500,000. I can understand why an Italians and French might not be familiar with the idea of a one off tax effectively on capital used to deal with a fiscal crisis. But, there were Germans involved. Germany has been there and done that.
How did Germany end its hyperinflation ?
Let's ask the Wikipedia
The newly created Rentenmark replaced the old Papiermark. Because of the economic crisis in Germany after World War I, there was no gold available to back the currency. Luther thus used Helfferich's idea of a currency backed by real goods. The new currency was backed by the land used for agriculture and business. This was mortgaged to the tune of 3.2 billion Goldmark, based on the 1913 wealth charge called Wehrbeitrag which had helped fund the German war effort in World War I.
This land is your land, this land is my land, this land is backing for the Rentenmaaaaaaark
Germany found itself in fiscal (and other difficulties) even after 1923 and again turned to a capital levy [pdf warning] This wassn't the very next capital levy to occur in Germany but I will skip one -- Goodwin's law and all that)
After World War II, in 1949, a capital levy was raised
on the asset base from 1948. It was conclusively
regulated as part of the burden-sharing legislation
(Lastenausgleich) in 1952.
9 S. Bach, “Lastenausgleich aus heutiger Sicht: Renaissance der allgemeinen Vermögensbesteuerung?” Vierteljahrshefte zur Wirtschaftsforschung des DIW Berlin, no. 80, (2011): 132.
Now Germans who remember German history might reject the Syriza proposal as much too little much too late compared to the bold willingness to seize capital to serve the common good demonstrated by Schacht, Luther, Helfferich, Schaffer, Erhard, and Adenauer. However, it is very odd that they argue that a one off tax on wealth must cause an even deeper depression, when their own country's history demonstrates that such policy has been immediately preceded a wirtschaftswunder.
There are a number of very good explainers at The Washington Post and The New York Times. I do think that they all leave out one key point. The Greek government made an alternative proposal for austerity in exchange for a loan. The other 18 rejected this proposal saying that the deficit reduction (which excluding interest is a surplus increase) had to be based on pension cuts not higher taxes on employers. Their argument was based on dynamic scoring/supply side economics/right wing ideology. Some might suspect that the true motivation was a desire to not reach agreement, cause a crisis and show Greeks and especially Spaniards that it is unwise to elect leftists.
update:[don't miss the very shocking update at the end of the post] OK starting at the top, Neil Irwin's post at The Upshot is excellent. I question only the following passage
Greek leaders think the offer on the table from European governments and the International Monetary Fund is lousy, requiring still more pension cuts and tax increases in a depressed economy, and intend to throw to voters the question of whether to accept it.The statement is true, but it leaves out the fact that Greek leaders offered a different plan including smaller pension cuts and different and larger tax increases which was rejected by the other 18 European governments. The dead lock is no longer over the question of whether there shall be additional Greek austerity but over the form of that austerity. Now it may be odd that a radical leftist government proposed inflicting further grinding austerity on a depressed economy when that approach has utterly failed so far. But this is what happened. In practice the Greek authorities caved and declared their willingness to do the opposite of what they promised to do during the election campaign. Given where we are now, the Greek proposal is irrelevant. But it is worth mentioning how we got here.
Still at the Times Jim Yardley wrote a front page news article. Again I think it is very clear and much more worth reading than this blog post. An amazing amount of information is packed into the article. I do think a mention of the Greek proposal could have been added roughly here
The referendum was a surprise move by Mr. Tsipras, announced early Saturday, as he declared that voters should decide whether to accept the terms of the creditors’ latest aid proposal — terms he considers onerous.
Greece’s creditors — the other 18 eurozone countries, the European Central Bank and the International Monetary Fund — in effect cut off negotiations with Mr. Tsipras after he called for the referendum,
Now Michael Birnbaum at the Washington Post
Negotiations over Greece’s future have been dragging for months. The disagreements are about the extent of the painful reforms it must make to continue receiving the rescue funds that keep the nation’s finances afloat. But talks came to a halt Saturday after Tsipras announced he would hold a referendum on July 5 to ask Greeks whether they would accede to the austerity demands of the nation’s creditors. Greek leaders have urged their citizens to vote no.
This is not exactly accurate -- the extent of austerity in the Greek proposal and in the Institutions proposal is roughly the same. the deadlock is over tax increases versus pension cuts. Also "reforms" is a charged word -- there is an automatic guess that reforms are improvements. Since the agreed type of further reforms is more of the policy which has been followed by a 25% decline in GDP, this presumption should not be encouraged. In particular "painful reforms" suggests short term pain for long term gain. This is the sincere belief of the heads of the institutions formerly known as the troika. However it is not supported by evidence and is hard to reconcile with either recent data or data from the 30s and 40s. I almost typed of "experts" at the institutions, but I think it is fairly clear that head IMF economist O J Blanchard disagrees. (so, by the way, does Neil Irwin see above).
I think the three articles suffer to different extents from the fact that Greek leaders did not stick with their role as radical leftist rejectors of austerity. The nature of the Eurogroup debate changed radically last week when the Greeks attempted to surrender.
This is history now, but I think there is some value in remembering the distant past of last week. The evidence that European leaders who together have a veto are unwilling to compromise at all with Greece is useful to anyone trying to predict the medium run future.
very shocking update: Paul Krugman too
That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, was willing to accept the austerity that has already been imposed. All it asked for was, in effect, a standstill on further austerity.
Krugman also advises Greeks to vote no. He is certainly opposed to further austerity and he is not inclined to Ballance. In fact, I learned of the outrageous antics of the Troika from him here "the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts."
Forgetting where I first read that and considering DeLong's two rules regarding Krugman, I checked to make sure that Greece had indeed proposed further austerity. Greece definitely proposed further tax increases and pension cuts.
Among the key sticking points
Athens has stuck with its demand for a one-time 12 per cent tax on all corporate profits above €500,000, a measure the government estimates will raise nearly €1.4bn by the end of next yearSo a debtor country was (and maybe still is) insisting on raising taxes and its creditors won't let it. I think the institutions formerly known as the Troika might as well have said that they must reject the proposal because they are "but a committee for managing the common affairs of the whole bourgeoisie."
In addition, it would raise employer contributions to Greece’s main pension fund by 3.9 per cent
Greece’s bailout creditors – the International Monetary Fund, European Central Bank and European Commission – eliminated the one-time profits tax and the increase in employer contributions to the pension system in their offer to Athens yesterday, arguing that such heavy levies on companies would severely hit economic growth.
I'm pretty sure this non-post is a quotation of Daniel Davies, but I can't find the link.
Presumably the US government won’t react to a Puerto Rican default by kicking it off the dollar.— Matt! (@mattyglesias) June 29, 2015
Sunday, June 28, 2015
This would have been the Troika's enforcement mechanism punishing Greek default, but Greece hasn't even defaulted yet.
update: never mind maybe given Reuters V BBC clash of the titans
ECB considering increasing haircut on security offered by Greek banks for ELA while keeping assistance - Reuters
Also @Frances_Coppola With anything from EU sources, unless the source is named you should not believe it.
end update update 2: Robert @Peston provided a link to the ECB press release. I don't entirely understand what sticking to the June 26 ceiling implies. http://www.ecb.europa.eu/press/pr/date/2015/html/pr150628.en.html Robert Peston explains
The European Central Bank is expected to end emergency lending to Greece's banks on Sunday, the BBC understands.
The country's banks depend on the ECB's Emergency Liquidity Assistance (ELA). Its governing council is meeting later. Greece will probably have to "announce a bank holiday on Monday, pending the introduction of capital controls", a source told the BBC's Robert Peston.This is the way in which Grepudiation of debt would lead to Grexit. Greek banks can't operate using Euros if the Greek central bank runs out of Euros. The Greek Central Bank can't call cyber-Euros from the vasty deep (Tartaros) but must ask for them to be sent from Frankfurt.
The bailout for heavily indebted Greece expires on Tuesday and talks have broken down. Greek banks would find themselves in serious straits as soon as Monday if the ECB went ahead and cut the lifeline, the BBC economics editor says.
Capital controls are restrictions on how much customers can withdraw from banks. Until now, the Greek government has signalled that it does not want to impose such controls.
In recent weeks, Greeks have withdrawn billions of euros from banks, and long queues formed at cashpoints on Saturday, amid fears that banks would not open on Monday.
The ECB has been sending emergency funds on a daily basis to the Greek central bank, which then allocates it to the high-street banks.
I guess it is theoretically possible for Greek banks to operate without a lender of last resort (such things were done for decades in my native USA). It would be necessary for Greek depositors to trust that things will work out. This hope is chimerical and as likely as a flying horse. Given Greeks' rational total lack of confidence in Greek banks, the banks need a lender of last resort with unlimited resources. I think that means the Greek central bank must control a fiat currency, that is, Greece must leave the Euro. I think that, without ELA, the only alternative would be to abandone banking and conduct all transactions in cash with paper Euro notes.
I think that if ELA is not reintroduced (say if Greece concedes entirely to the Troika demands) then it will be necessary to convert Euro denominated assets (including checking account balances) into Drachma denominated assets using some exchange rate. Also whatever this rate is, a Euro will immediately cost more Drachmas on the market. This means that it is wise for Greeks to take all the money they can out of banks and hold it as cash. This means that the Greek banking system can't survive function using Euros.
In a poll conducted by Alco for the Greek newspaper ‘Proto Thema’, 57% of the participants said they would vote yes in the upcoming referendum, favoring a deal.I am very surprised. Prime minister Alexis Tsipras called for the referendum (which has been approved by parliament) and advised Greeks to vote no. I just assumed that he had good reason to expect to win the referendum -- that he had internal polls or something.
Another poll conducted by Kapa Research for ‘To Vima’ found that 47% of the population will vote yes approving the agreement, while 33% will vote ‘NO.’
According to the referendum, voters will be asked to respond to the following question: “Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25.”
I don't know what happened so I will speculate. It is possible that Tsipras is surprised too. It is also possible that he guessed (and guesses) that Greeks will vote yes. Finding himself in the minority in a referendum is preferable to finding himself with the confidence of a minority of parliament. If the referendum is held and a plurality vote yes, then it would be extremely unwise to vote no confidence in Tsipras because he obeyed the instructions of the people. Earlier, I argued that Tsipras can't just concede the the Troika proposal. But he can if voters tell him too. It is conceivable that he wants to concede (to the troika) and this is his strategy. Finally, it is even possible that he is being fully honest. He promised an end to austerity without Grexit. He might feel that he wasn't delegated the authority to decide which promise to keep, so he should ask the people. You know Democracy -- another one of those crazy Greek ideas.
It isn't clear to me that, even given these polls, Greece will make it to the July 5th referendum without defaulting. They owe a payment to the IMF due Tuesday June 30th. The Eurogroup must release some rescue money by Tuesday to prevent default. I think it certain that at least finance minister (cough Schauble cough) will oppose this. For the Eurogroup to cause default before a referendum in which polls suggest the people will accept the Troika's current bargaining proposal would be for it to prove that a blocking coalition of non Greeks is determined to achieve Grexit (presumably to make an example of Greece to scare the Spaniards). This would be moderately politically costly. I doubt that such proof would be very costly given public opinion about Greece and Greeks in
important European countries Germany.
I won't try to guess if the one week loan to allow time for Greeks to say uncle will be extended. I also have no idea if the IMF has any flexibility which would allow it to ignore the eventuality that the Greek payment is a week late but not a Euro short.
I now must recognise that I have no idea what is going to happen. update: The alco poll with 57% didn't ask about the deal offered by the troika. According to the AP
"In the poll by Alco for the Proto Thema Sunday paper, 57 percent said they believed Greece should make a deal with its EU partners while 29 percent wanted a rupture."
This is not the question Greeks will answer in the referendum on July 5th which refers specifically to the deal offered to Greece on June 25th.
Both sides say that an agreement is now extremely unlikely.
“The negotiations are clearly ended, if I understand Mr. Tsipras correctly,” said German Finance Minister Wolfgang Schäuble as the continent’s top finance officials gathered for their fifth emergency meeting in the past two weeks. “We have no grounds for further discussions.”The first question is whether either is bluffing. Until Tsipras called for a referendum, I had guessed that there would be an agreement which would prevent default/kick the can down the road. I now guess that there won't be an agreement.
I don't see how a Tsipras government could survive if he were to try to accept the creditors' demands and calls off the referendum. Calling a referendum as a bluff would be a crazy bluff, but the key point is that he is just Prime Minister and doesn't have the authority to fold*. At the same time, calling a referendum violates the norms of international negotiations which require that the general public is kept out of it except, perhaps, for approving the final agreement (with minor amendments and a second vote scheduled if they vote the wrong way the first time). If the European Finance ministers/Troika grant concessions in exchange for cancellation of the referendum, they will have to do something similar in all future negotations. This might be in the interest of the European Union, but it would be too humiliating and infuriating.
Greece doesn't have the cash to meet a payment to the IMF required on Tuesday June 30th. The referendum is scheduled for July 5th (so Greeks won't have a chance to declare independence from the Unitet States of Europe on the 4th of July). This is really at least as soon as it can practically be managed. Some concession must be made to prevent default.
I think this is acceptable to Greece's negotiating partners (very especially including Shäuble). Last week Greece made major concessions and the creditor replied with extreme demands that the primary surplus be increased by spending cuts not tax increases. This sure seems to indicate a desire to get to no.
So what happens next ? A key issue and key cost of default for Greece is that the European Central Bank (ECB) has been loaning and loaning to Greek banks as Greeks take out their Euros while they can. It is entirely possible that Greek banks won't be able to open Monday. A default (scheduled for Tuesday) would almost certainly cause the ECB to cease to help Greek banks. It seems likely that Greece faces at least a banking holiday. This would cause great suffering directly and further decline of production.
I think at that point, Greece is much better off reintroducing the Drachma and declaring that references to the Euros in contracts are to be replaced with references to (some initial exchange rate) drachmas. The cost to Greece of Grexit would have been a financial crisis. If they have a financial crisis Monday anyway, they might as well regain monetary independence and devalue. I don't see any point in Greece promising to pay its debts to official creditors in Drachmas. They can't accept that (or every country with foreign currency denominated debt would redefine their debts) so simple default seems better for everyone.
My ignorant guess is that the crisis won't spill over to other countries (I'm not trying to empty my Italian bank accounts).
* update: I see that Matthew Yglesias says that Tsipras's best strategy is to fold 'em. I think that it might have been a wise move to accept the extreme undemocratic Eurodemands, but it is too late for Tsipras to do that. The question is what would happen next were Tsipras to announce that the referendum has been cancelled and he is accepting the deal. I think it very unlikely that enough Syriza MPs would accept this for the current coalition to survive. I think Tsipras would have to do a Ramsey MacDonald and try to form a unity government with the former opposition as in "the Labour government was split by demands for public spending cuts to preserve the Gold Standard. In 1931, MacDonald formed a National Government in which only two of his Labour colleagues agreed to serve and the majority of whose MPs were from the Conservatives. As a result, MacDonald was expelled from the Labour Party, which accused him of betrayal." MacDonald is still very much loathed by the few who remember who he was.
Tsipras the traitor would not be useful to the new coalition -- a leader with a history of bluffing and folding is not valuable. I don't see how a second Tsipras government could last.
I think that folding might conceivably be a good strategy for Greece, but I don't see how it could be managed. Another even grimmer historical analogy would be the Franco-Prussian war in which the French were defeated in six weeks then spent three months futily attempting to surrender.
In contrast, the experiences of countries which default isn't so horrible. I am thinking of the cased of Iceland, Russia and Argentina. Argentina didn't even entirely have its own currency. Countries considering default are threatened with terrible things, but International Finanz Kapital is not a united agent -- in practice foreign banks do business with countries which have defaulted. Default is associated with horrible economic suffering, because countries endure horrible suffering while trying to avoid default. I can think of these three cases when default was preceded by horrible recession and followed by rapid growth. I think default is the least bad remaining option for Greece. ** update 3 "(represented by the Eurogroup)" deleted -- Greece is part of the Eurogroup which (officially) therefore isn't Greece's bargaining counter party.
Saturday, June 27, 2015
The paramount injury [from Roberts’s decision] is the court’s embrace of a duty to ratify and even facilitate lawless discretion exercised by administrative agencies…. Rolling up the sleeves of his black robe and buckling down to the business of redrafting the ACA, Roberts cites a doctrine known as “Chevron deference.”… The doctrine is that agencies charged with administering statutes are entitled to deference when they interpret ambiguous statutory language. As applied now by Roberts, Chevron deference obligates the court to ignore language that is not at all ambiguous but is inconvenient…One problem is that George F. Will seems not to have read John Roberts’s opinion before writing. He decided to attack John Roberts for expanding the deference that the Supreme Court offers the President. But Chief Justice John Roberts says expressly that he is not – repeat NOT — deferring to the IRS in the manner of the Chevron case. He is not expanding the deference that the Supreme Court offers the President: he is, in fact, narrowing it:
We often apply the two-step framework announced in Chevron…. “In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation” [to an agency.] This is one of those cases…. Whether… credits are available on Federal Exchanges is… central to this statutory scheme…. It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy…. This is not a case for [deference to] the IRS. It is instead our task to determine the correct reading of Section 36B…Because of Roberts, no future President with a different IRS can change the implementation so that tax credits flow only to state exchanges.
The honest thing for Will to have done — after he got around to reading Roberts’s opinion — would have been to pull an Emily-Litella-“never-mind” and pulled his piece.
Instead, he has tried to silently edit it — at least the version appearing in National Review Online:
Rolling up the sleeves of his black robe and buckling down to the business of redrafting the ACA, Roberts cites a doctrine known asinvents a corollary to “Chevron deference.”… It says that agencies charged with administering statutes are entitled to deference when they interpret ambiguous statutory language. As applied now by Roberts, Chevron deference obligates the court to **While purporting to not apply Chevron, Roberts expands it to empower all of the executive branch to** ignore or rewrite congressional language that is not at all ambiguous but is inconvenient…