Sunday, November 16, 2014

The zombie of Merkel-nomics lurches on

In their 2011 book Modern Political Economics: Making Sense of the Post-2008 World, Yanis Varoufakis et al describe the basic macroeconomics of pulling the economy out of a depression with counter-cyclical stimulus:

When a complex capitalist economy enters a downward spiral like the one described in the previous paragraph, thrift makes things far, far worse. Then, the only glimmer of hope is the state. Uniquely able to step in and pump money into the economy, it is our only chance of ending the 'beggar they neighbour' logic during a recession. This is exactly what the Second World War did ... and how the post-war economic golden age came about. (pp. 211-212)
Even left-leaning economists now speak of the period of 1945-1973 as a Golden Age of capitalism. And in historical perspective, that seems to be justified.

This doesn't mean that there weren't still substantial destructive and self-undermining features of how the economic system was working. But the system in the advanced countries enjoying a substantial amount of stability and was spared severe, protracted crises on the scale and intensity of those of the Great Depression and whatever the historians eventually call the one that began in 2007-8.

The eurozone is the poster child for the disastrous consequences of doing just the opposite of what basic macroeconomics indicates. Bill Black talks about the eurozone's situation in Germany’s Passive-Aggressive “Stimulus” Program New Economic Perspectives 11/08/2014:

Kilkenomics [in Ireland], being a festival of economists and comedians, has long reflected the economic consensus that austerity in response to a Great Recession is economic malpractice akin to bleeding a patient to make him healthy. One of the great changes in Europe in the last month is that the number of economic voices willing to make this same point have grown rapidly. Germany’s “there is no alternative” (TINA) to austerity claims were always absurd, but now many more European voices are willing to point out that there are superb alternatives – in Germany. ...

There a one trillion euro shortfall on German spending on infrastructure even though such spending (1) improves life, (2) saves lives and reduces injuries, (3) increases productivity, and (4) spurs economic recovery from the self-inflicted disaster of the second, gratuitous Great Depression that Germany inflicted on the eurozone by demanding austerity. Germany is actually running a substantial budget surplus even though this is crippling the German economy’s growth and impairing growth throughout the eurozone. The obvious win-win is for Germany to substantially increase spending on its infrastructure. Naturally, invoking TINA, Germany refused.
He explains that criticism from other eurozone members is now strong and persistent enough that Angela Merkel's government has seen the need to produce what Black calls "a faux stimulus program."

As he explains, the €3.3 billion per year "stimulus" program that Merkel is promoting actually represents a continuation of severe austerity economics. "The surprising fact is that Germany felt the need to gin up even an oxymoronic 'stimulus' plan given her constant invocation of TINA," he writes.

Wolfgang Münchau in The wacky economics of Germany’s parallel universe Financial Times 11/16/2014 describes the hold that austerity economics has on the Sehr Ernste Leute (Very Serious People):

German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes. To describe the economic mainstream in Germany as conservative misses the point. There are some overlaps with the various neoclassical or neoconservative schools in the US and elsewhere. But as compelling as a comparison between the German mainstream and the Tea Party may appear, it does not survive scrutiny. German orthodoxy straddles the centre-left and the centre-right. The only party with some Keynesian leanings are the former communists [the Left Party]. [my emphasis]
This is his summary of the ordoliberalism that Merkel practices, a definition that in my mind understates how stone conservative (in American political terms) the notion is:

The Germans have a name for their unique economic framework: ordoliberalism. Its origins are perfectly legitimate – a response of Germany’s liberal elites to the breakdown of liberal democracy in 1933. It was born out of the observation that unfettered liberal systems are inherently unstable, and require rules and government intervention to sustain themselves. The job of the government was not to correct market failures but to set and enforce rules.

After 1945, ordoliberalism became the dominant economic doctrine of the centre-right. In the 1990s, the Social Democrats started to embrace it, culminating in Gerhard Schröder’s labour and welfare reforms in 2003. Today the government is ordoliberal. The opposition is ordoliberal. The universities teach ordoliberal economics. In the meantime, macroeconomics in Germany and elsewhere are tantamount to parallel universes.
That's a surprisingly generous description, especially since he goes on to note that the ordoliberals have "no obvious explanations" for that little matter known as the Great Depression.

He also gives some sense of what a basically nationalistic policy it is. And, less clearly, how much it comes down to dogmatic insistence on austerity policies no matter what.

But his conclusions is certainly appropriately pessimistic: "It is hard to think of a doctrine that is more ill suited to a monetary union with such diverse legal traditions, political system[s] and economic conditions than this one. And it is equally hard to see Germany ever giving up on this. As a result the economic costs of crisis resolution will be extremely large."

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