“catastrophic austerity” in Greece and in Weimar Germany

February 8th, 2012

The Financial Times has published an interchange of letters responding to a single sentence that Martin Wolf included in his column last week. The sentence, referring to German insistence on fiscal discipline in vulnerable eurozone countries, is the following.

This attempt to vindicate the catastrophic austerity of Heinrich Brüning, German chancellor in 1930-1932, is horrifying.

Martin Wolf, “Europe is stuck on life support“, Financial Times, 1 February 2012.

The first letter writer supports Martin’s view that austerity and deflation was the proximate cause of the fall of the Weimar Republic.

Monetarist fetishists have helped to circulate a pernicious falsehood that the Weimar über-inflation caused the rise of Hitler. The wild inflation storm occurred in 1924. The Weimar economy recovered from it. The Nazis came to power only in 1933, as an immediate consequence of the deflationary spiral that resulted from what Mr Wolf refers to aptly as the “catastrophic austerity” introduced by Brüning.

Greece is now suffering from policies of similarly “catastrophic austerity”.

Anthony Murray, “Catastrophic austerity not über inflation gave us Hitler“, Financial Times, 6 February 2012.

The second letter writer asserts that the hyperinflation of 1924 was more important than the deflation of 1930-32 in ushering the Nazis into power in 1933.

No matter whether austerity today is catastrophic or not, to call Heinrich Brüning’s policies “the real reason for Germany’s descent into Nazism” (Letters, February 6) is a gross exaggeration. Although Brüning’s measures were disastrous, they were not very different from what other countries pursued during the Depression, mostly without turning into dictatorships. Germany’s descent began much earlier. ….

While we cannot draw a straight line from hyperinflation to the Machtergreifung by the Nazis, it is evident that the Weimar Republic never gained the broad-based democratic legitimacy needed to survive the Depression intact. Hyperinflation played an important part in that by destroying the faith of the middle class in the new regime.

Mark S. Manger, “Genesis of Nazism predates Brüning“, Financial Times, 8 February 2012.

No doubt both hyperinflation and austerity played a role. I have limited knowledge of recent German history, but timing seems to indicate that austerity was a more important factor in destroying German democratic institutions.

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defining ‘Keynesian’

February 7th, 2012

Jonathan Portes argues that the label ‘Keynesian’ has become politicised, resulting in sterile political debate and needlessly high levels of unemployment. He describes three definitions of ‘Keynesian’.

Definition 1 is ‘anyone who doesn’t believe the Treasury View’, the doctrine that it is impossible for fiscal policy to affect aggregate demand “because the government needs to get the extra money from somewhere, whether through taxes or borrowing”. Mr Portes used to believe this, but no longer does. Nor does anyone else, so everyone is a Keynesian by this definition.

Definition 2 is “someone who believes that as an empirical matter, fiscal policy does have a substantial impact on aggregate demand; in contrast to those who believe that ‘Ricardian equivalence’ means that changes to government spending and borrowing will be substantially or wholly offset by changes to private sector spending and saving”.

Definition 3

So under Definitions 1 and 2 I’m a Keynesian, but then so is pretty much everyone else whom one would take seriously. The final definition, then, of a Keynesian, appears to be a much more ‘political’ one – someone who thinks that slowing fiscal consolidation would be a sensible policy decision in the current UK (or US) economic context. But this definition seems to me to be misconceived ….

[T]he main argument between those of us who favour slowing fiscal consolidation in the UK and those who think that this would be a dangerous mistake is not about whether the direct impact would be positive. It is whether the price of this direct positive impact would be ‘credibility’ with financial markets, and hence a damaging rise in long-term interest rates that would more than offset the gains.

I think this risk is hugely exaggerated, … but … this debate really has nothing to do with Keynes at all. It’s about a lot of things – how policymakers should deal with potential market irrationality, the role of the credit rating agencies, multiple equilibria, etc. But I don’t see that taking one side or the other of these arguments makes you a Keynesian (or not).

Jonathan Portes, “Fiscal policy: What does ‘Keynesian’ mean?“, Vox EU, 7 February 2012.

Jonathan Portes (born 1966) is director of the National Institute of Economic and Social Research, a London-based, independent research institute.

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Rowe on retirement

February 6th, 2012

By saving, and by paying taxes to support government pensions for retirees, we smooth consumption over our lifetime. In striking contrast, we don’t smooth our ‘consumption’ of leisure, taking much of it in one large chunk (known as ‘retirement’) in the last years of life. Nick Rowe asks, Why?

If real interest rates were higher than your subjective rate of time preference, then you would choose a consumption path that is smoothly growing over time. You would consume more when old than when you were young. For all other consumption goods, some people act a bit like that, and others don’t. Some people consume a bit more when old than when young, and others consume a bit less when old than when young. But when it comes to the consumption of leisure, we don’t act at all like that. We consume roughly the same amount of leisure every year. And then we suddenly go on a massive consumption binge for the rest of our lives. Why?

As we have gotten richer over the last two centuries, we have chosen to spend a greater proportion of our lives consuming leisure rather than working. But I think I’m correct in saying that by far the biggest increase in our leisure has been in that big bunch of leisure at the end of our lives. Most people used to work until they died. Now most people stop working and then consume a decade or two of leisure before they die. Proportionately, the growth in leisure taken in retirement massively exceeds the growth of coffee breaks, lunch breaks, evenings, weekends, and holidays. The income elasticity of demand for retirement leisure massively exceeds that of all other forms of leisure. Why?

Nick Rowe, “Retirement and the non-smoothing of consumption of leisure“, Worthwhile Canadian Initiative, 4 February 2012.

Observe and participate in the discussion over at Worthwhile Canadian Initiative.

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Andrei Shleifer on transition from communism

February 5th, 2012

Recently, I was asked by the organisers of the IIASA conference to mark the 20th anniversary of the beginning of economic reforms in Eastern Europe and former Soviet Union to comment on the lessons of transition. …. [H]ere is my top-seven list.

First …. Economic transformation takes time.

Second, … have faith – capitalism really does work.

Third, … a reformer should fear not populism but capture of politics by the new elites.

Fourth, … do not over-plan the move to markets, but, more importantly, do not delay in the hope of having a tidier reform later.

Fifth, … you cannot teach an old dog new tricks, even with incentives.

Sixth, … do not panic about crises; they blow over fast.

Seventh, … middle-income countries eventually slouch toward democracy, but not nearly in as direct or consistent a way as they move toward capitalism.

Andrei Shleifer, “Seven things I learned about transition from communism“, VoxEU, 5 February 2012.

IIASA is the International Institute for Applied Systems Analysis, based in Laxenburg, Austria.

Russian-American economist Andrei Shleifer (born 1961) teaches in Harvard’s department of economics.

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an early proponent of universal pensions

February 5th, 2012

Tom Paine in 1795 called for the creation of a pension for everyone from age 50, financed from an estate tax. The proposed pension, he wrote, was “not charity but a right, not bounty but justice”.

[Government must] create [from the proceeds of a 10% inheritance tax] a national fund, out of which there shall be paid to every person, when arrived at the age of twenty-one years, the sum of fifteen pounds sterling, as a compensation in part, for the loss of his or her natural inheritance, by the introduction of the system of landed property.

And also, the sum of ten pounds per annum, during life, to every person now living, of the age of fifty years, and to all others as they shall arrive at that age. ….

It is not charity but a right, not bounty but justice, that I am pleading for. ….

I care not how affluent some may be, provided that none be miserable in consequence of it. But it is impossible to enjoy affluence with the felicity it is capable of being enjoyed, while so much misery is mingled in the scene. ….

I do not suppose that more than one family in ten, in any of the countries of Europe, has, when the head of the family dies, a clear property of five hundred pounds sterling. To all such the plan is advantageous. That property would pay fifty pounds into the fund, and if there were only two children under age they would receive fifteen pounds each (thirty pounds), on coming of age, and be entitled to ten pounds a year after fifty.

It is from the overgrown acquisition of property that the fund will support itself; and I know that the possessors of such property in England, though they would eventually be benefitted by the protection of nine-tenths of it, will exclaim against the plan. But without entering any inquiry how they came by that property, let them recollect that they have been the advocates of this war, and that Mr. Pitt has already laid on more new taxes to be raised annually upon the people of England, and that for supporting the despotism of Austria and the Bourbons against the liberties of France, than would pay annually all the sums proposed in this plan.

Thomas Paine, Agrarian Justice (1795).

Tom Paine (1757-1809) is best known as author of the revolutionary pamphlet Common Sense (1776), in which he called for independence of British colonies in North America.

From the Thought du Jour archive, 17 August 2007.

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stimulus for manufacturing

February 5th, 2012

Berkeley economist Christina Romer writes that there is no convincing reason for the United States government to single out its manufacturing sector for special treatment.

Everyone seems to be talking about a crisis in manufacturing. Workers, business leaders and politicians lament the decline of this traditionally central part of the American economy. President Obama, in his State of the Union address, singled out manufacturing for special tax breaks and support. Many go further, by urging trade restrictions or direct government investment in promising industries.

A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce “real things” than services. American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada. ….

As an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.

Christina D. Romer, “Economic View: Do Manufacturers Need Special Treatment?“, New York Times, 5 February 2012.

Christina Romer was the chairwoman of President Obama’s Council of Economic Advisers. Read the entire column. It is excellent. I have excerpted only the first two paragraphs, and the conclusion.

Especially interesting to me was Ms Romer’s opinion that the benefits from clusters of manufacturing plants “while real, may often be small”. Paul Krugman, in contrast, emphasizes the importance of industrial clustering. See, for example, the paper he wrote two years ago for a meeting of the Association of American Geographers, or his recent defence of the auto bailout.

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capitalism and the Bible

February 4th, 2012

Catherine Rampell’s readers provide her with examples of anticapitalist passages in the Jewish Bible.

As described in Leviticus 25, every 50th year is a jubilee year, during which slaves are freed and property is returned to its original owner.

Debts are forgiven even more frequently. Just as God rested on the seventh day, I.O.U.’s get wiped out every seventh year. From Deuteronomy 15:

At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite. He shall not require payment from his fellow Israelite or brother, because the Lord’s time for canceling debts has been proclaimed.

I can think of a few American homeowners who might support reviving this rule. Maybe a few countries, too. Oh, but wait — the biblical passage continues:

You may require payment from a foreigner, but you must cancel any debt your brother owes you.

Sorry, Greece.

Catherine Rampell, “Reader Response: Bible-nomics“, Economix, 3 February 2012.

Catherine Rampell is an economics reporter for The New York Times. This, and her earlier post, is in response to a recent op-ed column by Rabbi Aryeh Spero:

The mechanism of capitalism, as manifest through investment and reasoned speculation, helps facilitate our partnership with God by bringing to the surface that which the Almighty embedded in nature for our eventual extraction and activation. ….

Many on the religious left criticize capitalism because all do not end up monetarily equal—or, as Churchill quipped, “all equally miserable.” But the Bible’s prescription of equality means equality under the law, as in Deuteronomy’s saying that “Judges and officers . . . shall judge the people with a just judgment: Do not . . . favor one over the other.” Nowhere does the Bible refer to a utopian equality that is contrary to human nature and has never been achieved.

Aryeh Spero, “What the Bible Teaches About Capitalism“, The Wall Street Journal, 30 January 2012.

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government repression and natural disasters

February 4th, 2012

University of St. Gallen (Switzerland) economist Samia Costa measures the effect of government repression on mortality from natural disasters and finds it to be an inverted U. Countries at each end of the repression distribution suffer fewer casualties. Countries whose citizens are mildly repressed experience greater mortality from natural disasters.

Natural disasters have been a major cause of human suffering. Countries with higher income, lower inequality, lower corruption, and more democratic regimes have been found to experience less casualties from disasters. Government repression, however, could also play a role in disaster preparedness. ….

I empirically test whether countries whose governments are deemed to be repressive (and which hence may not expect to receive assistance) experience less disasters and lower mortality rates from natural disasters. I find that overall, countries with worse human rights records are no less likely to experience a natural disaster, but that they suffer higher casualties than countries with better human rights records. However, the relationship between repression and fatalities is an inverted U-shaped, so that countries at either end of the human rights distribution have lower casualties. ….

[To control for effects of other variables on death tolls, the estimated models] include the number of disasters, the log of GDP per capita, the percent of the population living in urban areas, population density, the log of population, the log of development aid, a democracy indicator, corruption, the log of land area, and the absolute value of latitude, as well as a time trend.

Samia Costa, “Government Repression and the Death Toll from Natural Disasters“, CESifo Working Paper No. 3703 (January 2012).

Partitioning the full sample into two groups – low- and high-income countries – Ms Costa reports that the relationship between repression and fatalities is linear rather than inverted U-shaped. For low-income countries, the relationship is positive, whereas for high-income countries the relationship is negative.

This finding is surprising to me. The author does not provide the partitioned regression results, nor an explanation for them, but I think that I might have one. Is it not possible that the relationship between fatalities and “log of GDP per capita” variable is U-shaped rather than linear? Testing the full-sample equations by inserting the square of “log of GDP per capita” would be an interesting exercise. Would the relationship between fatalities and repression continue to be nonlinear? Perhaps. Perhaps not. I would love to find out. Perhaps the author has already examined and discarded this possibility.

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banks also suffer stigma

February 3rd, 2012

Many living in poverty fail to apply for government benefits because of stigma attached to them. You might think that banks do not feel similar shame. Think again. Germany’s largest bank, Deutsche, refuses to access cheap loans on offer from the European Central Bank (ECB) because this might damage its reputation. Josef Ackermann, the CEO we met yesterday (with video), claims that Deutsche Bank has “never taken any money from the government”. Presumably “government” includes the ECB.

Deutsche Bank does, however, shamelessly accept handouts when they are called “tax benefits” and don’t have to be repaid. The bank’s pre-tax loss of 351 million euros last quarter became net income of 186 million euros, thanks to a €537m tax benefit.

Perhaps if we labelled transfers to the poor “tax benefits”, or “negative income tax”, this would remove the stigma. It works for Deutsche Bank!

The ECB’s offer of … [unlimited three-year] loans to eurozone banks has been key to attempts by Mario Draghi, the central bank’s president, to ease market concerns over banks’ access to funding. In December, 523 eurozone banks took €489bn from the ECB in its first such offer and banks are widely expected to take part in a second chance to bid for funds this month.

Mr Draghi has said banks should see “no stigma” in using the ECB’s offer. Mr [Josef] Ackermann said Deutsche had not taken part in December and was reluctant to be seen as needing help. “The fact that we have never taken any money from the government has made us, from a reputational point of view, so attractive to so many clients in the world that we would be very reluctant to give that up,” Mr Ackermann told analysts on Thursday. ….

Mr Ackermann’s comments came as Deutsche Bank prepared for a change of leadership by making provisions for crisis-related lawsuits and writing down some corporate holdings, burdening its quarterly results. With the economic crisis also hitting investment banking profits, Deutsche reported a pre-tax loss of €351m, but net income of €186m after a tax benefit.

James Wilson, “Deutsche Bank concerned by offer of ECB loans“, Financial Times, 3 February 2012.

Banks are using the cheap ECB loans to purchase higher-yielding eurozone debt, so this is indirect aid to eurozone governments. But it is simultaneously aid to banks, which profit from the difference in interest rates.

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banker warns of growing inequality

February 3rd, 2012

Swiss banker Josef Ackermann (born 1948) warns of a “social time bomb” from growing wealth and income inequality. He is CEO of Deutsche Bank and also heads the Institute of International Finance, an association of the world’s largest financial institutions.

Josef Ackermann … told the BBC that bankers had a responsibility to be philanthropic with their bonuses.

He is due to receive a partially deferred bonus [from Deutsche Bank] of 8m euros.

However, he said, he felt people in his position had to make a contribution.

“We have a social responsibility, because if this inequality increases in income distribution or wealth distribution we may have a social time bomb ticking and no-one wants to have that.”

However, Dr Ackermann said he “preferred not” to talk about philanthropic gestures.

“Deutsche Bank chief Ackermann fears ‘social time bomb‘”, BBC News, 2 February 2012.

Ackermann is stepping down after a decade at the top of Germany’s largest bank. Deutsche Bank is not doing well. The bank posted a 4th quarter 2011 pretax loss of 351 million euros compared with a 707 million euro profit in the same quarter of 2010. Despite this loss, Ackermann will keep his 8 million euro bonus.

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