Barkley Rosser
Barkley Rosser announces his new book:
I am pleased to announce the publication of my book with David Colander and Richard Holt, European Economics at a Crossroads, being issued in both hardcover and paper back simultaneously from Edward Elgar. Several years in the producing, this book is the sequel to our 2004, The Changing Face of Economics: Conversations with Cutting Edge Economists, which created a bit of a stir by arguing for the possible existence of “non-orthodox mainstream” economists, with someone like George Akerlof being an example of this peculiar breed. We also argued strongly for viewing the economics profession and intellectual development as being a complex adaptive process.
Prof. Rosser also had this to say about Europe and reporting Tues. May 11 at Econospeak:
Yep, there it is, the subheadline under “A new reality for the old world” for an upper left-hand corner, front page story by Howard Schneider on the front page of today’s Washington Post. Wow. Except that this is one of the most distorted and off-the-wall headlines to appear in such a place in a long time, with the obvious agenda of wanting to say the same for the US (time for that deficit commission to cut social security anyone?).
What is true is that for a country (e.g only Greece so far) to borrow from the newly established fund, put up by EU countries and the IMF and backed by the ECB, with a further backing by the US Fed, which has reopened its closed-down currency swap lines, it must engage in serious budget deficit reduction. Quite likely that will involve both spending cuts and tax increases, as have been voted for now by the Greek parliament, despite the riots in the streets by opponents of this.
However, let us be clear. First of all, this is not at all a statement or policy about “Europe” as a whole at all, much less social contracts in general. As of 2006 Greece had a lower percentage of GDP going to social spending (24.2%) than the EU average (26.9%). Countries with the highest percentages include some that have much less severe budget deficit problems, e.g. Germany, Sweden, France, Austria, the Netherlands. This is a problem of tax collections and corruption and underground economies, not of an out-of-control “social contract.”
Congratulations Barkley et al. “We also argued strongly for viewing the economics profession and intellectual development as being a complex adaptive process.” The question is, which is adapting to the other?
“Wow. Except that this is one of the most distorted and off-the-wall headlines to appear in such a place in a long time, with the obvious agenda of wanting to say the same for the US (time for that deficit commission to cut social security anyone?).”
Any more so than this from the NY Times?
“Greece, Debt And a Lesson: A Red Ink Question: Is U.S. So Different?” Second column, above the fold. And from the on line edition, Economic Scene: “In Greek Debt Crisis, Some See Parallels to U.S.” David Leonhardt reporting.
While the headlines refer to Greece and its woes the content of the piece is centered on the U.S. deficit and “what’s to be done” scenarios. In his discussion of the issues Leonhardt makes reference to both spending, especially social programs, Medicare and Social Security in particular, and tax cuts as things that we as Americans want and notes the conflict therein. But the emphasis to resolve the budget “problems” keeps focused on the social program cuts.
As in this summarizing paragraph:
“What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth”
Note that Leonhardt has managed to over look revision of the income tax codes that might capture a higher percentage on exceptional incomes and define income as inclusive of all types of income with no preferences being given to dividends, gains nor inheritance. A glaring omission if there is going to be any form of social sacrifice. It’s a clever piece that includes all the right words, but gives far greater emphasis to those which put the biggest burden on the working class. But that’s the NY Times.
“This is a problem of tax collections and corruption and underground economies, not of an out-of-control “social contract.””
That’s certainly half of it, but let’s not forget the other half. A country that builds and sells Porches intuitively should be “richer” than a country that grows and sells olives. It just makes sense.
Thanks, Jack.
Cedric,
Sure Gernany is higher income than Greece, but the issue is percentages of GDP spent on social spending. It is higher in Germany than in Greece. The problem is that the Germans are able to collect the taxes to pay for theirs, but the Greeks are not for theirs, with massive tax evasion deeply entrenched. This is not a matter of income levels, per se.
And so if the Greek government solves it’s tax evasion problem, they will not require a future bailout to maintain the same social contract and tax structure?
Why would you raise taxes and cut spending if enforcement of the tax policy is the solution?
Why would you raise taxes and cut spending before you solve the tax evasion problem?
If you could not solve the tax evasion problem before, what will change to solve the problem now?
I thought the way it might work is you have the government borrow to finance very high deficits as a percent of GDP, then spend it. You have all workers be tax cheats with more disposable income to spend. You add together consumption and government spending and ,voila, and get a high GDP number which then makes your social spending as a percent of GDP look smaller.
But at some point you would think this results in a lot of government debt?
Unless of course Keynes was right, everywhere, anywhere, and at anytime.
Funny that you should make reference to Porsche as an icon of Germany’s industry. This is the same Porsche that got burned in a finance squeeze when it tried to bite off too big a piece in a take over attempt of VW. The CEO and CFO are out after a decade of great success and Porsche is about to become a segment of VW. The engineers know what they’re doing, but some of the financial “engineers” got a bit too cocky.
“… but the issue is percentages of GDP spent on social spending. It is higher in Germany than in Greece.”
And Germany remains one of the strongest economies in the world. Maybe the strongest when you factor in size of population. So does adequate taxation and a strong social contract really lead a capitalist economy to its own demise. Apparently not.
I guess I could of said BMW (cool), Audi (almost cool), Mercedes (lost coolness), or VW(back to Earth). But Porsche is still the definition of cool.
Deutchbank – Definition of uncool.
Also, Rebecca Wilder did a post about a month ago here where she presented data on per unit labor cost and Germany was way below any of the PIIGS. They have been working on improving productivity and getting government spending under control for about 15 years now. This probably has a lot to do with their relative success. But it could end up being all for naught…..
Nuanced argument is old fashioned and doesn’t sell to readers. Many econblogs have shifted to more strident tones.
Thank you for posting this. I am Italian, and when southern European governments are blamed to be profligate social spenders I don’t know whether to laugh or cry. Everything in Italy costs more than in Germany (university, child care, medicine), no matter if it’s state- or privately provided. All of us have been run by right-wing dictators or Christian democrats for 50 years until the end of the Cold War and it’s not like we have changed much since then. This is not to say that our finances are in a good state; as you say there are other problems.
But there’s more. The Washington Post article says:
“But there was also concern about the risks being introduced, particularly whether the indebted Portugal, Ireland, Italy, Greece and Spain would make the changes needed to avoid further crises”
“PIIGS” (note the order). I am amazed at the power of acronyms on the minds of people who should know better. Italy has not had a sovereign default since its inception in 1861, and our deficit situation is fully under control. I don’t know why people insist we are a risky country. For instance
“Italy’s primary balance is a standout difference between it and other European countries”
From Reuters>Moody’s, May 7
Please in your infinite wisdom you Angry Bears. Help my country. I think without the “PIIGS” acronym we’d be paying some 25 basis points lower interest on our national debt. Help me in my effort to get rid of that horrible word.
In fact when Weiderking was in charge of Porsche he was looking for ways to reduce production costs. So some time in the early to mid ’90s he had a bunch of Japanese auto guys come to the plant and make suggestions. He is said to have taken those suggestions to heart with good effect. Stuff like on-time inventory rather than store it all on the shelves and pluck it as needed. They run only two factories now. Leipzig produces the Cayennes and Panameras and Stuttgart still does the Carreras and the bits and pieces of the mid-engine cars. Some of the mid-engines are assembled in Stuttgart, but many go to Finland for assembly. No idle space. In the end the old man from Audi, Herr Pieche, got the better of the wunderkin Weiderking. It’s still all in the family. At least mostly. Pieche’s grandma was a Miss Porsche. So Audi, VW and Porsche have always been related through marriage.
All from my some day to be published, “1001 Useless Facts.”
Cedric
you forget the founding myth of Athens. Athena and Poseidon had a contest to see who could give the most valuable gift to the city, and have it named after him or her. Poseidon, earth shaker, created the harbor. Athena gave the olive tree.
jack
“a little bit of everything” is the fallacy of “a balanced approach [Orszag].” it is a brain damaged solution. instead of solving a problem (as if there was a real problem) efficiently and rationally, we solve it politically. we can get away with stealing from old people and taking away their retirements if we raise taxes [a little] on the rich. and guess how long that tax raise will last compared to the raise in the retirement age.
Mattia
people i know who have been to Italy for longer than a vacation like the place.
sadly Angry Bear has no voice in American politics or press. Angry Bear seems to me to be a still small voice of reason. Politics and the Press seem to me to be vast enterprises to fool the people. The so called deficit commission is pretty good evidence that the people can be fooled by a gross lie with no rational basis whatsoever.
my take on greece… purely intuitive … is that for a long time it has been understood (by all but the poor farmer) that big money could not induce you to sell your farm, but it would be happy to lend you more than you could ever pay back, and then foreclose.
this appears to be what is happening around the world. the people.. none too bright .. have been persuaded to borrow money they can’t pay back, so the Big Money, is going to take away your farm, your kids, your wife and your dog. you will work for them on their terms and “retire” when they can’t suck any more juice out of you.
Greece was just the low hanging fruit. American Social Security seems to be the next course.
Jimi
i think you make a valid point. what’s the next step?
Mattia,
GIIPS has been suggested as an alternative, but I don’t know if that helps.
We could go to IPSIG, but that sounds German, and everyone says Germany is not the problem.
The rule of thumb of sovereign finance is people worry when debt/GDP goes above 100%. That is a little dumb, because it also depends on personal and corporate debt levels too, since those are the ones ultimately paying on all debt.
P.S. Ferraris and Lambos are cool too, but I can’t afford those either. Thanks for buying Chrysler, it will save Americans the trouble (again).
P.S.S. In America, we think olives come from Italy, not Greece. Don’t know if that’s good or bad.
Coberly,
i think you make a valid point. what’s the next step?
A Crack adict doesn’t kick the habit when you give them more Crack!
jimi
i take it you mean the EU should not be bailing them out. what then?
Coberly,
The Greek people are smart. Stay out of the way, and let them figure it out on their own. The current situation is like my son throwing a hissy fit when you catch him with his hand in the cookie jar before dinner.
The quickest fix has been to throw away all the cookies, and then make him eat his vegetables.