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OJ Blanchard defends the IMFs interactions with Greece

I do not think that the actions of the Troika or of the 18 non Greek members of the Eurogroup are defensible. I am quite confident that, if they can be defended, IMF head economist O.J. Blanchard is the man for the job. He is very very smart and doesn’t just assume that Keynes was wrong about everythign (in fact he and Daniel Leigh provided the strongest (PDF) evidence that Keynes was right).

I do not find his argument convincing. I will semi fisk it quoting the bits with which I disagree and commenting.

Referring to 2010

Even if existing debt had been entirely eliminated, the primary deficit, which was very large at the start of the program, would have had to be reduced. Fiscal austerity was not a choice, but a necessity. There simply wasn’t an alternative to cutting spending and raising taxes. The deficit reduction was large because the initial deficit was large. “Less fiscal austerity,” i.e., slower fiscal adjustment, would have required even more financing cum debt restructuring, and there was a political limit to what official creditors could ask their own citizens to contribute.

First, there were at least two alternatives to “cutting spending and raising taxes” one is just cutting spending, the other is just raising taxes. Since the Eurogroup negotiations broke down exactly on the issue of whether Greece should raise taxes or cut spending, the absolutely unsupported assumption that the two must always go together is critical to the current argument.

What if Greece had just raised taxes and not cut spending ? I think that this would have been a better approach. First I must argue that it would be possible to eliminate the primary deficit without cutting spending given the well known Greek tax evasion problem. It is certainly possible, because income, payroll and value added taxes are not the only taxes. A capital levey, a one off tax on financial wealth can be used to deal with debt, deficits and hyperinflation. Default, debt forgiveness and a capital levy are the way Germany handled problems similar to the Greek problem. This worked fine in 1923, when the German primary deficity was 97% of the budget.

See this post .

This is very important because of the evidence (from Blanchard and Leigh) that the government spending multiplier is 1.5 three times as large as the IMF assumed (that’s my one sentence abstract of their paper). Using a super crude back of the envelope guess I think that their work suggests a balanced budget multiplier on the order of 1. Blanchard says the primary deficit was “over 10% of GDP”. Based on Blanchard and Leigh, Simon Wren-Lewis argues that spending cuts necessary to eliminate that deficit would cause GDP to decline 30%. In contrast my envelope says that lump sum tax increases (if possible) would cause a decline of 6% while increasing taxes paid mainly by the rich would have a smaller effect.

The Troika doesn’t just demand an increase in the primary surplus — it demands that Greece follow the advice of Laffer not of Keynes. Blanchard does not address this issue at all. He pretends that “cutting spending and raising taxe” are one thing ignoring the ordinary English meaning of the word “and”.

Blanchard’s assertion that “lower fiscal adjustment, would have required even more financing cum debt restructuring, and there was a political limit to what official creditors could ask their own citizens to contribute.” is not proven or supported by evidence. Paul Krugman has argued that it isn’t true. It would obviously be true if Keynes were totally wrong as assumed by TROIKA policy makers. Blanchard has proven they are wrong and here assumes they are right.

I think that Blanchard means “lower fiscal adjustment, would have required an honest assessment of the amount of fincancing, debt restructuring and/or default which was inevitable and there was a political limit to the honesty of official creditors”. I think the modified claim is true, but does not amount to a defense of the IMF.

Later Blanchard responds to the claim that structural reform hurt Greece by saying it would have worked if it had been fully implemented.

Given the dismal productivity growth record of Greece before the program, a number of structural reforms were seen as necessary, ranging from a reform of the tax administration, to reduced barriers to entry in many professions, to reforms of pensions, to reforms of collective bargaining, to reforms of the judicial system, etc.

Many of these reforms were either not implemented, or not implemented on a sufficient scale.

The argument that the recommended policy was not “implemented on a sufficient scale” is a universal excuse which can be made whenever a policy fails.

Blanchard expresses no doubt that the recommended structural reforms would have caused higher Greek GDP. He also presents no evidence. I stress not just no evidence based on the Greek experience but also no evidence based on the long history of the IMF. His claim is simply an assertion of faith. I too am confident that some of the reforms would have helped Greece, but I am also confident that our shared faith is not based on solid empirical evidence (a bleg if commenters know of any evidence that structural reforms of the type discussed by Blanchard have caused higher GDP growth please tell me about it in comments).

Also Pension reforms have “structural” benefits only if the problem is insufficient labor supply. This is not a problem in Greece. I think they are correctly called cuts in transfers. If Greece had a problem with high inflation, keeping people in the labor force by refusing to pay them a pension would have supply side benefits. This has nothing to do with Greece’s current problems.

Greece has achieved a massive internal devaluation with a 17% decline in relative unit labor costs. This obviously hasn’t solved their problems largely because that means they have also achieved massive debt deflation.

Tipping his hat to himself and Leigh (as I do) Blanchard does concede

The decrease in output was indeed much larger than had been forecast. Multipliers were larger than initially assumed. But fiscal consolidation explains only a fraction of the output decline. Output above potential to start, political crises, inconsistent policies, insufficient reforms, Grexit fears, low business confidence, weak banks, all contributed to the outcome.

Here I think that the key fundamental main problem with Blanchard’s post is that he doesn’t consider the implications of Blanchard and Leigh’s observation that “Multipliers were larger than initially assumed.” and, in particular, that government spending multipliers were 3 times larger than the IMF research department assumed. This implies a different optimal mix of tax increases and spending cuts. According to Krugman, it implies that further debt relief (and or default) could not be avoided by imposing Government spending cuts. The difference between a 1.5 multiplier and a 0.5 multiplier changes everything.

I fear that I think the assertion “fiscal consolidation explains only a fraction of the output decline” is simply false. Greece is a double outlier with both huge fiscal consolidation and a huge output decline. But Greek data are near the non-Greek still rich country regression line. The data don’t even demonstrate nonlinearity let alone Blanchard’s claim.

Here I steal Krugman’s standard scatter. I think that it is easy to guess which points are Greek. There doesn’t seem to be much anywhere in that graph inconsistent with the extreme crazy model in which fiscal policy explains everything.


There is a sign error “insufficient reforms” can’t cause a decline. The (unsupported claim) that Blanchard knows of something that would be done which would have caused higher GDP does not have anythi to do wingth the question of whether the effects of fiscal consolidation are greater than or less than 100% of the decline in Greek GDP. Also Grexit fears are causing high demand. The assertion that such fears must cause lower GDP is based on confidence fairy BS and a refusal to distinguish the demand side from the supply side. A fear that financial assets will be forceably converted to Drachmas and devalued should cause high demand for durable goods — Grexit risk amounts to a negative expected real return on Euro denominated assets subject to Greek law. Negative real interest rates would help Greece.

We believed that a small primary surplus, increasing over time, was absolutely necessary to maintain debt sustainability. Having examined the budget closely, we did not see how this could be achieved without VAT reform to broaden the tax base, and pension reform to put the pension system on a sustainable footing. On these, our views coincided fully with those of our European partners.

This is nonsense. It may be that VAT reform (which means raising prices tourists pay in order to deal with the trade deficit ???) and pension cuts are the best policies. However, the assertion that a growing primary surplus couldn’t be achieved by other tax increases or spending cuts can’t be true. I haven’t examined the Greek budget at all, but I am willing to bet Blanchard that, given time, I could propose reforms which (assessed with dynamic scoring using IMF models) would yield a growing primary surplus without any changes in VAT or pensions. I am willing to give him 10 to 1 odds (and not just because I know he can’t accept the bet). In any case, Blanchard doesn’t discuss the Greek proposal which was rejected by the rest of the Eurogroup. The argument against it was pure supply side economics which would be of very questionable relevance to a country suffering from vastly insufficient demand, even if there were any solid evidence from anywhere ever in support of the argument (I don’t claim their isn’t, but I can’t think of any). The Greeks claimed they could manage without further budget cuts. The fact that the IMF and its European partners reject that claim doesn’t mean that it is inconsistent with the budget or even that the IMF has asserted that the Greek claim is inconsistent with the Greek budget.

In sum, I think that Blanchard has not responded to the claim made by Krugman and Wren-Lewis that actual real world government spending multipliers (as estimated by Blanchard and Leigh) imply that Greek government spending cuts caused enormous costs, and provided no benefits even for creditors who only care about getting their money back. I don’t see anywhere in his post where Blanchard acknowledges that lower GDP causes lower tax receipts, or concedes that changes in tax receipts other than those which result from changing the tax code have anything to do with government deficits.

In particular, he refuses to note the policy implications of the important research of Blanchard and Leigh. I conclude by quoting what I think are the three key words one must read to understand the existence and content of the post

“a political limit”

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Trump Trapped: RNC Snagged

I’ll make this short and then turn it over to you all.

As long as Trump is polling in the top 2 or 3 in early States he can’t drop out and the RNC can’t force or even encourage him to drop out. After all he is “Winning” by the only measure that matters this cycle. In past cycles maybe there were only three or four tickets out of Iowa, two or three out of New Hampshire, and only one or two out of South Carolina. And most of that was driven by money, if you didn’t have one of those early tickets it dried up. But this cycle not only is money not necessarily the screen that it used to be (you being one Fries, an Adelson or a fifth of two Kochs from having cash for the distance), it wouldn’t operate anyway if you actually have one of those top two tickets.

As of now Trump is Trapped. By success. Or more precisely by successful excess. And I don’t see any mechanism by which the Republican Party can chase him away. After all I saw polls today that had him leading both nationally and in North Carolina. How much of a loser do you have to be to quit while you are on top?

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Taking a page from John Roberts, Jeb Bush solves the problem of workers working part-time who want to work full-time: The way to create full-time jobs for part-time workers who want, but can’t find, full-time jobs is for part-time workers who want, but can’t find, full-time jobs to start working full-time. [With awesome update!]

My aspiration for the country and I believe we can achieve it, is 4 percent growth as far as the eye can see. Which means we have to be a lot more productive, workforce participation has to rise from its all-time modern lows. It means that people need to work longer hours.

— Jeb Bush, in an interview published today in the Manchester, NH Union Leader


Anyone who discounts 6.5 million people stuck in part-time work & seeking full-time jobs hasnt listened to working Americans @hillaryclinton

— Jeb Bush, on Twitter later today, responding to a Tweet by Hillary Clinton that included a chart from the Economic Policy Institute showing stagnating wages in the face of dramatically rising worker productivity since the 1970s.


The way to stop discriminating on the basis of race is to stop discriminating on the basis of race.

— John Robertswriting for a 4-1-4 Supreme Court plurality in 2007 in Parents Involved in Community Schools v. Seattle School District No. 1, saying that voluntary-student-participation school race desegregation/integration plans in Seattle and Louisville (in two separate cases argued together) violated the Fourteenth Amendment’s Equal Protection Clause.

Okay, these aren’t quite the same thing, but one reminded me of the other.  Roberts conflated remedial government policy with longstanding private-sector race discrimination that resulted in the need for government remedial policy.  Bush, by contrast, identifies a problem (people who work only part-time because they are unable to find a full-time job) and thinks that’s the same as proposing a solution to the problem (how to create an economy in which everyone who wants a full-time job can get one).

Which I suppose is why everyone interpreted his comment to mean what the statement says. They assumed he knows the difference between problem and solution, between coherence and tautology, and therefore was suggesting that the way to bring about 4% annual growth in GDP is for workers to decide to work 24/7.  Silly them.

Of course, also, by his decision to use the term “productivity,” he unwittingly walked headlong into the stark facts of wage stagnation in the face of significant worker-productivity gains in the last forty years.  For which Occupy Wall Street, Elizabeth Warren, Bernie Sanders and Hillary Clinton are grateful.  I am, too.

This guy is dumber than a rock. The Koch brothers badly need to find a smarter puppet. Soon.  


UPDATE:  Reader Sandwichman and I just exchanged the following comments in the Comments thread to this post:


July 10, 2015 11:53 am

Dean Baker at the Guardian (not Dean’s headline):

Beverly Mann

July 10, 2015 1:23 pm

Well, with due respect to Dean Baker, Sandwichman, I think that what Bush is suggesting is not that we emulate the old Soviet Union but instead current Russia. And that countries such as Germany, Holland, Australia, Canada, New Zealand, Switzerland, Sweden, Finland, Norway, Denmark and Austria do so, too. See the chart published yesterday by Hunter Schwarz online at the Washington Post.

Wow, no wonder Germany’s GDP growth has held up so poorly, and that that country’s unemployment rate was so much worse than this country’s during the aftermath of the 2008 international financial-industry crash!  [This is sarcasm, folks.  Germany’s economy held up way better than ours.]*

Seriously, folks, here’s the list:

  1. Mexico: 42.8 hours
  2. Costa Rica: 42.6
  3. Greece: 39.3
  4. Chile: 38.3
  5. Russia: 38.2
  6. Latvia: 37.3
  7. Poland: 37.0
  8. Iceland: 35.8
  9. Estonia: 35.75
  10. Hungary: 35.7
  11. Portugal: 35.7
  12. Israel: 35.6
  13. Lithuania: 35.3
  14. Ireland: 35.0
  15. United States: 34.4
  16. Czech Republic: 34.2
  17. New Zealand: 33.9
  18. Italy: 33.3
  19. Japan: 33.25
  20. Canada: 32.8
  21. Spain: 32.5
  22. United Kingdom: 32.25
  23. Australia: 32
  24. Finland: 31.6
  25. Luxembourg: 31.6
  26. Austria: 31.3
  27. Sweden: 30.9
  28. Switzerland: 30.1
  29. Slovenia: 30.0
  30. Denmark: 27.6
  31. Norway: 27.4
  32. Netherlands: 27.4
  33. Germany: 26.4

Yup.  Definitely prefer Russia’s economy to Germany’s!  Sounds like a winning argument for Bush.

Other great comments in the thread include this one by Frank Stain:

July 10, 2015 9:55 am

“This should not pass unnoticed: in trying to wriggle out of his “people need to work longer hours” gaffe, he characterized people working 30 hours a week instead of 40 as “getting in line and being dependent on government.” The scroungers! ”

Why does Jeb Bush hate stay-at-home moms?

And this one by Sandwichman:

July 9, 2015 10:28 pm

McCarthy, eh? Now I remember who Jeb reminds me of. Not Joe but Charlie.

Actually, I came this-close to adding, after my comment that the Koch brothers badly need to find a smarter puppet, that Charlie McCarthy would qualify. Wish I had!

Updated 7/10 at 2:25 p.m.

*Bracketed comment added 7/11 at 1030 p.m.

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A Case for Grexit

I think that the Greeks would be wise to abandon the Euro and introduce their own currency. Very few Greeks agree with me. Also many very smart economists around the world strongly strongly disagree with me. I will try to explain the case for a new Greek currency.

1) ECB blackmail is a crucial consideration. The ceiling on liquidity assistance (ELA) is binding. This is the reason Greek banks are closed. If Greece had its own currency, the Bank of Greece could lend as much of it as it pleased to Greek banks. The banks would be able to continue to handle electronic transfers (they are doing so at the moment but won’t be able to keep this up for long without more ELA or drachmas). As soon as Drachmas are printed, Greeks would be able to take them out of ATMs without limits (I guess some Greeks will take some out just to burn them in protest).

As soon as their banking system is independent of the ECB, Greece can threaten to default. The negotiations about debt repayment will be very different. I think this is a huge advantage for Greece.

In any case, without ECB blackmail, Greece will regain control over its own policy. Even if the Greek government can’t borrow, it can balance the budget by taxing last years profits and not by cutting already tiny pensions. The Eurogroup talks broke down on the question of tax increases vs spending cuts. The tax increases proposed by the Tsipras government are much less contractionary than the spending cuts demanded by the Troika. The debate between Greece vs the Troika is the debate between Keynes and Laffer. I think the evidence is clear that Syriza policy is based on sound economic considerations while the people who control the commission, the ECB and the IMF are clueless (notably not willing to listen to the IMF research department). The evidence for the second claim based on the effects of the policies they dictated (and their totally wrong predictions about these effects) is overwhelming.

2) with the drachma there will be inflation not deflation. This will be a very good thing. The long long US GDP decline from 29 though 33 ended exactly when prices ceased to fall and began to increase. When the US went off the gold standard it experienced record growth. FDR wasn’t the only person who took office in 1933, went off the gold standard, and watched GDP increase dramatically (Goodwin’s law trigger alert). I think that going off the Euro is a bit like going off gold and no policy has ever performed one tenth as well. With the inflation (which is likely to be high) the Bank of Greece can achieve negative real interest rates. Currently the lowest possible real rate is about 2%.

update: in the Washington Post Suzanne Daley reports that “Greeks Spend in Droves, Afraid of Losing Savings to a Bailout”. A spending spree is just what a country with deflation and 25% unemployment needs.

3) The Greek parliament can declare the Drachma legal tender. It can also decree that the word “Euro” in contracts is to be read as “drachma”. Workers will renegotation wages or strike, but creditors can only refuse to lend more (as they are already). Debt deflation is a choice for countries with their own currency. I think the transfer from creditors to debtors will stimulate demand.

4) money illusion is usually very powerful. In this case it will be much weakened by the fact that Greeks will continue to think in Euros. I don’t think it drachma nominal stickiness will be nonexistent (as it was in Germany in the fall but *not* the Spring of 1923). I expect Euro bearing tourists to get excellent bargains in Drachma using Greece. I think tourism should boom (note this argument is fourth and last).

So what is the case against Grexit which convinces almost all Greeks. After the jump I try my best

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The Silly Analogizing of Bernie Sanders to Ron Paul

Oh, dear.  This post of mine from yesterday is soooo yesterday.  (Okay, sooo last-weekend, to be precise.)  The attempt to paint Sanders as the Democrats’ Donald Trump has failed.  Sanders isn’t the left’s Donald Trump; he’s the left’s Ron Paul!  At least according to a rapidly congealing CW pushed by pundits that include—surprisingly—at least one progressive one.

Freelance writer Zaid Jilani writes on Alternet, in an article republished today on Salon:

In response to the high turnouts at Sanders’s events, many in the media have sought to downplay his momentum by comparing him to former GOP presidential candidate Ron Paul, who also inspired an enthusiastic following:

Bernie Sanders is the left’s Ron Paul.” [Slate Magazine]

Why Bernie Sanders is the Ron Paul of 2016” [The Week]

Bernie Sanders could be the Ron Paul of 2016” [Washington Examiner]

Can Bernie Sanders be the left’s Ron Paul?” [Rare]

Is Bernie Sanders the next Ron Paul?” [Fox News]

The message these outlets are promoting is that Sanders, like Paul, will be able to get an enthusiastic base but will ultimately fail in his quest for the presidency and will only make only a minor impact on the debate. The implication seems to be that Sanders’ views are on the fringe, like Ron Paul’s. But are they? Or is it just that he is the only one articulating the need to address extreme inequality and expanding social security, which millions of Americans support?

The media message seems to rely on the idea that the two men are similar because they spark genuine enthusiasm among their supporters – which is perhaps a sad commentary on American politics that there are so few candidates who can do this that when they do they are instantly compared.

Jilani goes on to deconstruct the analogy by pointing out, most importantly, that:

Paul, despite his enthusiastic and genuinely creative volunteer and donor base, has advocated ideas like completely eliminating Medicare, Social Security, and Medicaid. Even among the GOP base, these ideas are extremely unpopular.

Ah.  I get it. There’s no reason to think that a candidate who proposed deeply unpopular policy changes is different than a candidate who proposes popular policy changes. Why would anyone think otherwise?

Okay, maybe there’s a difference between proposing, say, the repeal of Social Security and an increase in Social Security in light of the near-universal end to traditional pension plans.  No, the real problem for Sanders—according to several commentators I’ve read in the last week, including another liberal one—is that Sanders is not like Barack Obama in 2008 because, see, Sanders, unlike Obama in that campaign, isn’t campaigning on generic hope-and-change, fill-in-the-blanks-as-you-want-them-to-be-filled-in slogans, providing specifics about domestic policy proposals only kicking and screaming because John Edwards has done so and then Hillary Clinton has done so because John Edwards has done so.

Nope.  Sanders is running on a series of specific policy statements.  And irrespective of whether or not those policy proposals are popular, Sanders can’t beat Hillary Clinton because he’s  not Barack Obama.

Look.  Obama was supported against Clinton in 2008 by progressives who really, really didn’t want another triangulation Democratic White House.  People thought that’s what a Hillary Clinton administration would be, and a Barack Obama administration would not be.

But the first five years of the Obama administration turned out to be largely a triangulation administration, filled to capacity with former Clinton administration officials, most notably but far from solely significantly Timothy Geithner. So, so much has happened since 2008, most significantly, in my opinion, the movement begun in the fall of 2011 by Occupy Wall Street, and Elizabeth Warren’s election to the Senate in 2012.

The mainstream political punditry, mainstream politicians, and the army of political consultants and such are, of course, not known for mental agility.  But their particular seemingly inalterable cluelessness right now is dramatic nonetheless.

Clinton is running a really terrible campaign, almost completely devoid of in-depth policy discussion, or discussion of any kind.  Much of what she says is incoherent and almost none of what she says responds directly to any policy statements by any Republican. She made news yesterday by giving an actual uncanned, non-generic response to an journalist interviewer’s statement about Jeb Bush’s positions on immigration policy, that actually was responsive to the statement or question.  Hurray!  I mean … wow!

But as I noted in my post yesterday, the most critical fact that the political analysts and pundits miss is the significance of the fact that Democrats are beginning to realize that their party’s nominee will be running against a Tea Party or mostly-Tea-Party Republican nominee—and that, yes, a very progressive Democratic nominee’s policy positions will likely be more popular than the Republican nominee’s.

Which means that Sanders indeed could win the nomination. Largely because he is not only the un-Clinton but also the un-Obama, and that that—a genuine progressive—is what a majority of voters would choose.  At least over Scott Walker, Marco Rubio or Jeb Bush.

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The Bizarre Attempt to Present Bernie Sanders As the Democrats’ Donald Trump

Stranger things have happened in American politics, but the sudden surge of Democratic/populist Bernie Sanders and Republican/populist Donald Trump puts one in mind of alternate universes.

And I don’t mean Miss Universes.

Both men are holding second place in some polls behind Hillary Clinton and Jeb Bush, respectively. And both are steadily ascending in the polls at a greater pace than anyone could have predicted — or imagined.

Sanders, a socialist running on a platform that should send shivers up the spines of most Americans, drew his largest crowd of the season — nearly 10,000 — in Madison, Wis., last Wednesday night. The anti-establishment candidate, who wants to break up big banks and redistribute wealth, makes President Obama (and Clinton) look like robber barons by comparison.

— The unexpected rise of Bernie Sanders and Donald Trump, Kathleen Parker, Washington Post, Jul. 3

Stranger things have happened in American political journalism, but really, it’s not a shock that political pundits equate Sanders and Trump.  Not all political pundits.  Just some of them.  Several, actually; Parker’s piece is one of three or four commentary or analysis pieces I’ve read in the last few days that suggests not simply that the surge of attention and poll recognition is, in each case, unexpected, but that these two both are on the crackpot fringe.

Since Trump is appearing mentally unhinged, Sanders must be borderline-crazy, too.  After all, neither is part of his respective party’s establishment, and therefore, necessarily, both are extremists.  And equally so, since they both rose dramatically in their party’s polls during the same short period of time.

Yup, reinstituting the Glass-Steagall Act separating deposits-and-lending banks from investment-banking-and-derivatives-speculation financial institutions, and federally insuring only the former, is just like accusing Mexican immigrants of bringing drug traffic to this country and raping American women!  Not to mention babbling incoherently. The resemblance is striking, although not to me.  Especially since Glass-Steagall was in fact the law for forty-six years until its repeal in 1999.  During which time this country had several Communist presidents, including Dwight Eisenhower, Richard Nixon and Ronald Reagan.

Yes, Elizabeth Warren may send shivers up the spines of most Americans, but a majority of Americans probably would vote for her as a presidential candidate.  Especially since she would be running against a Tea Party Republican or a George W. Bush Republican.  As will the eventual Democratic nominee.  Whether it’s Clinton or Sanders.

And while, in the opinion of many of the targeted wealthy, Parker among them, raising taxes on them to levels above those enacted under George W. Bush, and reinstating meaningful estate taxes to, say, inflation-adjusted 1960s levels, should send shivers up the spines of most Americans, including the ones who aren’t wealthy—at least the ones who don’t like safe and modern infrastructure and access to college by the non-already-upscale—it doesn’t appear, judging from poll answers, that these policy proposals would be deal-killers for a nominee who proposes them.

And while single-payer Medicare-for-all-type healthcare insurance—another of Sanders’ proposals— would solve, once and for all, problems such as these, it’s likely that most Americans shutter at the thought.  Especially those who think Medicare itself is socialized medicine and want it repealed.  And all those Democrats who considered Ted Kennedy and extremist because he fought for decades for single-payer healthcare insurance.

First among those Democrats being Claire McCaskill, who as a Clinton surrogate told an interviewer last week that Sanders couldn’t win the general election—against Scott Walker, Marco Rubio or Jeb Bush—because he’s an extremist.  Luckily for her—and for Clinton—McCaskill wasn’t asked which of Sanders’ proposed policies she, and Clinton, thought a majority of the public would consider extremist.

And which of Walker’s, Rubio’s or Bush’s she thought a majority of voters wouldn’t consider extremist.  Rubio’s proposal to repeal the estate tax completely?  Walker’s to effectively end collective bargaining in the private as well as the public sector, and his attempt to turn Wisconsin’s state university system into a lightly-funded job-training apparatus?  Jeb Bush’s Romney-esque cut-taxes-even-further-on-the-wealthy-and-corporations-and-we’ll-see-an-annual-4%-rise-in-the-GDP promise, because that worked so well for his brother?  (Glenn Hubbard for Treasury Secretary!)  Every single one of the Republican candidates’ Romney-esque cut-taxes-even-further-on-the-wealthy-and-corporations-and-we’ll-see-an-annual-4%-rise-in-the-GDP promise, because that worked so well for Jeb’s brother?

Ah, I know!  It’s their completely-deregulate-the-financial-services-industry plans!  And as a bonus, their Koch brothers’-dictated environmental policy proposals.

The point here being that while the claim of a mirror-image symmetry between Bernie Sanders and Donald Trump is preposterous, an analogy of that sort between Sanders and Walker, Rubio and Bush would be pretty close to spot-on.  And this is so even though those three rose in the polls weeks and even months before Sanders and Trump did.

Don’t think so, Ms. Parker?  Strangely enough, it is.

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Austerity Arithmetic

Paul Krugman uses elementary Keynesian Macroeconomics to argue that the austerity demanded by the Troika would reduce the Greek debt to GDP ratio, if at all, only by causing deflation and increased Greek net exports. This means that it would take a very long time (or forever) to reduce the Greek debt to GDP ratio that way.

I add that this is also an argument for achieving primary surpluses through tax increases (as proposed by the Greeks) rather than spending cuts (as demanded by the rest of the Eurogroup).

The reason is that the effect of a tax increase on aggregate demand is multiplied by the marginal propensity to consume which is definitely less than one. Typical guesses are that it is about 1/3.

My comment

Alternative austerity arithmetic. But what if the 1% surplus were achieved by raising taxes not by cutting spending ? I will be extra super back of the envelope crude and assume that the accelerator effect is equal to the marginal propensity to import so the marginal propensity to consume can be calculated as 1/3 from the 1.5 multiplier . So a 1% of GDP increase in taxes would reduce GDP by (1/3)/(1-1/3) = 0.5% and that would reduce tax revenues by the back of Wren-Lewis’s envelope by 1/6 % so to get to 1% primary surplus taxes would have to be increased by 1.2 % causing GDP to promptly decline 0.6% and the debt to GDP ratio to promptly increase by about 1% so one year to get back to the no austerity debt to GDP ratio.

Your Phillips curve says 1.2*0.23 % less inflation so debt to GDP would fall
(1-(1.7*1.2*0.23)) % per year so it would take about 2 years to get back to where Greece would have been, 2< infinity. But wait, there's less. What if the increased taxes were taxes on high incomes (say profits over 100,000 euros per year). That would have a much smaller effect on demand. Or how about increasing spending 0.5% of GDP and increasing taxes 1.5%. That gives a primary surplus 1% higher and no effect on aggregate demand. The point is that Keynesians do not have to insist on deficits. The alleged need to choose either fiscal stimulus or low debt is nonsense or in any case has almost nothing to do with Paleo Keynesian macro and less to do with new Keynesian macro.

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OXI ~ 60%: What now? Greece Open Thread

Greece Interior Ministry Results
all regions voting ‘OXI’ = ‘No’

Huffington Post: Live Updates: Greece Votes In Referendum On Bailout Proposal

More links as afternoon progresses.

This article by Steve Randy Waldman at Interfluidity has been getting a lot of play around the Intertoobz since yesterday (I also linked to it in Comments on the previous Grexit post). It’s title is simple but it has a lot of depth and insight, I thoroughly recommend it. Greece

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Mellon-ization, Austerianism, and Grexit

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…

It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
-Andrew W. Mellon

This quote of the advice that Secretary of Treasury Andrew Mellon allegedly gave to President Herbert Hoover is famous, though mostly in the form that omits the second part. But it is exactly there that the ethos of Austerianism shines through. Which I would summarize as “high living is not for the undeserving” where “undeserving” is defined basically as anyone not in Andrew Mellon’s economic class. A class in which Mellon was an elite among the elites, take this from his Wiki entry Andrew Mellon.

Areas where Mellon’s backing created giant enterprises included aluminum, industrial abrasives (“carborundum”), and coke. Mellon financed Charles Martin Hall, whose refinery grew into the Aluminum Company of America (Alcoa). He became the partner of Edward Goodrich Acheson in manufacturing silicon carbide, a revolutionary abrasive, in the Carborundum Company. He created an entire industry through his help to Heinrich Koppers, inventor of coke ovens which transformed industrial waste into usable products such as coal-gas, coal-tar, and sulfur. He also became an early investor in the New York Shipbuilding Corporation.[2]

Mellon was one of the wealthiest people in the United States, the third-highest income-tax payer in the mid-1920s, behind John D. Rockefeller and Henry Ford.[1] While he served as Secretary of the U.S. Treasury Department his wealth peaked at around $300–$400 million in 1929–1930.

Mellon was a member of the South Fork Fishing and Hunting Club (whose earthen dam failed in May, 1889, causing the Johnstown Flood), and he belonged to the Duquesne Club in Pittsburgh. Along with his closest friends Henry Clay Frick and Philander Knox (also South Fork Fishing and Hunting Club members), Mellon served as a director of the Pittsburgh National Bank of Commerce.[3]

Which gets to my point. Clearly Mellon’s (apocryphal) advice was not to suggest that HE be liquidated, that HIS way of life would have the ‘rottenness’ purged, that HE would have to work a harder more moral life. No instead the liquidation was destined for those who never should have been in the market in the first place, the “less competent people”, thus allowing all the real assets underlying the investment bubbles to be picked up cheaply by “the enterprising people”. For example the members of the South Fork Fishing and Hunting Club and the Duquesne (town) Club.

My assertion is that this same underlying ethos of the “undeserving” (mostly but not just the poor) against the hard-working “deserving” (including but not exclusive to industrial and financial magnates) operated long before Mellon and long after him and fuels Austerianism today. Creditors are hardworking and deserving of their returns, debtors are not. And this includes not just individuals but whole countries. Like Greece. So in a pinch the right answer is to “liquidate farmers, liquidate stocks” while leaving those with deep capital to pick up the pieces.

A final note before turning this over. Under this ethos the phrase ‘shared sacrifice’ has a specialized meaning. Because the proposed sacrifices are very often in the form of pension ‘reform’ (i.e. cuts) and an increase in tax on consumption, which is to say a direct attack on the ‘high living’ of the ‘undeserving’. What you don’t see in general, and certainly not in the case of Greece, is any acceptance by creditors that ‘sacrifice’ require any significant tax on capital or haircut on financial investment. Business investment maybe, that is the ‘liquidate stocks … liquidate real estate’ piece of Mellon’s prescription, and driving small business to ruin is just an unavoidable part of ‘sacrifice’. But at no point was Mellon, or today the IMF or the ECB suggesting that any real burden should fall on hard working deserving bankers.

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