Friday, 26 April 2013


I'm off to the land of the free and home of the brave--no, not Scottland--for two weeks to indulge in some archival work. Limited or no posting for a while.

Rogoff & Reinhart

Via Paul Krugman I see that Steven Colbert is having fun with R&R. Looks like R&R are turning into the Cloward and Piven of the left. The difference is of course that C&P were never more than bogey men (women) for right wing conspiracy theorists while R&R's argument actually shaped policy and contributed substantially to prolonging the current crisis unnecessarily.

Monday, 22 April 2013

Beware of Americans bearing gifts

Apparently the US finance minister Jack Lew gave his German colleague Wolfgang Schäuble a copy of an Alexander Hamilton biography. As Schäuble will have discovered upon reading the book, one of Hamilton's main contributions was to have the federal government of the newly founded United States assume responsibility for debts run up by individual states. It's reassuring to see that Lew knows his history and understands that the USA as a federal state were not only founded on lofty ideals but also on the need to handle an imminent debt crisis. It's far less reassuring to see that German politicians are unwilling to learn from history (German, American or other) or even acknowledge its relevance. Apparently, Schäuble's come-back was a bland 'things are different today'.

Saturday, 20 April 2013

Schoolboy error, not

The BBC has a great piece about how the Reinhart&Rogoff mistake was discovered by a student. Why is it that so many professional (professorial) economists are so bad at critically examining the case for austerity?

Friday, 19 April 2013

Stereotyping GIPSIs

I admire Paul Krugman as much as the next liberal bleeding-heart, but I disagree with him about the history of European debt. Recently he wrote on his blog:

'European officials remain in deep denial about the fundamentals of the situation. They continue to define the problem as one of fiscal profligacy, which is only part of the story even for Greece, and none of the story elsewhere.' 

Krugman is right to point out that many of the GIPSIs (Greece, Italy, Portugal, Spain, Ireland) had sound public finances until very recently. Spain, Ireland and Portugal were only thrown into financial turmoil when they had to bail out their banks. So no irresponsible spending by politicians there. But not all GIPSIs are the same. Greece and Italy are different. Their public debt is much older and has been accumulated over longer periods. Their debt is not the result of a single 'mishap' but reflect structural political problems.  I have written about this before

'In Italy, as in Greece, public debt has been run up over decades in the post war period. In Italy mainly since the early 70s. In this period, expenditure for the welfare state increased rapidly, but taxation did not keep up. This was in large part due to the political context. Italy was the only western country--together with Chile--in which an election victory of the communist party was a real possibility. Left wing terrorism added to the political pressure. However, while the christian democratic governments of the time were forced to expand welfare provisions, they were not willing to go against the interests of their constituents and tax businesses and higher incomes according to expenditure.'
The different histories of public debt in the GISPI countries have important implications for the possible solutions to the debt crisis. In Spain, Ireland and Portugal it is possible to fix the short term consequences of the financial crisis along the lines that Krugman suggests. But in Italy and Greece things are more complicated. Throughout their existence they have been politically highly instable and this has not changed now. While Spain and Ireland are governed (badly) by stable democratically elected governments despite the crisis, Italy and Greece have gone into full political meltdown. 

It will take more than ECB intervention, Eurobonds and stimulus in the European core to fix the problems of Greece and Italy. European politicians may be in denial about the causes of the debt crisis in some GIPSI but critics of austerity are not helping their cause by ignoring the heterogeneous histories of European debt. 

Thursday, 18 April 2013

Reinhart-Rogoff and Asprine

There seem to be some very substantial problems with the data that underpins Reinhart's and Rogoff's thesis that countries with a debt/GDP ration above 90% tend to experience slower growth than others. A good summary of the problems with the data that have now emerged can be found here.

Other important doubts about the implications of the R&R data had been voiced earlier and are mentioned in the piece. Quite a part from the validity of the data, it is really important to ask what a correlation between high debt and low growth means (or rather would mean if it existed). Does this correlation really imply a causation and if so which way does it run? Most likely, people who take more Aspirine also have more headaches. But should we really conclude, that limiting your consumption of Aspirine will reduce your headaches?

Friday, 12 April 2013

Grease that rusty guillotine

Dominique Moïsi compares François Hollande with Louis XVI and warns that if he (Hollande) does not learn his history lessons he will have to face the consequences. That's great. By that I don't mean the apparently imminent execution of Hollande but the fact that this is finally a historical comparison that does not involve Heinrich Brüning or the rise of fascism in the 30s. But there are some points that remain unclear in Moïsi's argument. I have done some comparisons of 18th history with the present myself. That kind of long term comparison is often tempting, sometimes illuminating, but always tricky because of huge differences in the historical context.

Moïsi's main point is that the 'Ancien regime ... fell ... when the privileges of the aristocracy were no longer perceived as the counterpart to services rendered to society' and that we are seeing a similar situation today. This, he thinks, is the sign of deep crisis of the political system. 

The first question that I would like to ask Moïsi is how deep he thinks the political crisis is today in comparison to the late 18th century. My impression is that if growth rates were to pick up again from tomorrow we would see the talk about a political crisis in France disappear rather quickly. Before the French Revolution there were a few bad harvests, but most historians would agree that even with extraordinary harvests the Ancien Régime would not have survived because its structural problems were to big. 

This leads to the question of whether there are any structural problems today that are comparable to those under the Ancien Régime. Moïsi seems to think so, but does not really spell out what he means. So let me give this a shot:

The main obstacle to resolving the debt crisis of the French state were the fiscal priviliges of the aristocracy and the church. Their near complete exemption from taxation meant that a substantial part of revenues could not be taxed. Taxation on the revenues that could be taxed therefore became oppressive. In the words of Michael Kwass the Ancien Régime was a 'welfare state for the rich'. But government revenue still remained too low to provide for the increasing expenses, mainly for warfare. This was clear to most contemporaries but the political structure of the Ancien Regime meant that this could not be changed. Those who were unhappy with the status quo had not political power and those who had political power were quite happy to leave things as they were. Political elites used their political power to protect their economic privileges, thereby undermining the stability of the whole system. Of course the collapse of the Ancien Régime was not only a fiscal matter, but it was one of the central problem. 

What about today? Are there similar structural problems that prevent a solution of the current debt crisis? I would say yes but in a roundabout way. In most industrialised countries, the policies of the last decades have led to shift of the tax burden from the rich to the poor. At the same time, wealth and incomes have been redistributed from in the opposite direction. There may be some effect of this shift on overall government revenue. This may be a similarity to the Ancien Régiem. But I would argue that this development resulted mainly in a shift of the tax burden that left overall government revenues intact. The real problem lies in an other effect of growing inequality: domestic demand is depressed and growth remains sluggish. Over the last decades the solution in many economies was increasing private debt but this creates problems of its own of which we are now well aware. So, I would agree that the fiscal policies put into place by today's political elites in the interest of economic elites let to the current crisis. But the mechanism is more complex than in the 18th century. 

However, as perceptive readers will have spotted, there's a missing link in this argument. In the 18th century economic and political elites were to a large degree congruent. It's easy to see why the Duke of Orleans would and could oppose fiscal reform. He was both an extremely wealthy man and the brother of the king. But today's political elite is--which a few notable exceptions--not part of the economic elite. It is therefore much more difficult to explain why policies that benefit the economic elite are put in place. Is it because politicians are slaves to the ideas of defunct economists? Hayek and Friedman in this case? But this merely begs the question of why they're not slaves to defunct economists with different views. Or do party donations play a role in shifting political power from the masses the elite? More questions than I can answer in one blog post. But worthwhile thinking about. 

Thursday, 11 April 2013

Thatcher's legacy

"Margaret Thatcher once said that her greatest political achievement was New Labour. Tony Blair said today she was a ‘towering figure’..." More here in the LRB and here in the Guardian. 

Wednesday, 10 April 2013

Soros's sorrows

Germany needs to make up its mind: agree to Eurobonds or leave the Euro. Here's George Soros's argument and here's a broadly positive comment by Wolfgang Münchau (in German). I broadly agree that Eurobonds would go a long way to solve the current debt crisis of European periphery countries but I see two problems in the longer-term: one economic and one political.

First, let's assume the debt crisis is solved through Eurobonds. But after that we are still faced with very substantial imbalances in the Eurozone that are mainly due to German export surpluses. At the moment most politicians seem to think that this problem should be solved by lowering costs in the periphery. Hence austerity. Critics say that this should be addressed either by countries leaving the Euro and devaluating their currency or by inflating costs in Germany and other core countries. However, both arguments assume that German exports are price elastic, that is will fall if their prices increase. However, German exports are strong even to countries with very low costs of production such as China. It might well be that the strong international demand for a range of German products is not mainly due to their competitive price but to the fact that there is are no equivalent substitutes available. This share of exports that is driven by qualities of the produce and not its price may be substantial.

This would mean that tinkering with exchange rates and internal inflation or deflation would not do much to address trade imbalances. What would then be needed are development and industrialisation programmes for the European periphery. Such programmes might be very successful but they also require a level of political integration that seem utopian at the moment.

Second, once Eurobonds have solved the debt crisis what would make sure that periphery countries address their structural economic problems? This is one of main concerns of German politicians at the moment and while it seems overblown in the case of most periphery countries it should be a real concern in the case of Italy and Greece. Unlike Spain or Ireland, these countries were not dragged into this crisis because they had to bail out their banks. The debt crisis in Italy and Greece reflects their political instability. It is not a coincidence that both countries now have unelected governments of experts. Spain and Ireland may not have good governments but their political system continues to function even under great strain. These political problems of Greece and Italy will not go away if Eurobonds are adopted and they may be solved by greater European integration. But until the decadent political institutions of Greece and Italy are substituted by European structures there is still plenty of time for plenty of things to go wrong.


The death of Margarete Thatcher has given rise to a debate about her achievements. Ostensibly this is about the past, but inevitably it's also about the present. Members of the current British government apparently referred to themselves as 'sons of Thatcher' in the past and the similarities between current economic policies and Thatcher's are too similar to allow for a purely historical debate. And quite rightly so. If Thatcher's policies got the UK out of the last economic crisis, why not try them again? Here are some thought's on Thatcher's legacy:

(1) There can be no question that Thatcher's budget cuts and tight monetary policy led to a worsening of the economic crisis in the late 70s and early 80s, it remains much more doubtful how much credit she can take for the strong economic growth in the 90s and 00s. First of all there is the problem of the delay: Paul Krugman points to the fact that the economic renaissance of the UK happened only in the mid-90s. That's almost a decade and a half after Thatcher's reforms. 15 years is a long time in economics and one might wonder how much credit she and her policies can take for the recovery.

(2) Even if we accept that Thatcher should share some of the credit for the recovery are not a decade and a half simply too long a period for any economic cure to produce results if we are to take it seriously. As Keynes famously remarked, the long run is a bad guide to current affairs. By the time that recovery set in the lives of many individuals and whole regions of the UK had been ruined. If we agree with Thatcher that there was no alternative to her policies then this was an inevitable sacrifice. But one might wonder wether there were no faster and less punishing ways out of the crisis.

(3) How good was that recovery anyway? Many developments that occurred as a result of Thatcher's policies are today blamed for the present crisis: growing inequality, increasing private debt, housing bubble and financial deregulation. It seems that her interventions may have contributed to end a medium sized crisis only to lay the foundations for a gigantic one. Or in the words of Martin Wolf in today's FT: 'Today, alas, the post-Thatcher renaissance looks as much illusion as reality.'

Silence is golden

But not when you're writing a blog. Apologies for the prolonged silence. First there was not much to comment on, then Easter and then some other things to take care of.

Tuesday, 26 March 2013


Conveniently priced at 57£ 'Rebellious Prussians' makes for a perfect Easter gift for a loved one. Or not. But you might consider asking your library to buy it for you.

Urban political culture under Frederick II

'Rebellious Prussians' is obviously the product of an earlier project.  Here's what it's about:

'Prussian discipline is legendary. Central to debates about modern German history is the view that an oppressive Prussian state cast a shadow on the development of civil society. In particular, historians have seen the absence of a revolution in the eighteenth century as a symptom of a delayed and incomplete emancipation of the Prussian bourgeoisie. Prussia's urban dwellers have often been portrayed as poor relations of the self-reliant and assertive bourgeois of Western Europe and the Atlantic world. Economically backward and politically oppressed, they were allegedly in no position to challenge the iron grip of the state and question the authority of the Hohenzollern dynasty. 

Drawing from extensive and original research, Florian Schui challenges the accepted view and argues that Prussians in the eighteenth century were much more willing to challenge the state than has been recognised. Schui explores several instances where urban Prussians successfully resisted government policies and forced Frederick the Great and his successors to give in to their demands. Rebellious Prussians thus sheds light on a little-known historical reality in which weak Hohenzollern monarchs - and a still weaker Prussian bureaucracy - were confronted with prosperous, fearless, argumentative, and occasionally violent Prussian burghers. 

Such conflicts between state and citizens were by no means unique to Prussia. Rather the events in Prussia were, on many levels, connected to similar contemporary developments in other parts of Europe and North America. Florian Schui systematically explores these links and thus develops a new European and Atlantic perspective on Prussian history in the eighteenth century.'

Thursday, 21 March 2013

Rebellious Prussians

Out now...

I'll post the blurb later. Meanwhile you can have a look inside here or here.

'Economic viagra'

is what Osborne's once called austerity. Robert Shrimsley has funny piece in today's FT looking at the story of austerity as a clinical trial: 'George Osborne, the economic scientist behind the development of the Austerity™drug, had been running live human trials on a select group fo specimens known as the British.' Read more here. (No need to subscribe to the FT. If you register you get a number of free articles per month.)

End of history?

This is a bit of dry spell for historical comparison. The Cyprus story does not seem to conjure up any memories from history classes in most journalists and politicians. Krugman had a very generic reference to antiquity. But that's all. Not much to comment on. So I will do some housekeeping. Like following the repeated requests for putting up a new photo. Let's see what can be done.

Monday, 18 March 2013


We're well beyond a thousand page views now but no one wrote in to claim the prize. Perhaps I should not have revealed what it is... Anyway I will now look for a suitable charity to donate the unclaimed prize.

Friday, 15 March 2013


As this blog is getting close to its 1000th viewer I decided that there should be a prize to celebrate this momentous event. On the right I installed a page view counter (on the right). If you see that you're no 1000 then send me an email ( with your address and I will send you the prize. What the prize is? Through a series of mishaps I ended up with three copies of Hayek's 'Individualism and economic order'. Three copies is too many even of an important work as that one. The 1000th page view will get one copy mailed. I'll keep one for me and one for the next prize competition.

Austerians unite

Looks like 'austerians' everywhere are using the same, not always convincing, arguments. At my paper in Milan, one of the commentators talked about how his grandfather was a very frugal man and how that led him to great economic success. I tried to explain the difference between a grandfather and an economy. (Not necessarily something you would expect finding yourself doing in an economics department.) Today, I see that Paul Krugman, too, is making that point once again on his blog. In some respects that's a consolation. In others not so much. After all, Mandeville first pointed to the difference between private households and economies in the early 18th century.

Thursday, 14 March 2013

From the classics II

'The one thing modern democracy will not bear without cracking is the necessity of a substantial lowering of the standards of living in peacetime or even prolonged stationariness of its economic conditions.' (Hayek, Road to serfdom, Ch. 14.)

Wednesday, 13 March 2013

A problem shared...

At least I am not the only one having frustrating experiences with Italian economists. A whole different level, I know. Still offers a quantum of solace.

Austerity bunker, Italian version

Interesting experience at the economics department in Milan today. One commentator insisted that there are no economists who think that austerity does not work. Read the FT this morning? The whole thing felt a bit like walking into the conclave and asking whether they would consider a women as next pope.

Tuesday, 12 March 2013

Hayek on Grillo?

While re-reading Hayek I could not help but thinking of the new political forces emerging in European politics such as the Grillo Movement in Italy and Piraten Partei in Germany. Here's what Hayek says in the Road to Serfdom (Ch. 8): 'The resentment of the lower middle class, from which fascism and National Socialism recruited so large a proportion of their supporters, was intensified by the fact that their education and training had in many instances made them aspire to directing positions and that they regarded themselves as entitled to be members of the directing class.' According to Hayek, frustration of their ambition led them to embrace fascism. There are some interesting parallels in that both Piraten Partei and Grillo Movement have many supporters with university degrees. This is speculation, but many of them may feel cheated by the fact that today a university degree does not guarantee a privileged social or economic position anymore. Moreover, these movements have very little by way of an actual political program. Their main impetus is that they dislike the status quo (which is denying them the recognition they think they deserve) and that they want to send the current political elites packing (presumably to take up the privileged positions thus vacated). Often these movements are described as closer to the left than to the right. But I wonder if that is actually true.

See also this earlier post.


Tomorrow, at 12h15, I am giving a paper on 'Austerity: the old history of a new idea' at the Economics Department of the University of Milan. Apologies for the late notice.

Directions: The DEAS (Dipartimento di scienze Economiche, Aziendali e Statistiche) is at 7, via Conservatorio. Enter the main gate and turn right, where are just a few steps. Take the lift to the second floor. The seminar room is the first on the left.

Monday, 11 March 2013

Tu quoque

Liam Fox, yes, Liam Fox, is coming out against austerity. Here. Along with him a majority of Britons seems to have lost faith in austerity economics. Here. Good. But it's very hard to see how political leaders across Europe who are so wedded to the policy can bin it without loosing face.

The clown as a fascist

After many people have argued that Grillo is unlike the fascists of the 1930s here's a piece making the opposite case. No time to comment today. Do you have any thoughts?

Thursday, 7 March 2013

Medieval history

Finally, a historical comparison that does not involve the 1930s. Dario Fo compares Grillo to medieval fools. (A few days ago in the Guardian and now again in the print edition of Die Zeit.) Interesting, but I am way out of my depth here so will not comment.

More tragedy and farce

Wolfgang Münchau (like Gideon Rachman, the Economist and everyone else) contemplates the ascent of the clowns and compares them to Mussolini at al. (Here, in German.) Unsurprisingly, Münchau, too, prefers clowns to fascists. And, like me, he cannot resist making a reference to Marx's 'first tragedy, then farce' comment. (Germanic urge to display erudition?) But he adds an interesting twist compared to Rachman's story. One reason why Rachman likes the comics is that he believes they will behave reasonably once they're in power. And for him reasonable means that they will toe the line on austerity. Münchau, too, takes a cautiously positive view of Grillo, but for different reasons. He points out that Grillo has consulted with some prominent economists, including critics of austerity (Stiglitz, Krugman, Fitoussi) and therefore should not be considered economically naive. This is in contrast to the Economist's view. In the pre-election edition the magazine criticized Grillo for essentially not having an economic programme.

Commentators, like the political establishment in Europe, are clearly finding it difficult to make sense of Grillo. Is he a naive clown with no clue about economics, or an adaptive clown who can still be converted to 'reason' (i.e. austerity), or does he stand for a real alternative in economic policy. It may well be that at the moment Grillo and the members of his movement don't know the answer to this question themselves. But which way his movement and others in Europe go may have a significant impact on Europe's future economic and political.

Wednesday, 6 March 2013

Guest commentary by Malcom Tucker

Malcom's views on bloggers. Very funny. I should point out, however, that I never wear a track suit or sit in my bed-room when I write on this blog.

Some meta commentary

As I explained in my first post the primary function of this blog is to comment on the use of historical evidence in today's debates about fiscal and economic matters. This part is going well, I think. At least I am enjoying the writing and from the statistics that google shows me every time I open this blog, I can tell that at least some people are reading me. Well over 800 page views so far. That's great. Thanks a lot. By the power of google I can also see where readers are from: the US, Italy, Germany and Australia are top of the list.

But when I included this blog as a 'publication output' into my fellowship application with the Leverhulme Trust I also promised that I would talk about the progress of my research from time to time. I have not done much in that direction and should start today.

Put simply, the main question that I am trying to answer is 'Why are we so bad at learning from history in economic and financial matters?' More specifically, there is a good argument, made by Reinhart and Rogoff, that historically financial crises have developed according to very similar patterns. If true, this begs the question of why we are still so bad at handling them. Not that there has been no progress. Central banks were much more effective in the early stages of the current crisis than in the 1930s. But clearly there is still room for improvement. So, I am looking at how historical evidence has been used in public debates about fiscal crises in the last 250 years. I am mainly interested in what determines continuity and discontinuity in economic thought and what the main obstacles and catalysts of learning from the past are.

More details about the manuscript that I am working on will follow soon.  Now I have to ... ahem ... work on the manuscript.

Tuesday, 5 March 2013

What is going on at the FT?

First, Martin Wolf becomes a Keynesian and now Gideon Rachman is turning Marxist. In today's column, he essentially argues that we are seeing a replay of the 1930s, but this time as a farce, not a tragedy. In light of the Italian elections, he argues that the voters of the European crisis countries are turning to clowns rather than fascists. This, he says, is good because they're more entertaining, less brutal, and ultimately also quite responsible. The reason, he says, is that Europe is much richer today. Therefore, the pain inflicted by the crisis is not quite the same as in the 1930s.

It is refreshing to see someone arguing that it's not the 1930s all over again. And it would, indeed, be very difficult to argue that Grillo is the new Brüning. Some journalists have compared him with Mussolini, but that's not very apt either. And not only because of the hair.

However, there are some problems with Rachman's argument. First, there is the problem of evidence. He's basing his argument on Grillo's success and the election of a comedian as major of Reykjavik. But two comedians don't make a trend. He is right to say that there has been no significant rise in neo-fascist movements. Even in Greece this has remained a limited phenomenon. But we have seen another phenomenon that is quite pre-occupying: the re-emergence of nationalism, often with chauvinistic overtones. There is much anti-German sentiment, even in mainstream politics, in the European periphery. At the same time, a dangerous mix of arrogance and fear is prompting mainstream politicians in Germany and elsewhere in the European centre to play on deeply ingrained prejudices against southern Europeans. This is not neo-fascism, but nationalism can be destructive enough on its own.

There is another problem: Rachman seems to believe that it was misery that swept Hitler and Mussolini to power. But that is only partly true. The fascist movements on the 1930s were essentially petit-bourgeois movements. People who were hanging on to their 'bourgeois' status by the skin of their teeth and who were fearing to be 'declassed' as a result of the crisis were the driving force behind fascism. In contrast, fascist movements found it much harder to tap into the working class vote. The unemployed often voted communist. What mattered was not poverty per se, but fear of a relative loss of economic and social status. And this mechanism can apply at any level of wealth. Also in today's comparably much wealthier societies.

Finally, Rachman argues that clowns are not that bad because ultimately they behave reasonably once they're in power. What is his evidence for that? When Grillo's people took charge in Parma they began to cut public spending and the stand up comedian who became major of Reykjavik began to fire municipal employees. Is that the new litmus test for reasonableness? I think, Rachman needs to start reading his colleagues columns about austerity.

Monday, 4 March 2013

The spirit of '45

It's easy to forget, but not so long ago the UK was a nation leading human progress. Ken Loach's new film is about how it came to be that and how it ceased to be that. I haven't seen it, yet, but it's bound to be brillant. And it's very much about linking past and present, learning from the past and all that. See the trailer here:

And a Guardian review here.


For those of you who are in London. Might be an interesting lecture:

'The (Very Deep) Roots of Greece's Crisis: A Historical Reassessment'

The Hellenic Observatory research seminar 

Date: Tuesday 19 March 2013
Time: 6.30-8pm
Venue: TW1.G.01, Tower 1
Speaker: Professor Stathis N. Kalyvas 
Chair: Professor Kevin Featherstone 

Taking the present crisis in Greece as a departure point, Professor Kalyvas takes stock of the surprising number of critical junctures during the past two centuries, when Greece managed to become a focal point, both in negative and positive terms, of critical issues in European and global politics. This lecture also questions why a country so small and peripheral has come to play such a role, providing an interpretation based on a review of the country's history since it became an independent state in the third decade of the 19th century.

Stathis N. Kalyvas is Arnold Wolfers Professor of Political Science, Director of the Program on Order, Conflict, and Violence, and Co-Director of the Hellenic Studies Program at Yale University.  
This event is free and open to all with no ticket required. Entry is on a first come, first served basis. For any queries contact Ioanna Antonopoulou by email or phone 020 7107 5326. For further information visit theHellenic Observatory website

'The sad record of fiscal austerity'

It's not only Italian graffiti artists who think austerity is not working. The chief economics editor of the FT thinks the same. See Martin Wolf's recent piece 'The sad record of fiscal austerity'. I wonder if Angela Merkel is reading the FT or the writing on the wall in Italy.

While you were away....

Here's the big news that I missed during my absence: 'Italy ungovernable'. Other breaking news that I missed include: +++next pope likely to be a catholic+++bears prone to defecating in the woods+++earth probably not flat+++

Perhaps the only glimmer of hope is that Italians expressed a clear view about current economic policy. The writing on the wall in Italy is this:

It has to be said that the Italian people chose rather odd messengers to deliver the message. But nonetheless, the success of Berlusconi and Grillo who ran on an anti-austerity platform (together well over 50%) along with the clamorous defeat of Monti are a clear vote of non-confidence for a policy that does not work. I doubt that Grillo and Berlusconi have much to offer in terms of a long term political programme that gets Italy out of the crisis. But their success may be instrumental in liberating Europe from a misguided economic policy. 

Friday, 22 February 2013


There will be no blogging for a week.

Anderson on Italy

Perry Anderson had two really good articles about Italian politics in the London Review of Books a few years ago. (Here and here.) They are a bit dated now, but still among the best things I have ever read on the subject.

Your friendly failed state next door

Call me an optimist, but I don't  think anything good will come out of the elections in Italy this week end. Unlike in Greece, there is no party of any importance that says 'let's keep the Euro but loose the austerity'. That's a pity because unlike Greece Italy would probably be big enough to put some significant pressure on the rest of Europe. So, the choice is between two types of parties: one type (led by Bersani and Monti) that say 'let's keep the Euro and the austerity' and the other (Berlusconi and Grillo) that say more or less openly 'lets loose the Euro and the austerity'. Not much to look forward to. But then again no one ever said that progress was inevitable and a good part of the history of modern Italy is made up of larger and smaller failures.

Wednesday, 20 February 2013

Title inflation, Italian style

A short post script to the last post: whenever I am in Milan I go to a small cafe near the library here.  People there are very nice and always greeted me 'ciao dottore'. That's until they found out that I actually have a PhD, which is when they started to say 'ciao professore'. As I said, they're very nice and generous people. But I wonder what they will call me if I ever make professor.

Can these people save Italy?

While Italy has some serious problems to solve, here's what's making headlines in Italy at the moment. There's a new party called 'Act to stop the decline'. (A cunning choice of name by any account. After all only a tiny share of the electorate is bound to be 'pro-decline'.) Not long ago, an economist who is a member of that party--I won't bore you with names--accused an economist who is close to another party of not being a proper professor, but rather some lesser being in the pecking order of university hierarchies. So far so silly. But now, it turns out that the leader of 'Stop the decline' has lied about his degrees. Apparently, he claimed to have a master's degree from a US business school but that's not true. Now, here's a further twist. One other prominent member of the party who is also an economist (but a different one from the first) works at the business school where the party boss claimed to have done his master's degree. Recently, it occurred to this second economists that there was something fishy about the party boss's claim. After uncovering that there was no master he begged the party boss on his knees (by his own account) to publicly correct the mistake. The boss didn't and the economist published his information. After that, the party boss offered in tears to resign. Great from an opera lover's point of view, but perhaps a bit distracting form the economics bit. Was it Keynes who wrote that he was looking forward to a time when economists would become 'humble, competent people on a level with dentists'. Still a long way to go. 

Who can save Italy II

So I said that Italy needs a coordinated policy to promote innovation and investments to overhaul its economy. An obvious obstacle to this, a part from ideological ones, is that Italy has no money. Credit is hard to get as it is and an expansionary spending programme would almost certainly lead to another spike in interest rates. This is a tricky predicament, indeed. Yet, there may be ways out of it. One would be to lean more heavyly on Germany and other solvent northern European countries. (There is an acronym, GIPSIs, for the crisis countries. Why is there none for the others? Germany, Netherlands, Finland. Hmm, perhaps lack of vocals. And 'FinGerLands' sounds creepy.) They have access to very cheap credit and could easyly afford a stimulus package. Some of it could be spend in the FinGerLands and some in the GIPSIs.

Stimulus in the core would have several positive effects. (1) It would increase employment in Germany. (2) Since Germany and other core economies are already near full employment this would drive up wages in the core (3) This would lead to higher costs in the core economies and thus narrow the gap in competitiveness with the periphery. (Yes, I am saying Germany should become more like Greece.) (4) Higher wages and more employment would mean more domestic demand in Germany and hence more economic growth there. Also, Germany would become less reliant on export surpluses which may be unsustainable in the future anyway. (4) Higher costs in the core and increasing demand there would boost export prospects for the periphery country and hence get the back on a growth track. Some of the stimulus money should also be spent in the periphery countries to help with structural economic reform and improvement of infrastructure.

How would the core repay the debt incurred for the stimulus? Additional tax revenue that results from increased growth would go a long way. Perhaps one could also contemplate to bring tax rates on incomes and corporations back to where they were a few decades ago. And of course, if the core economies run a full capacity for a while this will produce some inflation that will help with paying off the debt.

Sounds too good to be true? Well, the prospect of increasing wages and rising costs will not be met with enthusiasm by employers in the core. So it would be an uphill struggle and, honestly, not one that looks winnable given the current political landscape in Germany and elsewhere.

Deserting the sinking ship

More and more people seem to loose faith in austerity. Not too soon, given the poor results that it produced now for several years in several countries. But now even Niall Ferguson is apparently against austerity. Or, rather, says that he has been against it all along.

Why the euro crisis is not over yet

Martin Wolf explains here it in today's FT.

Tuesday, 19 February 2013

Do it my way

Angela Merkel thinks that the European periphery can learn from east German experience. By that she does not mean that Greeks should drive around in funny cars and stop eating bananas. Rather she means that European crisis countries should look to the economic overhaul of east Germany after unification as an example.

The analogy is well chosen. It is hard to tell with any precision what east German productivity was in 1990, but reasonable estimates put it at one third of West German productivity. So we have a small less developed economy that was put into a currency union and free trade zone with a large more developed economy. The predictable outcome was (1) many companies in East Germany closed down (2) unemployment increased dramatically (3) many east Germans, in particular skilled workers, moved to the west (4) some west German companies moved to the east or opened factories there (often in exchange for substantial subsidies).

Can the German experience serve as a blueprint for the European crisis countries?

Probably not. There are important difference that may make it impossible to emulate this development. Perhaps the main difference is that east Germans and west Germans were both Germans. This made possible two things: (1) mass migration from east to west helped to mitigate the extent of unemployment and connected social problem. This is not possible to the same extent in the Eurozone because of the language barriers. Immigration from the south of Europe to Germany has dramatically increased, but remains far too limited to have any significant effect on unemployment in the countries of origin. Also, in the German case, migration was facilitated by the fact that many east Germans were skilled workers and that integration into west German communities posed hardly any problems. (2) Very substantial transfer payments were made from west Germany to east Germany. The so called 'Soli' is a surtax of 7.5-5.5% on income tax and some other taxes paid in west Germany to subsidize east Germany and make the transition socially more acceptable. In addition to this, transfers occurred also via unemployment insurance and in other ways. All of this was--reluctantly--accepted by west Germans based on a sentiment of national unity and solidarity. But similar bonds do not exist between European nations. The EU has done much to promote a feeling of European unity, but feelings of solidarity are simply not as strong between people in Rotterdam and Athens as there are between Hamburg and Dresden. There is nothing natural or immutable about this and, indeed, now would be the time to take European unity to a new level, but not many in Europe seem to be fond of the idea and certainly Merkel is not promoting it aggressively.

Should the German experience serve as a blueprint for the European crisis countries?

Merkel seems to believe that German unification was a success story. But if you take a look at the regional distribution of unemployment in Germany today (see below) you can still pretty well see the boundaries of the former GDR. That's more than 20 years after unification. Turning the south of Europe permanently into a de-industrialised, low output, high unemployment zone does not seem like an enticing prospect. In particular, if one considers the severe social and political problems, including the rise of right wing terrorism, that have developed in east Germany despite very substantial transfer payments which would not be available to the European periphery.

Map by Michael Sander [GFDL ( or CC-BY-SA-3.0-2.5-2.0-1.0 (], via Wikimedia Commons

It's not over, till it's over

Euro crisis fatigue has set-in in a big way. By now most people respond to articles about the possibility of a Euro break up with a spontaneous yawn. But where it matters the story is not dead. From the Wall Street Journal:

From the classics I

This will be a loose series of relevant, insightful, amusing or otherwise noteworthy quotes from great economists. This one is from Keynes who in 1930 pondered the question of what humanity would do with its freedom once it had solved the 'economic problem', i.e. was able to provide for all material wants with relative ease:

'We have been expressly evolved by nature-with all our impulses and deepest instincts for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose. 

Will this be a benefit? ... To use the language of to-day-must we not expect a general “nervous breakdown”? We already have a little experience of what I mean, a nervous breakdown of the sort which is already common enough in England and the United States amongst the wives of the well-to-do classes, unfortunate women, many of them, who have been deprived by their wealth of their traditional tasks and occupations--who cannot find it sufficiently amusing, when deprived of the spur of economic necessity, to cook and clean and mend, yet are quite unable to find anything more amusing.'


A while ago I wrote a post about the problem that self-adjusting mechanisms of a market economy are likely to resolve a crisis like the current one, but this takes so long that in the meantime you produce a lost generation. And that's not only bad for the generation, but also for the economy. Trained engineers who are forced to flip burgers for a decade become unemployable in their profession and growth prospects are damaged in the long term. I had a vague a recollection that there's a word for that. Now I know what it is, thanks to a great article by Miller and Skidelsky in the FT. It's 'hysteresis'. Write it down, learn it and start to impress people.

Who can save Italy?

Asks the Economist. Predictably they think that only economic liberalization will do the trick. (You already know that before actually reading any article in the Economist. But it's still interesting to see how their construct their case.) Basically, the argument is that Italy's main problem is slow, extremely slow productivity growth. The solution is to let loose the forces of innovation and investment but cutting red tape and regulations.

Anyone knowing Italy shudders at the number of professions that are protected by various forms of monopoly protection. Getting a cab in Milan on a rainy day is always a challenge and when you find one the price on the meter will be exorbitant. So are retail prices in general for everything from Paracetamol to Washing machines. Structural problems add to economic stasis. Small family owned companies abound in Italy. Much like France in the 18th century, they tend to be ill managed by scions of decadent dynasties whose only qualification to run a company is that they own it.

There is little doubt that unit costs of production could be lowered dramatically by deregulation and by substituting small family run companies with larger more efficient operations. This would dramatically increase the efficiency of the Italian economy and lower prices. (It would also take away much of the charme of Italian cities. You can still buy three screws in a small hardware store in central Milan. But of course this is a highly inefficient ways of retailing screws. Once these reforms will be done, the only way to buy a screw in Milan will be to drive to the outskirts of the city and buy a box of screws in a DIY market, while the centre will be populated by international chains. But that's an argument for sentimentalists.) The crucial question is if lowering costs will lead to growth. This is not a foregone conclusion. Much of the cost cutting would come from reduced labour costs. As it is now there are two people selling three screws: one getting them and wrapping them up and the owner hanging about doing nothing but operating the cash register. After the Economist is done, I will get a package of fifty screws in the suburban DIY and the only person involved will be a low paid cashier--deregulation of the labour market being a priority of all liberal reformers in Italy--who can pass thousands of screw packages past the scanner in a day. Reduced labour costs also mean less employment and less demand. So you get your screws for less, but you also have fewer people who can afford screws. However, if deregulation triggers capital investment a part of the efficiency gains would come from the use of new technology which would also create employment. But as things are this would probably create employment in Germany because one area in which the Italian economy is weak is the production of machines tools and other high tech products. Finally, a newly competitive Italian economy could begin to run large export surpluses and grow in this way. But with economies everywhere depressed this will be difficult.

Deregulation will not work on its own. Italy needs a targeted industrial policy. Skills training and research and development needs to be actively promoted. Most likely this will have to happen outside of existing companies because small family owned companies often don't have the muscle or the ambition to innovate. New industries like renewable energies need to be implanted through an aggressive state led drive for innovation. And by the way, this would also take care of the problem of domestic demand. Large infrastructure investments and the training of new qualified personel would create employment and strengthen domestic demand.

So is there a better solution than that proposed by the Economist? Of course there is. Is it likely to be implemented? No, of course not. The reason is not that too many people read the Economist--although the pervading influence of liberal economic ideas is important in this context--or that sinister forces are blocking Italy's ascend. It's not the masons or the illuminati this time. The problem is the weakness of the Italian state and Italy's social structure. More about that soon.

Monday, 18 February 2013

More impressions from the European periphery

Seen on a lamp pole here in Milan. Perhaps lacking analytical depth but making up for that in expressiveness:

A funny thing happened on the way to the library

This morning I noticed that the Mc Donald's opposite the Prada shop in Galleria Vittorio Emanuele here in Milan has closed and will be substituted by ... a second Prada shop. Crisi, che crisi? But then I picked up this week's Economist and all looked gloomy again. More on that cognitive dissonance later when I have read the Economist story.

Wednesday, 13 February 2013

30 hour week, 1923 and 1933

A group of left leaning economists, politicians and trade unionists in Germany have called for a reduction of weekly working hours to a 30 hours week while maintaining current salaries. The reaction among employer associations was predictably muted, but more interesting is perhaps the negative reaction of most German economists. There seems to be very little awareness in the profession in Germany that the German growth model based on low costs and substantial export surpluses creates problems not only for the Euro, but also for Germany's growth prospects. While China seems to be taking steps to boost domestic consumer demand and Japan will do so, at least if it follows the advice given in the FT by Martin Wolf, (see my earlier post) German politicians and economists seem to be oblivious to the problem. Instead, Bundesbank chief Weidmann and others worry about inflation. 1923 clearly is more on their mind than 1933.

History of economics playground

Another great blog that I often read is the History of economics playground. It's written by 'by young and restless (and good looking) historians of economics'. I wonder why I am blogging here. 

1923, 1933 and all that

Via Paul Krugman I read about this post on David Glasner's 'Uneasy money' blog. The first part is about currency wars in Asia and as such related to my last posts. But most interesting is perhaps the last paragraph where Glasner's hair is rightly raised by Irwin Stelzer's argument that Hitler was brought to power by run-away inflation in Germany in the 1930s. Here's Glasner + Stelzer:

OMG! Something has gone very, very wrong here. I repeat the critical passage to make sure it sinks all the way in.
Angela Merkel has made it clear that the long unpleasantness that followed Germany’s decision to run the money presses overtime in the 1930s is still etched in Germans’ minds
I can’t tell if Stelzer’s memory has failed him, and he is misrepresenting what Mrs. Merkel believes, or if — and this is an even more frightening thought — Mrs. Merkel actually believes that Hitler came to power, because Germany ran the money presses overtime in the 1930s.
I don't have a smoking-gun quote to hand, but the argument that inflation led to the collapse of the Weimar Republic is frequently used public debates in Germany and beyond. In this sense, Stelzer is actually right. This is unfortunate since, as Glasner points out, Hitler came to power thanks to deflation not inflation. See my earlier Brüning posts here, here and here. We should not forget that economic history does not tell the full story of Hitler's ascent. But to the extent that economics mattered it was unemployment and falling wages in the 1930s that did it. Remember that Hitler's first attempt to seize power, which came in 1923 in the middle of high inflation, failed and led to his imprisonment. If, in 1933, he was more successful, this was to no small extent due to the deflationary policies of Brüning and others in the preceding years. 

Survey results

Sorry for the long silence. Pressing on with chapter five of the manuscript and also nothing much to comment on in the last days.

By the way: Mario Draghi beat Grisú hands down in terms of popularity and recognition. Only a very small demographic of people born in the 1970s in Germany and Italy seems to know Grisú at all. This is a shame because re-watching some Grisú episodes alerted me to the progressive political subtext that was completely lost on me when I watched it as a kid. German readers can read this for a more detailed discussion of Griú's politics.

Friday, 8 February 2013

Survey on draghi

Who do you think is the most famous of the Italian draghi? Is it him or him

Sorry, no time for serious blogging today. 

Thursday, 7 February 2013

Being Mario Draghi

Thanks to Reuters everyone can now look at Draghi's dashboard. Apparently this is what Draghi looks at to steer the Euro through troubled waters.

The return of the master

It's hard not to think of Keynes's comments in the last chapter of the 'General theory' when reading about what is going on in the Pacific: 'But if nations can learn to provide themselves with full employment by their domestic policy ... there need be no important economic forces calculated to set the interest of one country against that of its neighbors.'

More on 1914

Yesterday, I ended by saying that the economic decline Japan and the potential economic decline of China would only lead to an 1914 style military escalation if the two countries try to fix their economic woes by expanding beyond their borders economically or politically. But I don't think this is the case. At least not necessarily. Rather than looking for solutions abroad both countries may be trying to fix their structural economic problems at home. Maybe.

China's economic success (like that of Germany) is based on large export surpluses. See this excellent analysis. But rising wages and international resistance against China's policy to artificially depress the exchange value of its currency will make this model unsustainable. Recent news stories suggest that China--unlike Germany--is preparing for the transition to a different growth model where growth is driven more by domestic demand. In addition to the rising wages, fiscal policy seems to be moving in a more redistributive direction. Taking from the rich and from corporate profits in order to give to lower income groups will result in increased domestic demand for Chinese goods. And it will lessen the pressure to enter into international conflict, political and economic.

China seems to have learned the lessons from Japan's economic decline. But it's less certain that Japan has. In the past Japan's economic success was to a large extent based on successful export industries. While the surpluses lasted the substantial profits of Japan's industry could be invested in these sectors. Today, exports are not as strong anymore and corporate profits remain unspent. As Martin Wolf suggested in yesterday's FT, the only way out of this is to change income distribution: 'The key to a better-balanced economy is taking the vast surplus profits away from a corporate oligopoly that has proved unable to use them. Corporate financial surpluses that end up in vast fiscal liabilities must be trimmed. Let the public enjoy the income, instead.'  China seems to embark on this route but it is not clear whether Japan will. The new prime minister seems to be inclined to use un-orthodox economic policy. But whether he is ready to take on corporate interests or whether he prefers to distract the public by whipping up regional conflict remains to be seen. 

Chinese wages

A good PS to yesterday's post: David Pilling's article about rising wages in China in today's FT. 'Real wages measured in 2005 Dollars have risen 350 per cent in the past 11 years, significantly faster than in any other Asian country'.

Wednesday, 6 February 2013


If you are reading this, you may be the 300th visitor to this blog. Yay!

(At the request of some readers I reduced the font size again.)

1914 Pacific time

As in 1914, Rachman argues, there is a general nervousness and trigger happiness developing the Pacific that may lead to the small skirmishes between Japan and China developing into a full blown war. In fact he makes a double comparison in which both Japan and China look a bit like Germany 1914. 

His Japan-Germany analogy goes like this: 'Some historians argue that in 1914, the German government had concluded that it needed to fight a war as soon as possible – before it was encircled by more powerful adversaries. Similarly, some Japan-watchers worry that nationalists in the government may be tempted to confront China now – before the gap in power between the two nations grows too large, and while the US is still the dominant military force in the Pacific.' 

His China-Germany comparison is this: 'The analogy with Germany before the first world war is striking – as the adept leadership of Otto von Bismarck gave way to much clumsier political and military leadership in the years before war broke out. The German ruling elite felt similarly threatened by democratic pressures from below – and encouraged nationalism as an alternative outlet for popular sentiment. China’s leaders have also used nationalism to bolster the legitimacy of the Communist party.'

One thing that is conspicously absent from Rachman's picture is the economy. You don't have to be a full fledged Leninist to think that the economic situation of Europe had something to do with the outbreak of WWI. The seminal contribution to the debate about the causes of WWI was that of the historian Fritz Fischer. Based on forensic study of the sources, he established that Germany had actively worked to escalate European tensions that led to the outbreak of the war. But even more importantly, he showed how central economic motives were for the decision of industrial and military circles in Germany to provoke a war. Among the principal war aims was the acquisition of the steel and mining areas in Alsace and Lorraine. 

The war aims reflected an economic situation in which economic growth in most European countries had begun to be constrained by a lack of markets. For the first time since the rapid economic growth of the 19th century, and partly as a result of it, overproduction had started to become a serious problem. Overseas imperialism provided some relief, although it often failed to deliver the economic benefits that many proponents of colonialism had hoped for. Stagnating economies, increasing economic rivalry and protectionism were an important part of the historical context before 1914. 

In some ways, including economics in the picture makes Rachman's comparison even stronger. But it also requires modifications. Japan's fear to be overtaken by China is partly about military strength. But Japan on its own has long been inferior to China because it has no nuclear weapons. And if we accept that Japan is protected by American nuclear weapons then the whole argument that we are on the brink of an escalation does not make much sense because none of the governments in Bejing, Tokyo and Washington seem to be crazy enough to enter a nuclear war. The risk of a war would then only lie in the possibility of human error that becomes of course much more likely in an already tense situation. However, where Japan is really about to be overtaken by China is in economic matters. So, if we look for the sources of Japan's general sense of insecurity and increasing competition with China we should probably look to economic development. 

Similarly, China is experiencing an enormous boom. But everyone, including Chinese authorities, are aware that this export driven boom will not last forever. As more important countries are in crisis, fewer can function as an outlet for Chinese exports. In addition, China's cost advantage is being undermined by the efforts of Chinese workers to improve wages and working conditions.The recent developments at Foxcon are in many ways typical. China, too, fears economic decline and this certainly contributes to the antagonistic stance towards Japan. 

So, as pre-1914 we have a climate of economic decline, real or anticipated, that raises tensions. But if we ask whether the result may be, as in 1914, the outbreak of a war, then crucial question is, how Japan and China will try solve their respective economic problems. Will they, like Europe's powers and above all Germany, seek salvation in military expansion? I think there are good arguments to say that they have other plans. More about this tomorrow. I know, this is quite a cliff hanger, but I have to crack on with other stuff. 

Is 2013 the new 1913?

After the wave of Brüning comparisons, the latest seems to be now to compare our current predicament with the months preceding World War I. I wonder whether this reflects a gradual increase in confidence, given that WWI was perhaps marginally less catastrophic than WWII. Or is it just that journalists are broadening their search for historical metaphors. If that is the case we will not have to wait long for the first 'collapse of the Roman Empire' comparison. Oh wait, we had that already... 

On a more serious note I will now devote a number of posts to the 1914 comparison. Gideon Rachman's article in the FT about the 1914 analogy is particularly interesting if you read it in conjunction with some other recent pieces here, here and here. I won't be able to go through all of this in one go, but will deal with them on article at a time. 

(I have made the font of this blog slightly bigger. Is that better?)

Monday, 4 February 2013

Evans on Berlusconi on Mussolini

As I said, I will not discuss Berlusconi's recent comments on Mussolini because they were not mainly about economic matters. But there is a good piece about post-war attitudes to Fascism among the Italian right in the London Review of Books. So I will outsource this. It would, however, be interesting to come back to Mussolini's economic policy at some point. He is sometimes portrayed as the 'austerity fascist' as opposed to Hitler, the 'keynesian fascist'. But I wonder how good that argument really is. Some other time. Now busy with my manuscript.

Mr Anti-Austerity

I didn't mean to sound too gloomy about the discipline of economics. There are of course also people arguing against austerity who seem to be real economists. For example last week here and almost every day here.


Please make them. I can see from the page view stats and from emails that I am getting that there is a good number of people out there reading this blog. This is great. But you don't have to take my rants in silent. Use the comments function.

M. Anti-Austerité

Le Monde has a story about an impostor who fooled various media outlets in Portugal, posing as an economist with anti-austerity views. The question that comes to mind is why anyone would bother to pose as an economist today. Certainly, the failure to prevent the financial crisis and the weak recovery cannot all be blamed on economics as a discipline. Not all economists failed to the same degree and economic policy is often not written by professional economists. But advice given by economists matters and on the whole has not been very successul as of late and it will be interesting to see how the discipline emerges from this crisis in the long term.

The crisis in the 1930s led to a paradigm shift in economics. Keynes's 'General theory', Schumpeter's 'Capitalism, socialism and democracy', and Hayek's 'The road to serfdom' were all to some extent responses to this crisis and deeply altered the way we think about economics. The current crisis may lead to similar re-birth of economic. But it may also not. In many ways the current crisis resembles that of the 1930s (one of the reasons why history matters so much in the current debates) and for this reason we are mostly seeing a rehash of past debates. It's mainly Keynes vs Hayek again. But with Hayek winning the argument this time. We all are therefore to some extent participating in a major macro-economic experiment that will be very useful to future economists and economic historians. Of course even with the most interesting experiments there is often no happing ending for the guinea pigs.

Friday, 1 February 2013

Mad Men

Germany's left wing party Die Linke wants to introduce a top marginal income tax rate of 100% for annual incomes above 500,000 Euro. That's rather steep. Prepare for a wave of outrage about these mad socialists. But one should bear in mind that by historical standards this proposal is neither particularly radical, nor particularly socialist. Viewers of Mad Men will know that the top marginal income tax rate was 70% in the US in the late 60s. And that was after it had been lowered from 91% where it had been under the well known Bolshevik Dwight D. Eisenhower.

Brüning trivia

Brüning's father was apparently a pious vinegar merchant in provincial Germany and later in life Brüning jr was known to be a sour faced man and ascetic spinster...

Being Brüning. But in a good way.

I am sensing Brüning-fatigue setting in, but here's one more. Most commentators use the Brüning comparison as a way to criticize today's austerity policies. But this seems to be true mainly of the English speaking commentariat. A reader alerts me to the fact that there are more positive views of 'Brüning-esque' crisis management out there. Perhaps unsurprisingly, similar views still seem to have some currency among German professors. (Or is it professors doctors?)

There is, of course, the classical (late 1970s) argument by Prof. Borchardt according to which Brüning essentially had no choice and was ultimately right in doing what he did. Brüning got the economics right and if the political and social framework could not take the pressure, well, tough luck. Without mentioning Brüning by name, Prof. Plumpe now seems to be putting forward a rather similar view of the current economic crisis and economic crises in general. I could not find a transcript of his recent talk about the current crisis, but there is this short article here (in German) and, of course, his book.

Prof. Plumpe's main point is that economic crises are necessary processes of structural adjustment that are about as old as capitalism. Such adjustments are ultimately salutary because they are necessary for economic development. Whether or not these transformation processes turn into a crisis largely depends on the reaction of contemporaries. The problem is not falling output and increasing unemployment, but the inability of contemporaries to see all of this as economically necessary and beneficial. Instead of revolting in the streets, Greeks should be at home, patiently waiting for the benefits that economic transformation has in store for them. So far, so Schumpeterian. The great Austrian was apparently fond of referring to economic crises as a 'cold douche for capitalism': a necessary cyclical process of reinvigoration.

Two points about this:

Schumpeter might be forgiven for focussing on economic benefits and ignoring political and social risks. He was no historian and much of his writings pre-date World War II. But we cannot cut anyone writing today similar slack. In particular, if they are historians. Anyone considering today's crisis must look at the complete package, including the possibility of political collapse in the European periphery and the implications of this for European peace and stability. Political instability on a 1920s and 30s scale still seems a rather unlikely scenario. But political risks need to be part of the picture when we think about the right response to the current economic crisis. Simply telling off the masses for their ignorance about economic history won't do.

The other problem is that the masses may actually be right. There is little evidence that the current crisis is anything to do with a structural transformations. If this were the case, one would expect lots of job openings in some sectors (the new emerging ones) and unemployment in others (the old, dying ones). But this is not the case. Unemployment is across the board. An other way of thinking about this as a structural crisis would be to say un-competitive economies in the European periphery are in the process of adjusting to the cost level of Germany and other leading countries. Once this process is completed, the Euro will be out of trouble and growth will pick up. But that's wrong, too. At least partly. The Euro would be out of trouble, but increased competitiveness does not necessarily lead to growth. It does in Germany because it makes high export surpluses possible. So despite stagnating or falling real wages and hence weak domestic demand, Germany can export its way to growth. But this model cannot work for everyone. It's not more possible that all countries run export surpluses because that would require someone to have an enormous trade deficit. There is no such place at the moment. Instead, deflationary policies in the periphery are depressing local economies and will eventually lead to slowing growth in the European core. Germany's economy is already slowing down.

So if we take the 'cold douche' approach to economics we will probably have a crisis that drags out for a decade or so. See Japan. Now, if you look at this from Prof. Plumpe's olympian perspective and look at these matters in terms of graphs spanning centuries, then there is no need worry. But a ten year economic crisis is enough to produce a lost generation. That is certainly a social problem. It might also become a political one. And it's most certainly an economic one. Long periods of high unemployment mean that people loose skills or never acquire them and today, more than ever before, a skilled workforce is an important element of economic progress. Economies, like people, never recover fully from prolonged periods of crises.

Wednesday, 30 January 2013


It should be added that Ritschl was brave to make his Brüning comparison in Frankfurter Allgemeine Zeitung. Given the demographics of the paper's readership many readers probably still have fond memories of Brüning's government.

Brüning, Brüning and no end

Of course, Wolfgang Münchau was not the first to make the Brüning comparison. In fact, there have been lots lately. I don't want this blog to become 'Brüning central', but Albrecht Ritschl's Brüning comparison of last year merits a brief discussion. It's a good one with a detailed argument.

Ritschl's is a version of the 'Helbich Brüning': in order to meet the reparation obligations of the Young plan Brüning was obliged to impose budgetary discipline. The measures were unpopular because they were imposed by foreign powers and a result of the Versailles treaty. This played into the hands of radicals and, as Ritschl put it, 'we know how that ended'.

This is a valid point and in the current context it's certainly good to remind the German public of the political consequences that can result from financial diktats imposed by foreign powers. And also of the futility of such diktats from the creditors point of view. After much to-ing and fro-ing and much political damage done only very small amounts of reparation were ultimately paid.

However, I think we need to ask how important the reparations really were. Let's consider a counterfactual: what if all reparations had been cancelled before Brüning came to power? Would that have prevented his rise to power as an unelected chancellor and the implementation of his ill fated austerity programme? Probably not. There were strong pressures to implement austerity that were entirely independent from the reparation issue. The mainstream of contemporary economists believed that excessive wage increases were threatening capital accumulation (see this post) and employer lobbies were pushing hard for a non-parliamentary government with a deflationary agenda (see this post).

It is important to remember the extent to which the dynamics that led to Brüning's policies were home-made because it also sheds light on the current situation. At the moment the international dimension of Germany-plus-some-allies pushing austerity on the European periphery is important and results in critical political tensions. But the Montis of Europe are not only puppets of Angela Merkel. They usually genuinely believe in the policies they implement. This is similar to Brüning was by no means only following orders from Paris and London but whose own economic and political views led him to do 'the necessary'.

Austerity Italian style

Next available dentist's appointment is in January 2014. I think you call that 'limiting health care costs through rationing'.

Tuesday, 29 January 2013


No blogging today. Tooth cleaning appointment and other stuff. What?! They always tell you to add a personal touch to your blog.

Monday, 28 January 2013

At least the trains were running on time...

Berlusconi's comments about Mussolini were not mainly about economics so I will not discuss them in detail here. However, what he said certainly raises all sorts of questions about the ways in which we learn, or rather not learn, from history. And unfortunately, this is not about the twisted views of one individual. A substantial part of the Italian electorate either share his views or at least don't mind sufficiently to drop him.

Teachings from beyond the grave

Comments on Davos and current economics from Marx, Keynes and Friedman. Exclusively in the Guardian.

When the facts change, I change my mind. What do you do, sir?

Jim O'Neill, the chairman of Goldman Sachs Asset Management has asked George Osborne to do just that, change his mind on austerity:  "Based on my business experience, if what you thought was not delivering what you expect to be the outcome surely you have to change what you thought a little. At a minimum, a repositioning of the stance, if not a full change.' This goes right to the heart of one of the greatest puzzles facing anyone interested in the evolution of economic thinking in general and the processes by which we learn collectively in economic matters. 

There is now growing evidence that the austerity policies deployed in several European countries and elsewhere do not produce the desired results. In most countries where similar measures are deployed growth remains sluggish, unemployment increases and deficits and debt do not decrease. Austerity is failing by any economic measure that could be applied, including the objective of deficit and debt reduction for which they were primarily designed. 

Nonetheless, public and political support for the policy remain strong. This is striking since the proponents of austerity are often seen as hard-nosed economic experts who, thanks to rigorous analytical training and knowledge of the facts, possess a firm grasp of the workings on our economic system. They dislike inflicting harsh measures on pensioners and others as much as anyone else. Occasionally, they even shed a tears about it. Still, they know (because they're experts) that if expenditure is not reduced the inexorable logic of our economic system will punish us in the future. In contrast to this, critics of of austerity are often portrayed as bleeding-heart liberals who may occupy the moral high ground, but whose views are ultimately naive and irresponsible because they fail to consider the facts. 

The question is: how can we explain that experts fail to react in to empirical evidence? More than anyone, they should be able to react and incorporate new evidence into their models. This is a complex question and I will return to this in the future, but here is a tentative hypothesis: if you look at the notion of austerity, that is the idea that there are beneficial effects associated with abstaining from consumption, in the history of economic thought, you notice that it is often, indeed, mostly proposed for moral and political reasons. It is normally the opponents of austerity who use the language of economic efficiency and the defenders of abstinence who wheel out morality. This is most striking in the early modern period when enlightenment thinkers like Mandeville and Voltaire challenged the condemnations of luxury consumption that were based on religious and philosophical precepts. They challenged these views not by challenging the underlying morality but by ignoring it and focussing instead on the economic effects of consumption. They did not ask anymore 'how much should we consume' but 'what will happen if we consume more or less'. 

Today may not be entirely different. That austerity policies continue despite the fact that they don't work in a narrow economic terms may be because they rest on on normative statements that are not open to critical scrutiny based on empirical facts. If you advocate austerity because you believe that the state should be smaller or because you think that there needs to be a period of atonement after the excessive consumption in the recent past, or if you think that we need to consume less in order to save the planet then there is not set of economic data, no economic outcome that will lead you to to change your mind.