Shopping Is Not a Perfect Substitute for Politics

The New York Times has an interesting piece today on the shortcomings of organic agriculture in its current, commercialized form.  They describe vast monocultures, drawdowns of aquifers, wasteful attempts to prevent natural blemishes and deformation of vegetables, and long-distance shipping in the off-season.

A few of their criticisms are spurious; for instance, it is better ecologically to ship tomatoes and basil from Mexico to the US during the winter than to try grow them in greenhouses, and trying to persuade consumers to remove such things from their diet for half the year is not a reasonable strategy.  Nevertheless it is quite true that an organic label does not guarantee that the agriculture that brought the food to your table is sustainable, ecologically or socially.

The roots of the problem lie with the idea that agriculture can be fixed by establishing labels like organic or fair trade, so that shopping does the work of social change.  Of course, shopping can be better or worse.  You can have no labels at all and drift inexorably to the lowest common denominator in all aspects of food production outside the purview of the consumer.  Or you can have labels like the ones we have today and give shoppers a choice in how much social responsibility they want to trade off for price, product differentiation or other consumerly objectives.

Don’t expect these labels to do everything, however.  They have to be kept simple and standardized, so they can’t address all the practices that arise in different environmental conditions.  Also, they are assigned to production on a producer-by-producer basis, so they can’t take into account the interactions at a regional or sectoral level.  For instance, even if it were possible to insert language about sustainable water withdrawals into the organic standards, what constitutes sustainable depends on what other users sharing the same groundwater resources are doing.  An individual farm may simply be the wrong unit of observation.

Real solutions require regulation and coordination, stuff like water and soil conservation districts.  Reducing the burning of fossil fuels in food production and distribution requires a systematic control over carbon emissions, such as the permit system I’ve pushed in the past (such as here and here).  And better labor practices require better labor laws and healthy unions to enforce them.  You shouldn’t expect shopping to take care of all this.

So why is all the burden placed on labeling and consumerism?  Because we’ve given up on politics, at least for now.  If you don’t think the rules of the game can be changed through collective action, all you’ve got left is shopping.  But remind yourself from time to time that this is duct tape, not real repair.

Partisan Misrepresentation of Ricardian Equivalence is Nothing New

Paul Krugman catches Robert Lucas (not to be confused with Robert Barro - thanks for the comment David) misrepresenting Barro’s claim to fame:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.

Let’s get back to this after this abbreviated explanation of Ricardian Equivalence from David Andofatto. OK David, we know that in a life cycle world where households understand the long-run government budget constraint that households view all tax cuts (even the 1981 and Bush43 tax cuts) as mere tax surcharges that have to be repaid. But this model goes well beyond this. If fiscal policy involved a permanent increase in government consumption, it also involves a permanent increase in taxes which would be a wash as Barro alleges. So if the Obama Administration passed a law where we built a bunch of bridges every summer only to tear them down every winter for the rest of time, then maybe Barro’s claim makes sense.

But this is not the correct policy experiment. The building of a bridge is a temporary blip in spending intending to invest in the public infrastructure where the benefits will be long-term. The financing requirements can be met either by a blip in taxes or very low taxes each year over the future. And in either case, the fall in private consumption in the first year will be small in proportion in the rise in government spending to build this bridge (which it does not intend to subsequently tear down).

One would think this logic was well known. The reason for this blog post, however, is to note that Republican hacks have grossly misrepresented Ricardian Equivalence before. Recall all the fuss over why the Bush43 tax cuts would be better aggregate demand stimulus if that were to be made permanent as opposed to temporary? While that might be good life cycle theory if we could ignore a lot of other economic propositions – such as the long-run government budget constraint (and of course Ricardian Equivalence). Yet some Republican hacks even went so far as to dismiss any concern about crowding-out (even as the FED was already raising interest rates) based on the proposition that tax cuts do not raise interest rates ala Ricardian Equivalence and that Paul Evans AER 1985 paper entitled “Do Large Deficits Produce High Interest Rates”. But wait a darn second – the Ricardian reason for all of this is the assertion that tax cuts don’t encourage more consumption. This incredible dishonest mishmash was most evident when Victor Canto claimed in what National Review November 2002 piece that the Bush tax cuts would be more powerful in encouraging consumption if made permanent, while in another National Review November 2002 piece he used Ricardian Equivalence to argue that the tax cuts would not raise interest rates. To be fair to Mr. Canto – the National Review expects such brazen dishonesty if it is in defense of its rightwing agenda.

I should say that the Evans AER 1985 paper always puzzled me because the Reagan tax cuts did raise aggregate demand by raising consumption during a period when government spending was not reduced. And while nominal interest rates may have declined, real interest rates rose. In other words, we got classical crowding-out from a mix of expansionary fiscal policy and the Volcker tight monetary policy. Now if you wanted to remain a true believer of Ricardian Equivalence, I guess you could have argued that households expected the Reagan revolution to eventually get around to reducing government spending. Domestic spending after all was trimmed a bit even as defense spending soared. But we did eventually get that good old Peace Dividend – in the 1990’s.

Does The Italian Bond Sale Mean The Eurocrisis Is Over?

Yesterday Italy sold bonds for a little over 3% compared to over 6% in late November. Does this mean the eurocrisis is over? Not necessarily, but it may well mean that the markets have finally figured out that Berlusconi really is gone, that Italy is one of four countries in the eurozone that is running a primary budget surplus (Germany, Belgium, and Luxembourg are the others), and a much higher proportion of its debt is held domestically by the high saving Italians.

The worst ongoing problem in the zone is Greece. It is caught in a downward spiral that is hard to see an end to other than an exit from the eurozone. While some worry what will happen "if Greece defaults," the hard fact is that it has already effectively done so. The wholse argument over the size of the "haircuts" on its sovereign debt is really just an argument over how bad the default will be and exactly who will end up having to bear the cost of their default. But for all the worry about linkage and contagion if Greece defaults, by now it looks like the ECB's plan to support European banks will probably work to keep the dominoes from falling down in a row as a result. Maybe Portugal might also have to depart, but both Spain and Italy have better budget fundamentals than either the UK or the US. Probably the eurocrisis will end with all that.

What we may be looking at is a better than expected scenario. I find it increasingly amusing to read and listen to commentators who note that Christmas sales did better than expected and that gasoline prices keep dropping, but who then warn that all this will probably turn around next year. Well, yes, maybe it all will. The eurozone has pretty much fallen into a recession that will probably continue into the next year, and more worryingly China is clearly slowing down with its property bubble seriously cratering. But it may be that the US will return to its old role as the engine of growth for the rest of the world, at least somewhat. Probably the biggest fly in the ointment may be the purely artificial crisis being ginned up over sanctions on Iranian oil to stop their nonexistent nuclear weapons program (despite all the hoopla, the IAEA report did NOT report an actual nuclear weapons program there, despite some new findings of some past research regarding a potential to have one).

Daring To Disagree With Dean?

That would be Dean Baker, briefly a co-blogger on the old maxspeak, who warns that the recent upbeat reports on housing are not reliable, with them being too much based on highly volatile changes in multi-family housing. For details see http://www.cepr.net/index.php/blogs/beat-the-press/erratic-patterns-in-monthly-housing-starts as well as the closely related http://www.cepr.net/index/blogs/beat-the-press/housing-is-back. Dean must be taken seriously on these matters since his being the first to call the housing bubble all the way back in 2002.

I am not disagreeing with him very much. I agree that for much of the year the hype over a possible double dip in the US has been overdone, which partly explains the sudden surge of enthusiasm we are now seeing at recent high GDP growth rates, which are probably overdone due to being heavily driven by inventory adjustments that are likely to halt after the first of the year, not to mention the continuing likelihood of a European recession with a Chinese slowdown that will put a drag on externally, although those fears have been the main source for all the moaning and groaning in the markets for much of the past few months. And Dean is right on part of the details: single family home construction is barely above its pit in 2009 and not moving; nearly all of this recent increase in housing starts has been for multi-family dwellings, and that is a highly volatile monthly series.

Nevertheless, if one looks at the charts he provides and those he links to, there is a clear upward trend since spring, despite the month-to-month volatility, even if it is mostly in multiple family units. It is also true that it is regional, mostly in the Northeast and West, but any apparently sustained movement should be welcomed. In the chart he shows, with January 2002 as 100, there was a peak in mid-2006 at around 140. The pit in late 2009 was around 20, and it was below 40 this spring. But the November number is at 80. This will probably show declines in coming months, but if the general upward trend continues, this will mean that for the first time since 2006, housing will be a net positive contributor to the US economy, even if only somewhat weakly so.

The newspaper reports have it that rents have been rising in the regions where construction has been rising, reflecting an increase in household formation, with this rising demand finally crashing against the long-depressed supply. Overall housing starts remain far below where they once were, but the issue is direction, and that does appear to be upwards, if erratically and not throughout the US. Dean links to data on rents, but that does not show the most recent that has been reported in the papers.

So, this is at most a mild disagreement with Dean, but in fact I am willing to say that the news on the housing front is improving, at least in terms of a trend for multi-family construction, even if there is a continuing problem in foreclosures and in the single-family home portion of the market. So, while Dean threw in a mention of celebrating Hanukah, I'll throw in one for celebrating Christmas as well, :-).

Lowering The Flag And Leaving Iraq

So, the US military has lowered the battle flag and the last official military have now left Iraq, although there will still be some engaged in advising and protecting the mammoth US embassy in Baghdad. Time for a reconsideration.

On the day that Saddam's last stronghold, his hometown of Tikrit, fell to US troops in April, 2003, I wrote a column published in my local paper, portions of which I posted on the old maxspeak. This was the moment of the highest US triumph, with the looting in Baghdad just starting and before the US stupidly disbanded the Iraqi army and fired all the Ba'athist civil servants, thus triggering the rebellion that eventually became the Sunni-Shi'i civil war, which seems to be picking up as the US leaves rather than tailing off. In that essay, I noted three positives and three negatives of the war, emphasizing that I thought the last of the negatives weighed more heavily than anything else. All six have come to pass.

The positives were that Saddam would no longer be violating human rights, that economic sanctions against Iraq would be ended, and that US troops would be reduced in Saudi Arabia, which had been a leading propaganda point of Osama bin Laden. Yes, despite the apparently tightening of authoritarianism of the Maliki regime and reports of ongoing torture, the human rights situation in Iraq is better today than under Saddam in general. Yes, economic sanctions were ended, but the benefits of that have been far overwhelmed by the subsequent economic collapse engendered by the ongoing war, with the effects of that still not ended. And the removal of US troops from Saudi was a strictly minor event, also overwhelmed by other events.

The negatives were that womens' rights would be worsened in the country as Shi'i fundamentalists would come to power, that the situation of Christians would also be worsened, and finally and most importantly, that this invasion would give al Qaeda a major propaganda gain. Womens' rights have not worsened as badly as I thought they might, but they have worsened. The situation of the Christians has been catastrophic, with more than half of their population having fled the country, not that this has registered one blip on the radar of the US fundamentalists backing the war. And, not only did al Qaeda get a propaganda boost, but as the civil war erupted al Qaeda gained a major foothold and became a major player in that war. More generally, the standing of the US in the Muslim world and more broadly was severey damaged by the entire episode and remains so.

Needless to say, I did not foresee the civil war or the scale of death and destructiont that followed. But then, just about nobody else did either, not at that point in time anyway.

One clear winner from the war has been the Kurdish population, who were under particular repression from the Saddam regime. They have won a virtual autonomy, now guaranteed as they remain power breakers in the federal government in Baghdad, and have been independently developing their oil industry with help of various minor oil companies from places like Norway and Canada. While not perfect, governance in autonomous Kurdistan seems to be reasonably competent, and the economic and social and political situation is almost certainly far improved over the previous period, something that cannot be said about the rest of Iraq.

Finally, I would like to comment on the whole issue of the role that oil played in the war, and here I shall largely be reiterating arguments I made long ago, although not in that original essay in April, 2003. While many thought and continue to think that the war was "mostly about oil," I have never accepted this. Yes, the first Gulf War was. Bush, Sr. clearly would not have bothered undoing Saddam's invasion of Kuwait if there were no oil there or if there was none in neighboring Saudi Arabia. As it was, it was the Saudis, satisfied that Saddam was contained, who held Bush Sr. back from rolling to Baghdad out of fear that this would lead to a pro-Iran, Shi'i-dominated government in Baghdad, which has indeed been an outcome of Bush Jr.'s invasion.

No, it was mostly about Bush Jr. trying to prove that he was a bigger man than his dad, a neo-Ronald Reagan, and many of the other backers of the war in the administration were neocons like Wolfowitz whose big concern was Israel and how Saddam's paying the families of Palestinian suicide bombers was an affront, not to mention the Israeli fear of the nonexistent weapons of mass destruction. As it is, the interests of Israel have basically never been in line with those of the US oil majors in the Middle East.

There was one player for whom oil was important: VP Dick Cheney, certainly a not inconsequential figure, and possibly the one who most effectively played on Bush Jr.'s inferiority complex vis a vis his dad to get him going on the whole thing. At a minimum, Cheney's own company, Halliburton, made money hand over fist, and there is a clear case of oil playing a role, if a minor one. It is also true that Cheney apparently semi-secretly plotted with various US majors about "getting back into Iraq" as a result of the war, although the CEOs of these companies were not enthusiastic about the idea of disruptions of oil production and transportation that might arise from the war and were not at all public supporters of it.

As it is, of course, the oil companies did make money as the price of oil rose with the disuptions that did occur, although these were not supposed to occur. Indeed, not only Cheney but Wolfie as well were fully under the delusion that we were going to be welcomed with flowers, and the drive to secure the Oil Ministry first in Baghdad was driven by the even more ridiculous delusion that as did Kuwait, Iraq would actually pay for the war itself out of their overwhelming gratitude. It is really astounding to think how such actually intelligent people (Paul Wolfowitz, whom I know personally, is in fact brilliant) could be so completely out of touch with reality.

In any case, the ultimate irony of this is that in the end, the US majors were probably right not to get too excited about all these prospects. They never came to pass. The Kurdish production is being handled by oddball small companies from around the world, although with a couple of minor US ones in there as well. And in the rest of Iraq, oil production has only barely gotten going again due to the ongoing problems of pipelines being blown up and so on, and the companies that have made contracts to do anything have been overwhelmingly non-US ones, with Chinese and Russian ones much more active than any US major. Cheney may have had getting the US majors into Iraq as a major goal of his own efforts, but this may have been the ultimate failure of the many that he was responsible for as VP of the US.

George W. Bush's Second Biggest Foreign Policy Mistake Revisited

Of course the first would be invading Iraq. But a close second not often remembered or even realized occurred two months into his term of office. It was the humiliation inflicted on then South Korean President Kim Dae-Jung, a Nobel Peace Prize winner and former torture victim of earlier military dictatorships in that country, when he arrived to visit the US. Secretary of State, Colin Powell, had planned on a continuation of the warming policies between the two Koreas and a friendly meeting with Bush and support for Kim. As it was, the "Vulcans" led by Cheney and Rumsfeld intervened to torpedo this and leave Kim not meeting in the cold and without his long-running policy. This also ended that round of negotiations with North Korea on nuclear weapons, with the Vulcans arguing that the US should pursue "regime change" in North Korea, which, hack cough, did not happen.

Instead what happened was that the nuclear negotiations came to and end and US-South Korean relations tanked until a more conservative government took over there. Not long after the end of the negotiations, the DPRK withdrew from the Nuclear Non-Proliferation Treaty and restarted its plutonium-based drive for nuclear weapons, which led to its successful acquisition of such not too long later. This is fish soup that cannot now be turned back into fish or spilled milk that cannot be returned to its container, a disastrous development that we might not now have to be dealing with at this time of leadership transition in North Korea, if Bush and his
Vulcans had not pulled this enormously stupid blunder.

KimJung Un should have such problems!

He doesn't have principles students telling him, on a final exam, that, for instance, the "shoe-leather costs" of inflation stem from "the rising price of leather" Or that hoary and hardy perennial, that the alternative to monetary policy is "physical policy" - carried out, no doubt, by the President's Council on Physical Fitness.

Why was I born?

How North Korea Became So Isolated

North Korea (DPRK) officially follows an ideology developed by its founder, Kim Il Sung, known as KimIlSungism (really), which his just deceased son continued to follow, and which it is likely will continue to be followed at least for awhile by his grandson, the Great Successor, Kim Jong Un. Besides generally following the Stalinist version of strict command planned socialism, somewhat loosened in recent years, the most famous aspect of KimIlSungism has been its doctrine of self-reliance, or juche (also transliterated as chuch'e). While some of the poverty of the DPRK is clearly due to its overemphasis on military production (fourth largest military in the world, and check out those nukes) and the typical stagnation of command planning, much is almost certainly due to the nearly autarkic approach due to KimIlSungism. Where did it come from? I see at least five sources.

The first is the Stalinist model itself. In the great struggle with Trotskyism, Stalin advocated "socialism in one country," although, of course, the Soviet Union was the largest nation in the world by far in land area. However, after WW II, this would be less emphasized as Eastern Europe went officially command socialist with the assistance of the Red Army in place. But in the DPRK, Kim Il Sung would cling to the older model.

Second is that after the death of Stalin, Kim would find fault even before Mao did to the moves towards thawing and loosening of the model that was going on in the Soviet Union. The first recorded speech of Kim supporting juche occurred in late 1955, prior to Khrushchev's 1956 deStalinization speech that reportedly upset Mao (according to official DPRK histories, Kim Il Sung gave his first pro-juche speech in 1930 at age 18, but no independent evidence supports this). With the failure of North Korea to conquer South Korea, and truce without official peace treaty after Stalin's death in 1953, the new leaders would go even softer with the Geneva summit in 1955, accepting the reunification of Austria, guaranteed to be neutral, a model possibly there for Korea that Kim rejected.

Third was the emergence of the Sino-Soviet conflict after 1956, although it would be a few years before this would become open and a problem for the DPRK, caught between the two. While Kim tended to side with Mao's critique of Khrushchev's ideological and policy deviations from Stalinism, he also disagreed with the more decentralized and agriculturally oriented version of socialism that Mao followed in China. As the conflict worsened, he wished to keep independent from both of them, which encouraged the idea of self-reliance. He also did not wish to go the capitalist road or fall into dependence on the capitalist West (or worse yet, Japan), so self-reliant juche became the way to go and was gradually developed over a long period.

Fourth was the emergence of his desire for a socialist monarchy, with his son to succeed him. Having a distinct ideology of self-reliant socialism fit in with this (and it is curious that some other dictatorships have followed the same path of de facto monarchy even if officially socialist republican, see Syria). Curiously, this is also consistent with traditional Confucian values of respect for family.

And the fifth involves the DPRK also falling back on traditional Korean attitudes and practices. Not only has Korea long been described as the most Confucianist nation, but prior to the Japanese conquest in 1910, it was also the most isolated, known as the Hermit Kingdom. In this it had long imitated Japan, but continued to resist being "opened up" even after Japan was by Commodore Perry's black ships in the 1850s, leaving it to the Japanese themselves to do the opening. Kim, of course, presented himself as the national hero of the anti-Japanese resistance, and this return to a traditional Korean practice burnished his credentials as the truly genuine national Korean leader who deserved to lead the unified nation.

Dear Leader Dead, Long Live Great Successor

While all had known that Kim Jong Il had long been seriously ill, his death on Saturday of a heart attack in a train has taken many by surprise, with citizens of the DPRK (North Korea) showing the same sort of hysterical grief they did when his father, Kim Il Sung (Dear Leader) died in 1994, which in turn repeated the sort of reaction seen in the Soviet Union on the death of Joseph Stalin.

In contrast with the long delay of reporting Kim Il Sung's death, it has taken only 48 hours for Kim Jong Il's death to be reported, with DPRK media reporting that his third son, Kim Jong Un, is to be called the Great Successor. Kim Jong Un had been reported to have been favored by his father and to have been groomed for acceptance by the family and military elites that rule the nation. Pretty clearly this ruling group has decided that he is to be the front man for continuing their dominance, although it is almost certain that it will be some time before he will be able to asert anything like the dominance his father and grandfather would come to have.

So, in the intermediate term the prospect is for stability, even as the South Korean stock market dropped 5% on the news before rebounding some, along with a drop in the ROK won as well, and various military maneuvers have been reported near the DMZ. Inter-Korean relations have been particularly bad during the past year, since military attacks by the North, thought by many to have been made to impress the DPRK military with Kim Jong Un on his appointment at a four star general.

Even as the near term seems to augur continuation of the system that has produced five straight years of GDP decline and ongoing malnourishment of large parts of the rural population, particularly in the nation's northeast. However, underneath this apparent stasis, many changes seem to be going on. Cell phones have spread widely, as have informal markets in various goods, towards which the government has oscillated in attitude. Chinese pressure to follow their model has steadily increased, and in recent months there have been reports of negotiations with the US. Kim Jong Un studied in Switzerland. So, there may be major changes down the road, if not immediately, particularly as the Great Successor may need to imitate in economic policy what was done in military policy this last year to assert his legitimacy to be officially on top of the nation's system. But this death and succession does mean the further future becomes much less clear.

President Gingrich Would Ignore The Humphrey-Hawkins Full Employment Act

I was scratching my head as to why any Presidential candidate would say Ben Bernanke should be fired until I read this:

"I would, first of all, demand a thorough audit [of the Fed]. Second, publish all the decision documents for 2008, 2009, 2010. Third, I would prepare legislation to eliminate the Humphrey-Hawkins Full Employment Act, which has totally confused the Fed," Gingrich said. The former House speaker went on to say that he would demand the Fed to hold "hard" money

There are lots of reasons why Newt should never be allowed near the White House again but this one has to go to the top of the list.

The Exegesis of Deceit

One of the steadiest hums of our time is liberal indignation at the dishonesty of the Right.  On any given day, you can hear the shock and disbelief: How can they say that?  Don’t they care about getting the facts right?  Don’t they realize they are being inconsistent?  Last week it was the Romney campaign ad that deliberately and even crudely misquoted Obama.  This morning I wake up to Krugman “truly amazed” at the way Paul Ryan would cite commodity prices on the way up and ignore them on the way down.  May I suggest that there is a method to this deceit and that being shocked is not an adequate response?

Obama's Payroll Tax Cut

When the cut was first announced, I wrote that it seemed to pose a threat to Social Security. Now, a few of the Democrats, especially Bernie Sanders, seem to be picking up on the risk to Social Security. What would have stopped Obama from making it a tax rebate in which the treasury would not have to leave the fingerprint on the Social Security system. Besides, it could be targeted to people who made under x millions of dollars a year. Of course, really smart CEOs do not have to pay the tax. They can take a one dollar salary, then cash in stock options instead.

The Brussels Agreement: Why it will Fail

One response would be to point out the irrationality of the agreement itself—the minimal role that fiscal profligacy played in bringing on the fiscal crisis, the lack of any mechanism for rebalancing between surplus and deficit countries, and the unchanged charter of the ECB, which prevents it from behaving like a normal central bank.  Those arguments have been made, are being made and will continue to be made, and will apparently have no effect on the course taken by European politics.

So let’s look at the realpolitik, past and future.

First of all, it is important to bear in mind that this is an agreement of the European right.  The economic collapse of 2008 resulted in an electoral rout of social democrats throughout the continent (and in the UK).  That’s a story that needs more explanation, but for now the point is simply that conservative parties have absolute control over Europe, and the agreement just reached represents their priorities.  It is for hard money, austerity in the face of recession, full guarantees for creditors, and implicitly for reining in the costs of the welfare state, which must happen if the deficit targets are to be met under foreseeable conditions.  This is why politics matters, after all.

Not liking a political program is not the same as predicting its failure, however.  It could happen that the conservatives get their way and a socially regressive stability takes hold.  Under this scenario, the fiscal crisis recedes and Europe enters a long period of slow growth which is favorable for those who acquired wealth during the go-go years: the value of their assets is protected, and labor is mortally weakened.  For those who designed the Brussels agreement, and for those who bankrolled them, this would look like victory.

A clear-eyed view of the situation suggests, for me at least, that this outcome is unlikely.  I believe that the fiscal pledge will buy time—at most a year—for German support for peripheral finances.  It is essentially a quid pro quo: the countries of Europe make a (foolish) promise to bind themselves to a 3% deficit rule, and in return the main creditor country, Germany, softens its stance toward transfers.  How much softer?  From first appearances, it looks like about €250B net, with some financing moved forward from 2013 to 2012.  (This assumes that the €200B directed to the IMF is returned to Europe without leveraging Chinese or other commitments.)  Is that enough?  It depends on whether the market response is favorable.  If interest rates come down in Italy, Spain and the rest, debt can be rolled over until the economy subsides.  This means something like a quarter or two.  If interest rates shoot back up, the money is not sufficient.  In that case, everything depends on the ECB and whether Draghi now has implicit German forbearance to monetize a portion of euro-denominated sovereign debt.

But this about whether the plan can make it through the next few months.  I believe it is simply impossible for it to survive much more than this.  Absent a miracle, Europe is sliding into a recession.  This will affect Germany as much as the weaker countries, even more considering its dependence on Eurozone exports.  (Germany suffered an exceptionally sharp contraction post-Lehman too.)  The result will be a risk of debt deflation in all markets.  The sovereign debtors will again face default as public revenue dries up.  Speculative assets like real estate will resume their decline.  Overleveraged financial institutions—and Europe is the world leader in overleveraged finance—will need to be bailed out.  Of course, a rise in unemployment will trigger automatic stabilizers and increase the pressures for discretionary fiscal deficits as well.  It is likely that there will be a wave of elections in which center-left parties take revenge for their defeats of the past few years—Germany could lead the way, in fact.

When it comes to whether European economies will simply collapse into a deflationary spiral, or whether the Brussels commitments will be abrogated, I’ll put my money on abrogation.  This agreement has a ticking clock, and when the time winds down, it will be history.

The Meme that Refuses to Die: Government Debt Must Be Paid Back

No it doesn’t.  It almost never is.  To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt.  But don’t take it from me, look at the record.

The story is unmistakable: the US jacked up its public debt to finance WWII and increased it further in almost every year since then.  We are not paying off the debt left by our parents and grandparents, and our children and grandchildren will not pay off ours.

The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it.  The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates.  If you want to show your solicitude for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.

What to avoid: nonsense like this excerpt from today’s column by Catherine Rampell of the New York Times:

Total debt for the United States — that is, also including corporate and government debt — hit another all-time high because government borrowing is still outpacing the rate at which households shed debt.

 Guess who will ultimately pay back that government debt: American households.

A Theory About Polish Politics

This morning’s New York Times has a piece about Polish PM Tusk’s avid support for Germany’s stance in EU bargaining.  The article plays up Tusk’s pan-Europeanism and leaves out his equally passionate attachment to fiscal orthodoxy à la Merkel/Schäuble.  Putting both together, you have the classical liberal position, one that can still be found in every European country, although seldom with as much backing as in Poland.

I don’t have a detailed understanding of Polish politics, and I welcome comments from readers who can set me right, but here is my tentative explanation: