Market Liberalism and the Grip of Sovereignty in Euroland

I’ve just had a look at this bracing commentary, originally posted at VoxEU and mirrored on Naked Capitalism, on the sickness at the heart of the Eurozone. It clarifies for me an issue that I have been thinking about for some time. Consider:

The Maastricht Treaty reinforced a reliance on market forces to provide discipline and stability. The only collective mechanism for dealing with crises was the Stability and Growth Pact that accompanied the treaty. This was essentially an agreement on sovereign debt burdens, less inflexible than many thought, but the overall framework implied that governments, not financial markets, were the problem – if the rules were properly applied, stability would prevail. The Treaty thus favoured price stability and the fight against inflation over growth, employment, and social policies.

The question for me was how to explain, from a political economic perspective, the intense liberalism on all matters financial imposed by the EU. What makes it a question is that this drive coexists with a parallel “Social Europe” of relatively aggressive environmental regulation, nondiscrimination, mandatory works councils, etc. Because all of this is embedded in a capitalist order, financial liberalism has tended to erode social protection, but why should there be this left hand/right hand problem?

This could be examined through the prisms of class and ideology, but here we see another dynamic stemming from nationalism. The problem of constructing an integrated economic area is one of coordination in core markets—labor, goods, capital. This can be accomplished directly through public and private institutions that explicitly regulate and standardize across the entire domain, which has been the story of the United States since the end of the Civil War. One reason this was possible was the war itself, which destroyed the ideological and political basis for states’ economic sovereignty. But Europe’s “wars between the states” in the last century were not about disunion but hegemony, and their outcome is a cooperative, non-hegemonic arrangement between sovereign nations. There is little political support for making Brussels the primary locus of economic rule-making.

The alternative to organized integration, however, is self-organized integration. By using capital market liberalization as a battering ram, the EU can hope to dismantle, over time, barriers to the single market in all dimensions without a direct assault on subsidiarity. The Eurozone addition, of course, is the Stability and Growth Pact, which is intended to limit the exercise of fiscal policy at the national level, now that monetary policy is safely tucked away in the ECB.

Liberalism presents itself as a strategy for integration in the absence of robust supranational authority. Of course, this aspect of the situation is not walled off from the class and ideological aspects. Financial liberalization became the dominant policy framework because of the political ascendancy of individuals who viewed their economic interests in financial terms, as I argued earlier.

The practical issue remains how to advance European integration on democratic lines, overcoming nationalism from below and across rather than outside (market liberalism). The current crisis should be an opportunity to construct a programmatic counter-vision, but I am not hearing much of this from where I sit.

Decoding Economic Ideology link is fixed

Sorry for any inconvenience

Decoding Economic Ideology

Molière’s 1670 play, The Bourgeois Gentleman, presented before the court of Louis XIV, mocked a foolish, social‑climbing merchant. In his effort to remake himself, the merchant takes lessons to help him pass as an aristocrat. In a basic lesson on language, he is both surprised and delighted to learn he had been speaking prose all his life without knowing it. Almost three and a half centuries later, much of the world finds itself speaking a different language ‑‑ economics ‑‑ also without full awareness.

more at
http://michaelperelman.files.wordpress.com/2010/12/decoding.pdf

David Carr vs. Waiting for Superman

http://www.nytimes.com/2010/12/20/business/media/20carr.html?ref=business


"... Which is odd when you think about it. If you are looking for an American institution that failed the public, made resources disappear without returning value and lacked accountability for its manifest sins, the Education Department would be in line well behind Wall Street. By now, the notion that business is a place built on accountability and performance should be as outdated as the one-room schoolhouse. Ask yourself, what would happen if American public schools were offered hundreds of billions in bailout money? One outcome is not in the cards: its leaders would not end up back at the trough so quickly, sucking up tens of millions in bonuses as Wall Street has."

Lecture for a Chinese Delegation

I am going to give a talk to a Chinese delegation. I have to write up the talk in advance for the participants to have a translation to read.

Any comments would be appreciated.


http://michaelperelman.files.wordpress.com/2010/12/china.doc

Douglas Holtz-Eakin Falls Into Lunatic Pandering

Once upon a time Douglas Holtz-Eakin was a reasonable professional economist, if of a conservative bent and clearly associated with the Republican Party. He served honorably during the period of GOP control of Congress when Bush, Jr. was president as Director of the Congressional Budget Office. There he resisted the relentless pressure from delusional supply-siding GOPster Congresspeople to declare that tax cuts pay for themselves with the proper "dynamic analysis." DH-E put this canard to sleep once and for all, at least in Congress, if not on Fox News and in the general Tea Party looney bin. Even though I did not support McCain in 08 (and by all accounts he knows little to nothing about economics), DH-E served respectably as one of his top economic advisers in the campaign, along with other such respectables as Ken Rogoff, who has managed to avoid making a fool of himself since then.

However, now Douglas Holtz-Eakin has fallen into lunatic pandering, I can only guess in the hopes of becoming an adviser to Sarah Palin or some other future GOP prez nominee who is equally out to lunch on economic matters. Accounts are given on Mark Thoma at http://economistsview.typepad.com/economistsview/2010/12/words-will-never-hurt-us-or-our-cronies-if-we-dont-allow-them-to-be-used.html a few days ago and today by Paul Krugman at http://www.nytimes.com/2010/12/17/opinion/opinion/17krugman.html?_r=1 .

As one of the four GOP members of the financial crisis commission he has joined with the others in voting to refuse to allow the words/phrases "Wall Street" or "shadow banking" or "interconnection" or "deregulation" to appear in its final report. While Dem commission member Brooksly Born (who had warned of the coming crisis ahead of time) has expressed sadness that some sort of reasonable compromise language to encompass competing viewpoints could not be arrived at, DH-E and company have absconded to issue their own report that blames it all on Fannie Mae and Freddie Mac, along with the 1977 Community Reinvestment Act. As Krugman points out, the F's did not even get into buying subprime mortgages until 2004 and other countries without them or the CRA have had worse housing bubbles than has the US. This is just fantasyland stuff that is only taken seriously by, well, Fox News and the Tea Party crowd. Douglas Holtz-Eakin: shame on you!

The Hidden Dagger In The Budget Deal

Most of the discussion about the recent budget deal has been about Obama caving on failing to push for returning the top marginal income tax rate from 35% to 39%. It is certainly poltically symbolic to point at the screaming hypocrisy of Senate Republicans to threaten to hold up all legislation on this, but it really does not matter much one way or the other. This difference in rates barely affects income distribution, and we have had such top rates vary from 28% to over 90% during the last 70 years, with little obvious effect of either on economic growth.

However, one part of the deal that has mostly received praise, although a few such as Mark Thoma have noticed that it might have some negative consequences, is the "temporary" cut in payroll taxes. Now, I grant that this is more stimulating than keeping the lower marginal rate on top income earners, but it constitutes a hidden dagger in our political-economic-social system.

First, if we did not know it before, we certainly should now that there is no such thing as a "temporary" tax cut. Anyone attempting to allow such a temporary cut to expire politically becomes a "tax raiser," ready to be excoriated by millions of dollars worth of negative TV ads.

Second, this was obviously slipped in by the enemies of Social Security, who know the first point. So, we have long been hearing hypochondriacal howling out of the bipartisan crowd that wants to gut Social Security benefits to fix our budget problems, because, eeeek, it is going bankrupt soon!!! Well, with lowered revenues from its dedicated revenue source, well, you won't have to wait for it too long, these screamers will be back in force with much scarier projections. The bankruptcy will be coming sooner!!!!! Cut benefits more and even sooner !!!!!!! Eeeeeeek!!!!!!!!!

Tragedy

The erstwhile Tea Party Senate candidate and dabbler in the black arts, Christine O'Donnell, has proclaimed, in the wake of Obama's deal with the Republicans, that "tragedy comes in threes: Pearl Harbor, Elizabeth Edward's passing and Barack Obama's announcemet to...extend unemployment benefits."

Easy to ridicule , of course, but how many people remember that Oedipus never would have left Corinth for Delphi and then, ultimately, Thebes - where, not to put too fine a point on it, all hell breaks loose- had he not been on extended unemployment benefits? Without those benefits, he would have been forced to find a job in Corinth, never knowing who his real father and mother were, and neither killing the one nor wedding the other. This is how tragedy occurs: the devil finds work for government- financed idle hands!

What? Nobody remembers the Chorus calling out to the King of Corinth at the beginning of the play, "READ OUR LIPS: DO NOT EXTEND UNEMPLOYMENT BENEFITS! DO NOT!"

Supply-side Economics: Tea Party Style

Andrew Leonard covers the opposition to the Obama-McConnell tax deal coming from Tea Party star Michele Bachman. I’m tempted to say that her comments make me feel 30 years younger (with the hesitation that this is the 30-year anniversary of when some twit named Mark David Chapman murdered John Lennon). After all, 30 years ago we were mocking supply-siders and their Laugher Curve. Andrew notes:

And as for what the country can afford? The total cost of the tax cut package unveiled yesterday, counting the extension of all the Bush tax cuts, the new payroll tax cut, the unemployment benefit extension and the reinstated (at a historically low level) estate tax comes to around $800 billion-$900 billion over the next two years. The cost of extending unemployment benefits for 13 months is about $60 billion. If your worry is "massive spending" then there are more appropriate places to direct your ire than unemployment benefits ... we should looking very closely at which tax cuts or social welfare policies are most likely to give us the biggest bang for the buck, in terms of encouraging economic growth. And on that score, spending money on unemployment benefits gets a very high rating. Extending unemployment benefits is a sensible move for a government when it is stretched for funds when economic growth is slow and the goal is to increase demand.

In Michele Bachman’s world – is $60 billion much larger than $800 billion? Or does she really believe reducing taxes does not add to the deficit? The latter seems to be the world Art Laffer lives in. Of course, Laffer might argue that fiscal stimulus ala tax cuts will increase real GDP. The endorsement of the Obama-McConnell tax deal from the National Review certainly sounded very Keynesian:

But the deal is still worth taking: If it won’t do much good for the economy, it will avert a serious blow to it.

Of course, a temporary tax cut on the very well to do likely is not going to generate much in the way of additional consumption demand, which is why increase government spending has a bigger bang for the buck. While Tea Party types say they’d like to reduce unemployment, they oppose even modest increases in government spending. And while they say they abhor deficits, they want large tax cuts with little bang for the buck. Go figure!

Jared Bernstein Defends the Tax Deal as Jobs Creating

Out of respect for Jared Bernstein, let me open with the case that his boss (Vice President Biden) wants him to make:

As this plan takes shape -- and I'll be the first to admit there's stuff to like and dislike about it -- one thing is clear: it's a much stronger plan on our number one priority -- JOBS -- than anyone expected.

Jared does criticize those low “bang for the buck” things that Mitch McConnell wanted in the deal. And getting an extension of unemployment insurance and a reduction in payroll taxes will help stimulate the economy a little. But let’s be realistic – the amount of stimulus relative to the output gap is very low. And we see nothing in the way of public investment or using Federal revenue sharing to make sure that state and local governments stop laying off their employees. Jared can argue that this is stronger than we expected but then our expectations of what DC politicians will do is far below what we economists could envision as good macroeconomic policy.

Chinese Students' Grim Employment Prospects

I am saddened by the employment prospects for my students, but the problems for Chinese students seem even more severe. I met no university students who expected any desirable jobs. Here is an article that suggests that my own observation of Chinese students was too rosy.

"China's college graduates on average make only 300 yuan, or roughly $44, more per month than the average Chinese migrant worker, according to statistics cited over the weekend by a top Chinese labor researcher and reported today by the Beijing Times."

""It's the first time China has faced such a situation," the paper quoted Cai Fang, head of the Chinese Academy of Social Science's Institute of Population and Labor Economics, as saying Saturday at a conference on Chinese youth. "It's hard to say how long this situation will last." By Mr. Cai's calculations, college graduates have consistently earned around 1,500 yuan a month since 2003. Migrant workers, meanwhile, have seen their monthly wages rise from an average of 700 yuan to 1,200 yuan over roughly the same time period, Mr. Cai said, according to the Beijing Times."

Chin, Josh. 2010. "Value of a Chinese College Degree: $44?" Wall Street Journal China Realtime Report (22 November).

http://blogs.wsj.com/chinarealtime/2010/11/22/value-of-a-chinese-college-degree-44/#

Robert Samuelson's Comments On Debt Panel Besmirch His Name Yet Again

In today's Washington Post in "What the Debt Panel Missed," Robert Samuelson embarrasses all the high quality economists who have or have shared his last name with more inane remarks. So, according to him, the "debt panel" missed defining what is our national interest in various programs, saying that just arguing to "give our children and grandchildren a better life" does not cut it. For him, our national interest involves no cuts in defense spending, as some were suggested by the panel, but "It's not in the national interest to subsidize Americans, through Social Security and Medicare for the last 20 to 25 years of their lives because healthier people and the huge costs make the budget unmanageable."

Regarding defense (and intelligence) spending, it strikes me there are many candidates for cutting or even eliminating. Do we really need 16 intelligence agencies? Given that there is the CIA on the one hand and intel agencies for the Army, Navy, and Air Force (this latter reputedly run by total maniacs) on the other, what on earth do we need the DIA for? Eliminate some of them, heck, a bunch of them. By many accounts the most capable of the lot is State Department I&R, which spends less than practically any of the others.

Then we have all the spending on privatized defense for the successor to Blackwell and its cronies. Instead of using military personnel for guarding diplomats and many other things, we pay about five times more per person for these privatized services that have had a simply awful track record in Iraq and elsewhere.

As for Social Security and Medicare, given that the vast majority of people live to use these, how is providing them not in the national interest? OK, medical care costs are rising, but the deficit commission offered nothing on this, and unfortunately the recent health care reform only nibbled at the problem. Social Security is not in financial trouble, and raising retirement ages, what Samuelson and the commission both support, does nothing about the near term deficit problem, while putting manual workers at risk in the future. And, life expectancy of poor white women in the US has actually been declining recently, so some of his assumptions about the future are not justified. In any case, as argued by Dean Baker and others, if a financial problem for Social Security arises, it can easily be fixed in a decade or so with minor tweaking. Doing anything now is stupid.

I do agree with Samuelson on one thing. The proposal to raise tax revenues by eliminating a variety of tax loopholes and deductions or "tax expenditures" is a worthy proposal. I have long supported tax simplification and did so back in 1986 when we had our last round of it. Bush, Jr. should have imitated Reagan and focused on that in his second term rather than running around the country for 60 days bashing Social Security. This might be passable and is fully deserving of support. However, the failure of the commission to get 14 votes means the pieces of its proposals will be chopped up and fed separately to the Congress, with the likelihood that very little of it will get passed in the current vituperous environment.

Bang for the Buck – Economic Policy Institute versus DC Politicians

Even the Senate Republicans would tell you that they want to reduce unemployment in the short-run and the deficit in the long-run. High bang for the buck fiscal stimulus is something we should all support. A great is example is this proposal from Lawrence Mishel, which has gathered the signatures of 33 prominent economists. Senate Republicans, however, don’t like this idea preferring to lobby hard for a budget busting extension of tax cuts for the well to do. Our President is on board with Mishel’s call for extending unemployment compensation but the Senate Republicans will not agree to this unless they get a concession on their hope for tax cuts from the well to do. Well, it seems our President is willing to bargain by letting there be a two-year extension of the Bush tax cuts. So let’s see – a temporary tax break for households who are not borrowing constrained. In other words – no bang for a lot of bucks! This is leadership?

Inadvertent Insights from the Wall Street Journal

Hook, Janet 2010. "Tax-Cut Vote Shows Democratic Divide: House Passes Extension Excluding Higher Incomes, a Largely Symbolic Effort Reflecting Unhappiness With White House." Wall Street Journal (3 December): p. A 5
http://online.wsj.com/article/SB10001424052748703377504575650901731419966.html?mod=ITP_pageone_1

Are we to believe that giving tax breaks to the super-rich will do wonders for the economy or that the people are clamoring to give aid to those worthies.

What about this Democratic divide? That only a few right-wing Democrats remain in the House; that the remaining Democrats generally oppose Obama and yet get elected. Their vote was largely symbolic because most of them know that Obama will cave and they can get credit for supporting the little guys who make less than a quarter million dollars a year. Then they can go about cutting benefits for the real little guys.

Question of the day: What is the most courageous decision that any politician today has been willing to take?

Republicans Who Think the FED Should Forego Fiscal Stimulus

If this reporting by CNNMoney is correct, then Mike Pence (Republican Congreesman from Indiana) is clueless as to the role of the Federal Reserve in at least a couple of respects:

But some critics are sick and tired of the Fed prioritizing job creation at the risk of rising prices. They say the juggling act of promoting economic growth while staving off inflation has proven ineffective, and has led to a policy of too much cheap money with dangerous consequences for the economy. "The American people have been witness to an era of unprecedented borrowing and spending by the national government," Rep. Mike Pence, a Republican from Indiana, told CNNMoney Thursday. "I know that the Fed can't spend us back to prosperity." … "The Fed can print money, but they can't print jobs," he said. "Printing money is no substitute for sound fiscal policy and we ought to be looking to the Congress to embrace the kind of policies that will get this economy moving again."

Maybe QE2 has confused the Senator but the Federal Reserve is not practicing fiscal policy in the sense of increasing the Federal deficit. On this claim that expansionary aggregate demand policy cannot reduce the output gap, Paul Krugman today reminded us of something he wrote last summer:

What’s odd, though, is how little talk there is about the way the 70s ended — which I viewed at the time, and still do, as a huge vindication of Keynesianism. Here’s what happened: the Fed decided to squeeze inflation out of the system through a monetary contraction.

Paul continues by nothing that the new classical theory that apparently Pence believes it predicted we would not have a prolonged recession during the early 1980’s. We did. This same theory would hold that our current Great Recession is not happening at all. I hate to say this – but this Congressman is clueless on a couple of macroeconomic fronts.