The German Obsession with Inflation

As a footnote to the previous post, here is an observation about the German obsession with inflation.  Media accounts always bring up the hyperinflation of the 1920s and its supposed role in ushering in the Third Reich.  This is bad history: a decade transpired between the inflationary madness of 1923 and the handing off of the chancellorship to Hitler.  That trope should be buried once and for all.

More generally, while the experience of the ‘20s is invoked by Germans themselves, I think it’s little more than a convenient rationalization.  Most Germans are generations removed from this era; it has as little relevance for them as, say, the great Mississippi flood of 1927 has for those living along its banks today.

The real reason is that Germany is a country of savers.  The savings rate is high, and savings are distributed broadly.  Saving is valorized by the culture; you could argue that it is seen as the greatest virtue of all, above courage, generosity and all the rest.  It is an act of self-denial that looks to the future—one’s own and that of the generations to come.  To have savings is to be free.  Germans see the capital stock of the country as the product of their own savings, and to a large extent they are right.  The mass savings institutions, the Sparkassen and the Postbank and savings banks, constitute the bulk of German finance.  Germany is a savocracy.

The great threat to savings is inflation.  Long before hyperinflation destroys savings altogether, modest inflation chips at their edges.  Policies that permit inflation to increase penalize savers, and this makes them immoral, since saving is the epitome of morality.  Better to allow your economy to go down in flames than to resort to the wickedness of the printing press; at least, in the rubble, you will have your savings to draw on.

Among other things, this perspective fails to take account of where savings come from.  Yes, they come from choices people make, but they also come from the income that make those choices possible.  Cut someone’s salary in half, and no matter how virtuous they are, their savings will take a hit.  And a significant part of German income derives, directly and indirectly, from its trade surplus with debtor countries like the Eurozone peripherals and the US.  In other words, the virtue of savings is inseparable from the vice of debt.  Simple accounting identities require this to be true, but it to point it out is to remove yourself from respectable public opinion in Germany.

Of course, it’s easy for me to see this as an American, the product of a massively indebted society buffered by the exorbitant privilege of minting the world’s currency....

The Power of One

European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries.  This is why important policy decisions have to be unanimous.  As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage.  You know, the Finns, the Slovaks and their ilk.

In fact, the small and weak do not have this power.  If they try to throw sand in the gears, they will be put in their place one way or another.  A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly.  Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?

The real threat to multilateral institutions has always been the veto power of the strong.  This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis.  As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.

Everyone except Germany.  Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”  Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.

In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity.  If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”.  This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.

So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion.  Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens.  Will any of them start to crack before it's too late?

Strike at California State University

Two of the campuses of California State University are striking today. The timing of the strike is unfortunate, coming at the same time as fees are raised once again almost 10%. The union realizes that pay raises are a small part of the overall abuse of higher education in California, but strikes are only permitted in opposition to the contract with University system. Chronic underfunding began during the first term of Jerry Brown, when the passage of proposition 13, frightened him. Not only is the administration grossly overpaid, its management style is arrogant and heavy-handed. Finally, the gutting of public education at all levels means that students come to the University underprepared and, more often than not, lacking the funds to pay for their education. Not only do they fall under a heavy debt burden, they work too many hours after school in order to focus on their education. To add insult to injury, all of us have to listen to public figures telling us how our economic future depends upon educating young people, presumably without any tax burden unless such funds are directed to hedge funds engaging in charter school scams.

Väsen

I’m slow to get up this morning after a concert last night by this great Swedish folk group.  They played in an ancient church—great acoustics—in the tiny village of Freepsum in northwestern Germany.  Although they’ve been together for 22 years, this was the beginning of their first German tour.  (“We’ve had a lot of time to practice”, said Roger Tallroth, the guitarist.)

On stage, the core of Väsen is Olov Johansson, who plays the nyckelharpa–like its name says (in Swedish), a stringed instrument with keys.  He flies through complex runs in the dance tunes and produces a resonant tone for the slow airs.  While a few of the pieces they played were traditional, most were composed by one of them, especially the fiddle player, Mikael Marin.

Väsen’s virtuosity is exceptional.  Their sound is rich with harmony (think Ravel), even when they are blasting away at high-tempo polkas.  Toward the end of the night they started to fool around, and this was good too.  Lucy in the Sky with Diamonds mixed in with 18th century Swedish fiddle standards—why not?

They will be returning to the US in a few months, playing the Wintergrass festival in Bellevue in February and other events.  Not to miss.

Paperback version of The Confiscation of American Prosperity

I am writing a first draft of my introduction to the paperback edition of my book. Any feedback would be very much appreciated.

The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression first appeared in October 2007, just as the stock market was peaking. Judging by the public pronouncements by economists and the business press, the economy appeared modestly healthy before the breakdown of the subprime mortgage market. In fact, the weakness of subprime mortgage market was a symptom of deeper problems that had been eating away at the economic core.

In addition to a diagnosis of these deeper problems, such as growing inequality and an emphasis on financial activities, rather than more productive economic endeavors, the book offered a historical analysis of the willful gutting of the economy that occurred over the last four decades. The Confiscation of American Prosperity presents this history in the form of a crime story, beginning with an accounting of the economic plunder engineered by a small part of society, with the complicity of both political actors and many, if not most, economists. The second part of the book describes the way that this group was able to carry out the theft of enormous wealth. In the tradition of crime stories, the third part of the book examines the expected retribution. The final section addresses the incompetence of the economists, who should have acted as policeman while the plot was unfolding.

The recent protests of the Occupy Movements indicate a deeper understanding of the crime than either the business press or the economic analysis following the meltdown of the financial system. The protesters correctly realize that many of the most serious perpetrators have escaped from the crisis without retribution. Their outrage might contribute to some modest retribution, but the expected retribution discussed in the book will come from more serious economic disruptions that are all but certain, without addressing some of the economic imbalances created by the crime. Of course, the economy can begin showing signs of health once again, but sooner or later the imbalances will take a serious toll on the economy.

Historically, economic crises do tend redress some imbalances, but political mobilization is also an important element in returning to a more healthy balance. One can only hope that such mobilization will be effective enough to prevent another Great Depression.

The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'

In the past couple of weeks, the Sandwichman has uncovered not one but TWO previously unheralded milestones in the history of "best-known fallacy in economics". The first is a erudite defense by an accomplished first-generation political economist, Rev. Thomas Chalmers (1820), of the proposition that "there is a certain quantity of work to be done; and this quantity, generally speaking, does not admit of being much extended, merely on the temptation of labour being offered at a cheaper rate..." The second is a spirited plea by Dorning Rasbotham, Esq.(1780) for the use and encouragement of machines that attributes to "some persons staggered by this argument" the false view that there is only "a certain quantity of labour to be performed."

Ecological Headstand has commenced a series on "The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'" The antiquity of Rasbotham's fallacy claim and the cogency of the Chalmers proposition suggest the persistence of the former as a pre-analytical, essentially pre-industrial fossil, petrified by ad hoc explanations.

Discipline, Hard Work and Obscene Wealth

It’s taken a day for this to settle in, but I find myself to be really embarrassed on Tyler Cowen’s behalf.  Yesterday he published a New York Times op-ed on the subject of why American’s don’t revere the rich, even though riches are usually the result of discipline and hard work.

Put aside his indirect reference to Steve Jobs (“earning money through production for consumers, as Apple has done”).  Rightly or wrongly, Jobs was admired because he brought industrial design values—beauty arising out of function—to high-tech products; he seemed to be as much an artist as an entrepreneur.  Over at Microsoft, Steve Ballmer has a work ethic second to none, and he will die a very rich man, but I doubt there will be much public outpouring of grief.

Let’s get to the core issue.  Assume there are four individuals, A, B, C, and D.  A and B are at the struggling end of the working class, C and D are rich.  A and C have only an average attachment to work and self-discipline; B and D drive themselves to the limit.  Suppose their annual incomes look like this:

A: $20,000
B: $30,000
C: $200,000
D: $2,000,000

If you had a lot of observations like this, and if you could somehow measure “work ethic”, you would find a healthy coefficient on it in an income regression.  But what would this have to do with the popular revulsion against an income distribution so skewed to the top?  The problem is not that there is a return to hard work, but that the return is so obscenely large at the high end and so small at the bottom.  Think of that old Jesse Jackson speech:

I know they work. I'm a witness. They catch the early bus. They work every day. They raise other people's children. They work every day. They clean streets. They work every day. They drive vans with cabs. They work every day. They change the beds you slept in these hotels last night and can't get a union contract. They work every day. No more. They're not lazy. Someone must defend them because it's right, and they cannot speak for themselves. They work in hospitals. I know they do. They wipe the bodies of those who are sick with fever and pain. They empty their bedpans. They clean out their commode. No job is beneath them, and yet when they get sick, they cannot lie in the bed they made up every day. America, that is not right. We are a better nation than that.

What does it mean when someone can see the self-discipline of the millionaire but not the double- and triple-shifts of the working poor?  Like I said, I’m embarrassed for Tyler Cowen.

OWS and its “Leaders”: A Lesson from the 60s

To a large extent, the New York Times sets the news agenda for American journalism.  Today’s Times backgrounder becomes tomorrow’s conventional wisdom throughout the broadcast media and the regional press.  So we should take notice when Arthur Brisbane, the Times’ “public editor”, writes of Occupy Wall Street

An investigation into origins would lead to the identities of early leaders, at least, and the search for the broader leadership of the movement should continue from there. I polled a group of journalism educators on the question of how The Times should direct its coverage henceforth. Not all agreed on this, but most said it was important to understand who the leaders were and what demographics they represented.

This brings me back in time, to the late 60s and early 70s, when another largely formless movement was making itself felt in America.  On the ground, this radical upsurge was composed of affinity groups, underground newspapers, community storefront projects and streetcorner networks.  It had a visceral distrust of leaders and authority, of having others speak for you.

Nevertheless, a pathological symbiosis developed between the media and a relatively small number of movement self-aggrandizers.  The ambitious would-be leaders discovered that they would be anointed by the media as long as they adopted ever more outrageous postures and rhetoric, and the media found that by focusing on them they had a story they could cover in a convenient, template-satisfying way.  Unfortunately, that was not all.  Because the movements of the time had weak institutional structures, they ultimately depended on media coverage to attract new recruits and hang onto old ones.  Thus, when “leaders” like the Weathermen and the Black Panther Party flamed out, they sucked the rest of us down with them.

But here’s the thing: neither I nor anyone I knew in this movement chose these “leaders”, nor did we feel represented by them in the slightest.  Our story, whatever it was, had little to do with its representation in the media.  We were seeking something completely different, but this quest was cut off and even our memory of it was gradually erased by years of repetitive, fixated discussion of our Promethean but, alas, flawed “leadership”.

Lessons?  They are partly about the role of the media in refashioning social movements so they fit the standard journalistic model of who they are and how they should function.  Even more, they are a warning to the movements themselves, that they have to give thought to their own self-defined structures that convey who they are, what they believe, who is permitted to represent them, and how new recruits can join in.

Naomi Klein on the Politics and Economics of Climate Change: Hit and Miss

Klein got her start, at least outside her native Canada, as a cultural critic in the wonderful book No Logo.  Since then, with each project she has dipped further into economics, with a weird bifurcation: her political and cultural analysis has become even more insightful, but her understanding of economics has not kept pace.  This was a problem in The Shock Doctrine, and it is a problem in her missive on climate change on view in the current Nation.

A first time investigation of the architecture of the international ownership network

It seems incredible that any economist, as late as this year, would claim that for the very first time in history there has been performed an investigation into the network of owners of global capital. But that is indeed what authors Vitali, Glattfelder and Battiston state in the opening paragraph of their abstract entitled 'The network of global corporate control'.

“The first investigation of the architecture of the international ownership network is presented, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers… network control is much more unequally distributed than wealth. In particular, the top ranked actors hold a control ten times bigger than what could be expected based on their wealth…”

"...nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries...."

The implications are mind boggling. How incredibly fragile must the global economy be when such an incredible lack of diversity of enterprise (and therefore also of intellect and strategic resilience) are present.

It is possible to see our world now facing very serious global trading and current account imbalances due to these enormous organisations having moved their gigantic 'enterprises' into pockets of cheap labour, land and currencies to gain an artificial economic advantage. As one big TNC after another diversifies into many enterprises there is a simultaneous loss of diversity for the economic system as a whole. This problem escalates when TNCs combine strategies through global networks. It's not surprising that vast portions of world trade have long metamorphosed into non-trade intracorporate transactions.

Major Economic Reporting Breakdown at the New York Times

I sometimes carp about minor missteps, but this is big.  In a front page “explanation” of how the eurozone got into a sovereign debt crisis, there is criticism of myopic banks, lax regulators and spendthrift peripheral governments, but no mention of the fundamental underlying cause, the swelling imbalances between surplus and deficit countries in the currency union.

The Times reporters and editors need a refresher in introductory economics.  The fundamental identity that connects financial balances to a country’s international position is

BP + BG ≡ CA

where BP is the net savings of the private sector (income minus spending for households and firms), BG is the government's fiscal surplus or deficit, and CA is the current account balance (mostly trade).

Over the decade of the 00's, the peripheral countries were running ever larger trade deficits with the core countries, especially Germany.  At first these deficits were financed by private sector borrowing, but after the financial crisis hit private sector leverage froze, economies contracted, and governments stepped in to do the borrowing themselves.  Before 2008 the problem was too much borrowing in real estate, banking and other sectors; after it was too much borrowing by the government.  Yet, as long as the trade imbalances grew, one or the other was unavoidable.

(From a macro identity point of view, if governments had not increased their deficits post-2008, incomes would have collapsed.  This would sustain the identity by curbing imports on the right hand side, but would have allowed an economic freefall.)

So the real story, the one that the Times should have told, is about how the imbalances grew, why few noticed, and how the eurozone framework, with its utterly irrelevant “Stability and Growth” criteria, was unable to cope.

Skip the Times and get your news and views from the econ blogosphere.

Footnote: Nothing Greece and Italy do by way of budget policies or “reforms” can solve their sovereign debt problems.  They might as well sacrifice goats to the gods.  The only practical significance of the current political drama is that it will or won’t persuade the core countries to open the liquidity spigots, write down debts and resolve the banks.

Moral Mythology and Economic Reality in the Eurozone

What more is there to say?  Europe is on a precipice, political as well as economic.  Eurozone leaders think they have time to slowly habituate their constituencies to incrementally greater commitments, as if we didn’t know from centuries of experience that financial crises descend with terrifying speed in the form of bank runs, panicked asset dumps, and other spasms of runaway positive feedback.  Greece, Portugal, Spain and Italy will not edge gently toward insolvency; one or more of them will undergo a sudden phase change, and the game will be up as soon as it has started.

And incantations of austerity and reform are pointless.  Simple arithmetic demonstrates that the peripheral countries cannot pay their way out of debt through primary fiscal surpluses: at current real interest rates and debt loads it just can’t be done.  Moreover, fiscal tightening throughout the zone can only lead to a severe recession, and as indicators of the slump materialize the panic dynamics will intensify.

Worse, the “reform” imperative—the demand that deficit countries privatize and deregulate—is punitive nonsense.  Politics in the surplus countries seems to demand that there be a story about wayward prodigals to the south who must be stripped of their comforts and put to the yoke.  Put aside this morality tale and there is no economic logic whatsoever.  There is no theoretical or empirical reason to believe that Greece, Italy and the rest are in deficit because they have too much public employment or their workers have too many rights.  (Where there is corruption and clientelism, any sort of employment, public or private, can be uneconomic.)  In fact, those who want to force-feed these reforms, with public displays of abject political submission to them, have never even tried to make this case.  There is no argument to critique, no evidence to rebut.  “Reform” is not a rational economic program for restoring trade balances; it is about exacting a cruel price on entire populations so that bailouts come with a quid pro quo.  Receive a transfer and you must sacrifice.

Of course, the bailout funds go directly to the creditors, mainly private banks, so even this attempt at moral equivalence is beside the point.

Eurozone policy, and most journalistic coverage of it, is in a parallel universe of virtue and vice, benefactors and supplicants, industrious and indolent, modern and honest versus traditional and corrupt.  It satisfies a craving for moral order.  Unfortunately, the real universe is about to crash into it and smash it to pieces.

Only Once In A Century: 11/11/11/11/11/11

At eleven seconds past eleven minutes after 11 AM this Friday, November 11, 2011, the time/date in succeeding digits will be for the only time this century a sequence of a single digit repeated a dozen times, 11/11/11/11/11/11. Enjoy it while it lasts.

Since the century began on 01/01/01 (no year zero, 2000 was indeed the last year of the 20th century), I have been thinking about those once a year days when one has the same two-digit number repeated three times for the date. There will be one more of those next year for this century on 12/12/12. I think the only one of these that got much attention was 07/07/07, which somehow became a faddish day to get married, one of my faculty colleagues (not in my dept) doing so then.

While thinking about this upcoming event this year, I was thinking about the fact that it was the old Armistice Day and remembered hearing when much younger that the armistice that ended WW I between France, Germany, Britain (and its empire), and the US was signed on "the eleventh hour of the eleventh day of the eleventh month" in 1918 (the war went on for several more years in some other locations). This got me thinking about time as well as date and how this one was full of elevens.

Then on Nov. 1 I was sitting in a piazza in Trento, Italy drinking some macchiato (gave a lecture there the next day) and saw a sign for the date, 1/11/11, and realized that we were dealing this time with a sequence of a single digit. Putting that together with my thoughts about both time and date led me to the conclusion I am posting on now here, which I think I am the first person to point out.

So, on Friday, when the moment comes for you wherever you are, have a happy onece-in-a-century 11/11/11/11/11/11.

Bribing Doctors to Abandon the Poor

Do I have this right?  The New York Times has an article today about the Cuban medical mission in Haiti.  After describing the modest perks doctors get for signing up, it says:

They are not allowed to bring their families with them, but the other incentives make it “a pretty good deal,” she [Katrin Hansing, a Baruch College professor] said, that has helped keep down defections. Still, a program the United States has run since 2006 that is tailored to attract Cuban medical professionals abroad has enticed several hundred to defect.  

Does the US really have a program to bribe Cuban doctors who are serving the poorest and most at risk populations in the world to quit, emigrate, and join the dysfunctional American medical establishment?  Is this cynical or what?

If the article is saying what I think it says, I have even more respect for the Cuban medical authorities, who continue their life-giving services abroad even though they lose many of their best and brightest in the process.

Tomorrow’s News Today

Care to know the future?  Then read Michael Pettis, who has been on top of things for many years running.  Nothing is certain, but I think his scenario, where a bank run crashes eurozone policy and forces Greece (for starters) out of the common currency, is the one we’ll probably see.