An Open Letter to Alexis Tsipras

I have just finished reading the interview with you that was published in this morning’s New York Times.  I assume it is accurate, even if the questions were not always the ones I would have asked.  I was especially struck by this comment from the reporter:

Although he conceded that the Greek state had “significant dysfunctionalities and a need for deep structural changes,” he did not offer specifics beyond faulting the Socialists and center-right New Democracy for building up a jobs-for-votes system that helped Greece’s public debt balloon.

The rest of the interview was about Greece and the EU, Greece and the ECB, Greece and Germany, and so on.  Your party was portrayed as focusing its strategy on linking up with dissidents across the Eurozone who want to end the fixation on protecting creditors and enforcing austerity.

Fine: I can understand why you would do this.  Greece needs friends, and a regime change in Brussels and Frankfurt could do a world of good.  But if I were you I wouldn’t put to much faith in this approach.

Greece is now seen as a pariah state across the rest of Europe.  You can blame the leaders of Pasok and New Democracy for this: they joined into the charade of “bailouts”, giving the impression to ordinary people elsewhere (and especially in Germany) that feckless Greeks were subsisting off the handouts of the others, the honest, hardworking taxpayers north of the Alps.  None of these politicians pointed out that it was not Greece that was on the receiving end of these funds but banks and other private investors whose only goal was to get as much of their wealth out of the country as possible.  That game succeeded, and now it is only working class Greeks who will suffer if the country returns to the drachma and all domestic financial assets are radically devalued.  Meanwhile, bailout fatigue has settled on the rest of the continent, since the myth has been upheld that the very Greeks who are most at risk are the ones who benefitted.

In short, while it is necessary to fight for support throughout Europe for a zone-wide policy shift, I would place a lot more emphasis on domestic change—the goal Greece can pursue with or without Europe’s help.

The dysfunctionalities you briefly referred to are class issues, and this should be emphasized at every opportunity.

1. The tax revenue capacity of the Greek state is a class issue.  This is partly a matter of who pays and who doesn’t, although many small business owners who are hardly members of the elite also participate in tax avoidance.  The real issue, however is that working class Greeks  depend on the ability of the state to collect taxes in order to live a civilized life, to enjoy the protection of social insurance and public services without which capitalism would be utterly intolerable.  The rich don’t need this and are content to live in a society with a small, threadbare state.  We have this conflict in the US too, and its class dimension is perfectly obvious.

2. The patronage system of politics and economics is deeply injurious to the working class.  This is often disguised at the individual level, since each recipient of a job or the expedited consideration of a claim or help with queue-jumping is grateful for what he or she gets.  Such benefits, however, are purchased at the cost of submission.  The beneficiary must provide loyalty to the big shot who hands out the favors.  Each time this exchange of benefits for loyalty occurs, it reproduces the hierarchy that tells you, “They are above and I am below.”  It is a humiliation.  OK, I don’t know exactly how patronage is experienced in Greece, but such systems are known all over the world (I’ve personally experienced aspects of it in the US), and the story is more or less the same.  It is a matter of shifting from a system of favors to a system of rights.

My point is that focusing on Europe is a trap.  It buys into the narrative that the political choices in Greece are fundamentally about how to respond to the demands of the troika.  If cracking down on tax cheats and creating a truly independent civil service are seen as demands from their creditors, most Greeks will understandably oppose them, quietly if not openly.  But they are not primarily about forking over money to the rest of Europe but social justice in Greece itself.  They are class issues and should be fought for no matter what happens on the financial front.

There are two sides to the democratic deficit of the EU.  One is the lack of democracy at the level of Europe that has permitted so-called technocrats, which is to say acolytes of neoliberalism who put the interests of finance ahead of all others, to impose their will on civil society.  The other is the removal of essential economic issues from national political debate, because they have been superceded by “Europe”.  On these issues there is democracy neither up there nor down here.  I don’t know what Greece can do for the effort to expand the democratic political space in the EU, but it can do a lot for democracy in Greece by attacking a system founded on privilege.

The Boogeyman Of The Debt Ceiling Crisis Raises Its Head

Earlier this week House Speaker John Boehner raised last summer's boogeyman of a crisis over rasing the US debt ceiling again.  That particular fun and games led to a debt downgrade for the US and a slowing of many markets and the US economy, and as the only way for the GOP to win the upcoming presidential election is for there to be a significant slowdown of the US economy, well, with the rest of the world's economy slowing down, maybe a raising of last summer's boogeyman might just do the trick.

Maybe it will, but probably not, although of course the US economy is slowing and will probably slow some more,  making for a nicely close race coming up, oh joy.  But Boehner's particular scare probably will not play.  The deal made last summer appears to still be in play on this matter.  The official debt ceiling might be breached prior to the election date in early November, but the US Treasury will be able to stretch things out for a few months as last year with its usual tricks.  The "fall off a cliff" fiscal deal cut last summer to end that round of debt crisis will kick in before the debt ceiling is seriously hit.  The jockeying and efforts to cut that short before it arrives is already going on in a major way.

Part of that involves a reported effort by Boehner to put up for votes four different budgets.  One is Obama's official budget.  This one will die easily with possibly zero votes in favor it, given its details.  All such presidential budgets are always DOA and never voted on as such.  This will simply be for a show to embarrass O, although it will not make any impression.  But then neither will the other three, one of which will be Rand Paul's and the even more radical Mike Lee's, both of which massively cut wildly popular programs while engaging in massive tax cuts in the name of balancing budgets (I am unsure of the details of the fourth, although I gather it is another GOP "cut taxes and cut social safety nets" one that will encounter death in the Senate, even if it passes the House).

So, in anticipation of the game that will be played after November, irrespective of the outcome of the election, I suggest that Obama seriously consider what was strongly proposed by many of us last summer, and has been long on the table, proposed even as early as during the Reagan presidency by his then adviser, Bruce Bartlett (and still supported by him): repudiation of the debt ceiling limit as unconstitutional (14th Amendment, if not others).  After the election, Obama can pull it off, and this move by Boehner simply reminds all of us how ridiculous this whole debate is and how this boogeyman needs to have a stake driven into its heart so that it goes to the grave for good.

Just to remind everybody of some basic facts.  1)  The US is the only nation in world history to enact a nominal debt ceiling. 2)  The Constitution mandates the Congress with the approval of the President to pass a budget whose bills must then be paid for.  3)  The debt ceiling is thus simply an extra imposition on top of this mandated responsibility that has never served any other than a symbolic purpose since it was first imposed in 1917, four years after the income tax amendment was approved, and threatens to have the US violate its contracts.  4)  Until last year it was always raised with only minimal questioning because it was obvious that it had to be done as a matter of "good government."  5)  Finally last year, lunatics entered the Congress uninterested in "good government," so the essential stupidity of this nearly-a-century-old law has been exposed in the debt downgrade of last year as lunacy, now possibly becoming an annual ritual in the face of filibustered gridlock.  6)  So, the beast must be killed most expeditiously, and the sooner the better.  This upcoming post-election negotiation will be the moment to do it, and Obama is the man to do it, I dearly hope.

Romney: JPMorgan Loss – Just the Way America Works

The Republican’s candidate for the Presidency on that JP Morgan loss:

this was not a loss to the taxpayers of America. This was a loss to shareholders and owners of JPMorgan and that’s the way America works Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain. The $2 billion JPMorgan lost someone else gained.

So what’s the fuss? After all – shareholder value remains at $135 billion. Never mind this little drop in their stock price. I’m speechless!

The Problem with the Eurozone’s Throw-Greece-from-the-Train Plan Is that its Timing Can’t Be Controlled

There is no democratic deficit in Greece: its people have clearly indicated they want to do two things, clean the slate by defaulting on their debts and staying within the Eurozone.  This is seen as unacceptable in Brussels and Frankfurt, and Greeks are supposed to understand that if they choose the first they will lose the second.

Alas, there is no legal procedure by which Greece can be expelled from the EZ; therefore the strategy has to be one of making retention of the euro so ruinous for Greeks that they will exit on their own volition.  The mechanism is the Target system through which euros are transferred from one national central bank to another.

The idea is this: when funding from the troika is cut off after a default, the Greek government will lack the resources to backstop its banking system.  Moreover, euro transfers via Target will be cut off.  Greek depositors who try to withdraw their funds will be told, sorry, but the cupboard is quite bare.  This will ignite a banking meltdown, and the only way out for Athens will be to redenominate financial liabilities in a new currency they can supply.  Whether they call it a drachma is up to them.

Clever, huh?  The only hitch is that, now that the game plan is becoming clear, rational Greeks are not choosing to wait for an EZ attack before withdrawing their funds from Greek banks and transferring them somewhere, anywhere, else.  There is a gradually accelerating bank run taking place which is likely to reach criticality before a Greek-EZ policy showdown can take place.

There is a broader lesson here.  By threatening to choke the Greek banking system, the EZ implicitly threatens to do the same for Spain or even Italy.  They can say otherwise, but why should depositors in shaky peripheral banks believe them?  Withholding euros from peripheral banking systems is a gun that goes off before it is fired.  Simply brandishing this weapon is causing havoc and speeding the demise of the entire zone.

Better to put the gun away and do what should have been done all along: have the ECB assume the lender of last resort function for all EZ banks, with centralized financing of deposit insurance in particular.  Don’t use the threat of a financial panic as a policy tool.

Greek Reforms

The news sources I have access to present Greek politics entirely in relation to austerity: will Greece have a government that continues to adhere to the troika’s austerity mandate (until the money runs out), or will they repudiate it and risk ejection from the EZ?  Momentous stuff, but what about domestic reform?

Looking in from the outside, it seems to me that two reforms are absolutely essential, no matter what happens with the euro.  First, the government needs to have real tax collection capacity, particularly over professionals and businesses.  Without the ability to raise revenues, the essential pubic goods that most Greeks depend on—health, education, social insurance—will be unaffordable.  Periodic cash infusions from outside the country obscure the real problem, that Greece has not been able to call on the resources of Greeks.  At its core, of course, this is a class issue.

Second, Greece needs an autonomous civil service.  All but the very top positions in the public sector should be under civil service protection, and that includes key personnel functions: hiring, promoting and rewarding civil servants.  Contra the claims of the troika, ironclad tenure for civil servants is essential; they should not feel that their jobs are at risk if they displease a political boss.  Enforcement of civil service protection should be lodged, as much as possible, within the system itself.  The goal is to break up the patronage networks that have corrupted Greek politics and economics, to make political payoffs, which cannot be ended entirely in Greece or anywhere else, the exception rather than the system.  It is also difficult to see how the tax collection problem can be addressed without transforming public service.

Perhaps these items are already on the agenda of the left parties.  Again, coverage in my neck of the woods is limited, and nothing I am saying is particularly profound.  I hope reform is seen as just as important as resistance to austerity; if Greece is tossed from the EZ, reform will be that much more vital.

One nice feature of the sort of reform program I’ve sketched is that it puts the rhetoric of the troika to the test.  They say they want reform too.  But are they interested only in smashing the organization, solidarity and living standards of ordinary Greeks?  It would be nice to see how they would respond to the real thing.

The Main Point

Macroeconomics is complicated and political economy is devilish, so it is easy to get lost in the details.  From time to time, it’s good to come up for air—to remember what the fundamental issue is.  In a way, the debate over structural versus cyclical factors invites us to do just that.

Suppose the current recession/depression is mainly structural.  Suppose it is due to an immense misallocation of capital and labor, a failure to foresee what our economy would really demand in the years ahead.  According to this story, we have trained too many masons and anthropologists and invested in too many building cranes and liberal arts colleges, and it will take years to shift our human and produced resources to more valuable pursuits.  (Actually, I think there continues to be an enormous misallocation of investment, but this will become apparent only when the threat of global warming is taken seriously.)  If the structuralist story is right, the ongoing slump is necessary and unavoidable and will end only when we have fashioned the resources for producing the right stuff.

If the cyclical story is predominately true, however, we have neither the wrong people nor the wrong capital stock.  We have all the ingredients it takes to have a vibrant economy that can fully employ our populations and generate a standard of living that surpasses what we had in the past and that keeps growing further.  But think about it: if we have the wherewithal to resume prosperity, what holds us back?  And why should rational people accept any excuses for policies that delay it?

Repeat: we have everything we need, right now, to restart our economies.  All the unemployment, the hardship, the lost opportunities are unnecessary.  That’s the main point.

The secondary point is about the why.  There are ultimately two reasons why economies like ours get stuck in a cyclical rut.  The first is that there is a reinforcing cycle of insufficient demand and insufficient investment.  This is where standard countercyclical policy comes in: through fiscal deficits the government increases demand on its own initiative, and through monetary easing an impetus is added to investment.  We are near the limit of what easing can do (diminishing returns to the QE’s), but not anywhere near the limit of fiscal expansion.

The second reason arises in balance sheet recessions: too much private borrowing has taken place, debtors find it difficult to sustain debt service, and both debtors and creditors retrench.  In this case, which is ours, the essential problem is that fulfillment of claims on wealth—both credit claims and equity claims on debt-related assets—interferes with the conditions required for restarting growth.  In other words, the shadow of past wealth creation is depriving new wealth creation of sunlight.  While respecting wealth claims is desirable during normal times, since it supports long-term planning, there come episodes in which a choice must be made between the past and the future.  This is such a time.  Wealth claims need to be trimmed, quickly and sufficiently, in order to reduce leverage and permit economies to return to growth.  We shouldn’t forget the main point, which is that economic growth produces the stuff of which real wealth is made, while satisfying the claims inherited from yesterday only allocates this stuff.  (And in a slumping economy the claims can’t be honored anyway.)

If you accept the cyclical story, and the evidence certainly weighs in its favor, you should not accept another month, much less year after year, of excuses for austerity.

Balancing the Budget with Tax Cuts and Defense Spending Increases

Charles Riley of CNNMoney has a must see graph showing how defense spending under Mitt Romney would compare to the current DOD baseline budget over the next decade. His title notes the spending over the next decade will exceed the baseline budget by more than $2 trillion. I like this:

Romney has proposed a slew of tax cuts, and plans to cap federal spending at 20% of GDP. But in both cases, the Romney campaign hasn't fully explained how those provisions will be paid for. The lack of detail means that Romney's claim of moving toward a balanced budget requires a great deal of trust.

But no one should trust Mitt Romney on fiscal matters. No one.

Is President Obama Taking Credit for Austerity?

Let’s put together two recent tidbits. First Justin Lahart documents the decline in government employment since December 2008 as he writes:

One reason the unemployment rate may have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought … The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

Evan McMorris-Santoro catches President Obama saying:

It’s worth noting, by the way – this is just a little aside – after there was a recession under Ronald Reagan, government employment went way up. It went up after the recessions under the first George Bush and the second George Bush. So each time there was a recession with a republican president, we compensated by making sure that government didn’t see a drastic reduction in employment. The only time government employment has gone down during a recession has been under me. So I make that point just so you don’t buy into this whole bloated government argument that you’re hearing.

I find this statement a little puzzling. OK, it is factually true. And the Republican Party along with its presumption Presidential nominee is currently calling for even more austerity, which would make the Great Recession even worse. But I hope the President is not citing this as one of his successes. No, it is a failure of our policymakers. Now it may be true that Republican opposition to sane fiscal policy has put our government on this destructive course. I guess the President is working on the presumption that his political opponent is not attacking him from the progressive side of the political spectrum as such a statement would be horribly damaging politically. But with Mitt Romney being the serial flip flopper of all time, you never know what he is going to say next. And if he claims that fiscal policy under the Obama Administration has not been stimulative enough – for once, Mr. Romney would be telling the truth.

How to Rebalance the European Fiscal Compact

Here is the problem: on the one hand, it is urgent to get countercyclical funds flowing in the Eurozone, particularly in regions hit by double-digit unemployment.  Dealing with trade imbalances and placing the banking sector on more secure footing are longer term objectives; growth needs to be restarted within months or the European project at a whole is in serious danger of collapse.  On the other hand, however, there is neither the institutional framework nor political support from Germany (a sine qua non) for either a relaxation of fiscal targets or central underwriting of sovereign debt.

Nevertheless, there is a way out.

(1) Keep the current fiscal targets.  Perhaps provide some form of central underwriting for a portion of old debt, to cap interest costs, but not for new debt.

(2) Create a European-level investment authority, linked to the European Investment Fund (or the Bank) with a mandate to conduct countercyclical public investment, financed by loans, most of which would be purchased by the ECB.  This authority would spend directly, not lend, and it should target its spending in regions in greatest need of fiscal stimulus.  Decisions regarding the overall size of its program and its distribution across countries would be taken on a supermajority basis of national representatives.  Thus the political conundrum of national sovereignty over fiscal policy and the necessity for interregional transfers would be overcome at the level of the Eurozone as a whole: it would be the Eurozone as an entity that takes on burden of countercyclical deficits and turns to the ECB for accommodation.

Note that this loosely parallels the institutional framework used in the currency zone called the United States.  Individual states do not have the ability to run operating deficits, nor do they normally look to the Fed for finance; this function is federal only.

In this way the emerging European growth consensus can move quickly to expand public spending in the most affected regions, while avoiding the perceived moral hazard of backstopping the deficit policies of some countries with the savings of others.

Austerity Economics: Tied Up in Knots?

A core element of neoclassical economics was to emphasize transactions rather than work, workers, or working conditions. The idea was that the justification of the system was the utility enjoyed by consumers. All considerations of work, workers or working conditions were to be swept aside. Production is relevant only insofar as serves to satisfy consumer needs.




Macroeconomics was expected to depend upon this neoclassical micro foundation. Nonetheless, macroeconomics centered on demand is rejected by all good austerians. Instead, the current fad is to emphasize supply-side economics. Trading the social safety net encourages hard work. Tax cuts ensure more employment.



Over and above the self-destructive consequences of austerity, the recent wave of austerian nonsense has the unintended consequence of contradicting the intellectual foundation of neoliberal economics.

Limitations of Raising Expected Inflation to Increase Aggregate Demand

Robert Samuelson is getting a bit of praise for this Battle of the Beards:

What we need now — and what the Fed could supply, says Krugman — is a bit more inflation. This would spur growth and job creation, he argues. The Fed now strives to keep inflation around 2 percent annually, a low level that it views as reassuring the public. Krugman wants the Fed to raise its target range to 3 to 4 percent for five years.

I’m for anything we can go to get our currently anemic aggregate demand to increase. But note that at current market rates for 10-year government bonds – nominal being just under 2% and real being around a negative quarter percent – we have already passed this 2% inflation target at least for now. OK, telling markets we will tolerate 3% inflation for the next 5 years could further reduce real borrowing costs even as short-term nominal rates hover around zero. I think, however, that James Hamilton has a point here:

I pointed out that the direct stimulative effects of a debt maturity swap were decidedly minor. The conclusion I draw from these two observations is that we might have to push on this lever extremely hard to get anything accomplished, and that pushing on the lever is not without its own dangers. My position is therefore that the Fed is correct in viewing this particular tool as one that should be used with caution.

Even if the Federal Reserve could further reduce real interest rates to 1% by letting expected inflation be 3%, how much extra private demand will this really create? This type of liquidity trap where national savings at full employment greatly outstrips private investment even at negative real interest rates calls for an outward shift of the IS curve more than a movement along the current IS curve. Of course, a more expansionary fiscal policy is clearly called for – an issue where both Bernanke and Krugman have agreed repeatedly. Alas, some powerful members of Congress choose not to listen.

Indiana Republicans "Choose Between Party And Country"

So says Dana Milbank in Sunday's Washington Post in regards to the Tuesday GOP Senate primary between 36 year incumbent Richar Lugar and tea party fave Richard Mourduck.  Lugar, who has a 77% conservative rating according to the American Conservative Union (more conservative than the Maine Senate Republicans who are around 50%) is behind by 10% according to recent polls, and Mourduck is running ads about how Lugar is Obama's "favorite Republican," which have been effective.

What Lugar has done over a long stretch of his career has been a leading GOP voice for sane policy regarding nuclear weapons.  What was the source of these ads was his support in late 2010 for Obama's push for a renewal of the SALT with Russia, something supported by all living previous Republican Secretaries of State and Defense.  This is the main framework for the post-Cold War control of the US and Russian nuclear arsenals, still large enough to wipe out humanity if  all set off in a full exchange.  This is not just country, but the entire world, and whatever else he has done, his announcement after the 2010 election that passing this was his top priority was one of the most intelligent and wise things Obama has supported, something that should be slam dunk obvious. 

In addition, Lugar coauthored the Nunn-Lugar Act in 1993, which provided for the initial monitoring of the post-Soviet nuclear weapons arsenal, again about as important a thing there is.  It really is easy to forget that no other issue comes close to being as significant as this one, although withoug regular drills for school kids to hide under their desks or people building fallout shelters in their backyards, it is easy to forget this.  Whatever we do with our economy or social or even environmental policy does not involve threats that could wipe out humanity entirely, certainly not anytime soon (maybe runaway global warming in the distant future). 

Anyway, while some Dems think it will be great if Lugar goes down because they might have a better chance of defeating Mourduck than Lugar in the general election, I think that if  Lugar goes down on Tuesday as appears likely, this will be one more serious nail in the coffin of any sort of intelligent discourse on the US national political scene, where complete fantasies triumph in a miasma of propagandizing that is so incoherent it cannot even be called ideological, because that would suggest that there might actually be some ideas involved beyond just the worst sort of knee jerk partisanship and looney bin cage rattling.

The French Election, As Seen Through the Lens of the New York Times

Has anyone else noticed that the Times’ backgrounder on the Hollande victory begins with speculation about a possible confrontation with Merkel and ends by envisioning a future confrontation with the unions?  Prescience or wishful thinking?

The Origins of Orthodoxy

I’ve been thinking a lot recently about the differences that flow from whether you have an income or a wealth perspective on economics.  In a nutshell, an income perspective is concerned primarily with the production of new goods and services, the incomes that are generated by that production, and the employment it requires.  Roughly speaking, we can call it Keynesian.  The wealth perspective is oriented toward the preservation and expansion of wealth: the protection of existing wealth against the threat of default or its confiscation by taxes or inflation, and the accumulation of additional wealth through sufficient returns on financial investment.  I identify this orientation with orthodoxy.  Each is rooted in particular social interests, and each has been elaborated in the form of economic theories and rhetorical motifs.

In fact, the origins of macroeconomics, at least in the English-speaking world, belong to orthodoxy.  Why is this?  My speculation is that the key institution that structured how thoughtful people looked at the economic system back then, and the lens through which many still see it today, is banking.  Banks are nodal points in the economic network, and the banking system spans the economic system as a whole.  Banks are in a position to gage the economic health of a community, and the decisions made by bankers profoundly affect this health.  Before the advent of publicly collected economic statistics, not to mention the emergence of economics as a profession, banking was, along with tax collection, the only feasible basis for thinking about economic processes on a large scale.  Even today, it is one of the best.

Banks are in the business of wealth preservation and expansion.  It is not an aspect of what they do; it is everything.  To look at the economy through the eyes of a bank is to observe the impact of events and policies on wealth; it means being orthodox.  From a bank’s point of view, how could Argentina and Iceland, who have defaulted on debt obligations, possibly be regarded as more worthy than Brazil and Ireland, who have not?  national income data, which point to the benefits of default for future growth, would be an afterthought, perhaps off the radar entirely.

The irony is that a banker’s eye-view of the economy is indispensable.  It really is essential to see an economy as made up of interconnected balance sheets.  The best economic analysis from Keynes onward has been cognizant of this.  The problem is how to take this practical insight without being derailed by the banker’s attachment to wealth at the expense of incomes when the policies that promote them diverge.

Argentina and Brazil, Income and Wealth

Paul Krugman compares the economic record of Argentina and Brazil, giving us an Excel chart of real GDP growth:

Yes, it’s true: wicked Argentina, which has violated every rule in the book, is growing more robustly than virtuous Brazil.  From the standpoint of employment and income generation, this is the main event.  Says Paul:

Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged?

But here is another case of focusing on income versus wealth.  From an income point of view, Argentina looks good, but what about wealth?  Argentina defaulted on its sovereign debt, Brazil didn't.  For a Keynesian, this is important only in terms of its impact on future growth, and clearly Argentina’s default was a constructive policy move.  If your perspective is the preservation of wealth, however, it’s a huge, huge deal.

And the confiscation of wealth was not a one-time event.  Here, courtesy of the World Bank’s Development Indicator database, is the record over the same years of “the real interest rate”.  (This is a measure of the private sector lending rate minus the concurrent rate of inflation—not ideal, but a reasonable indication of the real return on capital.)

In Brazil wealth-holders can count on rapid accumulation of more wealth.  In Argentina the situation for wealth is dire.  In fact, if Argentina’s inflation is underreported as some claim, the real return is even more negative than what we see.  In essence, claims on output are being reallocated from current wealth-holders to net borrowers and the state.  It is no surprise that people with money are trying to take it out of the country, which is why the Argentine government deploys a canine corps to sniff out suitcases of cash at the Buenos Aires airport.  Are all the folks trying to give their money a Swiss vacation rich?  The rich are certainly the most influential of the lot, but many are likely to be middle class as well.  When they worry about what the country is doing to their personal finances they are not hallucinating.

Just to be clear, I think that producing more of the goods that sustain a high quality of life and providing productive, decently paying work to those who need it should be light years ahead of wealth preservation in priority.  Nevertheless, from a political point of view, the balance of priority between income and wealth is rather different.  Opposition to the Kirchners is based primarily on their confiscation of wealth, and it will not disappear because Argentina’s GDP is growing faster than Brazil’s.

Footnote: Even from a Keynesian point of view there is some cause for concern.  Inflation in Argentina has drifted upward to the point where a takeoff into hyperinflation is no longer a negligible risk.  At some point soon the policy will have to turn toward disinflation, and unless they can pull off an incomes policy miracle, it will take the form of reduced growth.  Even so, of course, the decade-long run of rapid growth is almost certainly worth it.

Footnote #2.  For another example, consider Ireland and Iceland.  If your main concern is stemming the slump and restoring GDP growth, Iceland beats Ireland hands down.  But Iceland defaulted on the obligations of its banking system, while Ireland has gone profoundly into hock in order to avoid defaulting on theirs.  From a wealth point of view, it’s like comparing saints and criminals.