The Tragicomedy of Iran Sanctions

"... the 2007 US sanctions against Iranian banks ironically ensured Iran's immunity from the global financial crisis that was about to explode."

Parsi, Massoud. 2010. "The Tragicomedy of Iran Sanctions." AlJazeera.net (22 May).

The V-Bounce Man On The State Of Modern Macro

Recently the new president of the Minneapolis Fed, Narayana Kotcherlakota, also at the U. of Minnesota, and a longtime advocate of DSGE modeling, "apologized" for the poor performance of "modern" macro models in predicting/explaining the crash and recession of 2008, http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4428. He said that the models need much more complicated modeling of financial markets and dynamics, duh.

This led to James Morley of Washington University and Macroeconomic Advisers, who last year was forecasting a V-bounce recovery from the recession (which did not work, unfortunately), to write a critique of this paper, with which I largely agree, http://macroadvisers.blogspot.com/2020/06/emperor-has-no-clothes-ma-on-state-of.html. He points out that it is silly of Kotcherlakota to bemoan policymakers having fallen back on "long-discarded models" when considering such things as the fiscal stimulus, asking "Who is this 'we' who discarded those models?" He accurately points out that the best of these models, such as the one by Smet and Wouters, continue to rely on AR modeling of supposed exogenous shocks that have nothing to do with policy or anything else. In the end, he says that improved models should incorporate the ideas of Hyman Minsky, with which I strongly agree.

Others have commented on this, including Brad DeLong and also the estimable Mark Thoma at economists view, where there are extensive comments after his extensive excepts from Morley's paper, http://economistsview.typepad.com/economistsview/2020/06/the-state-of-modern-macro.html#comments.

James Buchanan On Chicago School Thinking: Old And New

At the Summer Institute on History of Economics held a week ago or so at the University of Richmond, 90-year old Chicago Ph.D. (and Nobelist) James Buchanan gave a talk on the topic in the subject head. One can see it and the question and answer period (1 hour, 16 minutes) here. It is not what most regular readers of this blog would expect out of this old pro-laissez faire workhorse and father of the public choice school.

So, yes, he is for free markets, but in the Old Chicago School (of Frank Knight, Jacob Viner, and Henry Simons), it was known that they only work with the right laws and institutions, whereas the New Chicago School (Lucas et al; he views Friedman, Stigler, and Becker as "intermediates"), thinks that markets always work all the time, no matter what. This is not the case, because "rules and laws are Samuelsonian non-partitionable public goods." Yes, the attitudes of the New Chicago School are partly responsible for the recent crises. And Buchanan now has "radical views," wanting to "break up the big banks" and reimpose the Glass-Steagall Act, among other things.

One other thing that was sort of amusing to watch was how he handled incoherent questions, of which there were several. He would say, "I don't understand your question," and that would be that, and, frankly, I did not understand them either. Left the questioners rather hanging with their gibberish. And for others he would answer "I agree," period, although still others he gave long and insightful replies to. I guess when you are 90, you do not feel like wasting yours and other peoples' time.

Notes on the Epidemic of Privatization

Here are two snippets regarding the replacement of public provision of services with less desirable private sources.

Kaplan University has an offer for California community college students who cannot get a seat in a class they need: under a memorandum of understanding with the chancellor of the community college system, they can take the online version at Kaplan, with a 42 percent tuition discount. The opportunity would not come cheap. Kaplan charges $216 a credit with the discount, compared with $26 a credit at California's community colleges.

For better or worse, the tough times for public colleges nationwide have presented for-profit colleges with a promising marketing opportunity.

In California, the memorandum of understanding also requires each community college taking part to sign a credit-transfer agreement with Kaplan -- and most of the state's 112 community colleges are not eager to do so. Thus far, Kaplan has no takers for its courses. "Faculty from across the state were uniformly irate and disappointed about the memorandum of understanding," said Jane Patton, president of the Academic Senate for California Community Colleges, partly because faculty members were not consulted.

Lewin, Tamar. 2010. "For-Profit Colleges Find New Market Niche." New York Times (24 June): p. A 17.

Where the Metropolitan Transportation Authority sees a sure-fire way to lose money, Joel Azumah sees dollar signs." "Mr. Azumah, the president, owner and sometimes-driver of TransportAzumah, thinks he can make money running buses along three routes that the MTA plans to shut down this weekend as part of deep service cuts to fill a yawning deficit. The MTA says it was losing almost $2 million a year on the X90, X25 and X29 express bus routes.

Grossman, Andrew. 2010. "Route to a Fare Profit? One Private Bus Operator Aims to Benefit From MTA's Pain." Wall Street Journal (25 June).

Austerity: A Prisoner’s Dilemma?

Maybe not, but it’s worth a look. The basic idea is that, leaving aside prices (which are flat or falling out to the horizon), fiscal policy can be viewed as having three macroeconomic impacts: on domestic demand, external demand, and fiscal space itself. Austerity is negative on the first and second, but positive on the third. Details (relatively speaking):

Domestic demand: This is immediate and can be assumed to follow some form of Keynesian determination. As long as the fiscal multiplier is greater than zero, cutting deficits will mean cutting income and jobs.

External demand: Similarly, domestic austerity will have a negative effect on demand among trading partners, depending on their bilateral exports (to you) as a share of their own GDP. So austerity in the US would have a large effect on its NAFTA partners, Mexico and Canada, but not much (directly at any rate) on a country like Hungary.

Fiscal space: Imagine that, in the current environment, the risk that bond markets may abandon your country is a sort of lottery. A sudden stop is the cost to be avoided, since it not only raises your borrowing costs, but also drastically narrows your policy autonomy. At any moment you have a given likelihood of losing this lottery over the relevant, multi-year policy horizon; austerity may lower this likelihood. (Actually, this is not clear, as the example of Spain, which was dropped by the markets just after announcing austerity, suggests. But let us make the assumption for the sake of the model.)

Thus, within a range of parameters, austerity could be a PD. This would be the case if the three PD criteria are met:

1. Incentive to defect: the benefits of greater fiscal space (reduction in the likelihood of being attacked by bond markets) outweighs the perceived direct effects on demand.

2. Disincentive to be the sole cooperator: the bond market costs of being the only country to run large fiscal deficits exceed the direct benefits to be had from greater domestic demand.

3. The superiority of mutual cooperation: each country regards itself as better off in a world in which everyone maintains stimulus rather than one in which every imposes austerity.

All are possible.

The first criterion, of course, depends mightily on the weight given by economic decision-makers on economic growth. At present, every country, save those who have no policy space left, is in the hands of the center-right. (I include Obama in this generalization.) For various political reasons, which differ in each country, this has dampened enthusiasm for the direct effects of Keynesian stimulus. Of course, the degree of openness is also germane. The US, for instance, can expect to have a much larger national income multiplier than the much more open European economies.

The second criterion is guaranteed for most deficit countries, the only exception being the US, which enjoys the privilege (and trap) of printing the world’s principal reserve currency. (The only example of bond markets turning against US sovereign debt was during the Carter presidency, but this was based on an inflationary spike, and inflation is not in the cards at this time.) Whether it may hold for surplus countries is an interesting question. Japan has been able to run up stupendous fiscal deficits at no bond market cost. China is more concerned about domestic prices and asset bubbles than bond traders. Germany—what is Germany worried about?

The third criterion depends in part on the other two, plus the extent to which each country depend on exports for its own demand. It could be true, but it depends on all the parameters described above.

Putting all of this together, it would be a project to assess the extent to which PD dynamics play a role in austerity—whether, in other words, the world faces a problem of competitive austerity. You would have to factor in not only the income multipliers and trade coefficients, incorporating n-round effects, but also the difficult-to-quantify perceptions of the costs of depressed income and employment, as well as the risks of a fickle bond market. It’s at least an article, possibly a book (or a doctoral thesis in IPE). Has it all been done before? I remember similar analyses in which the cost of cooperation (stimulus) was a trade deficit, but not the risk of bond market distress. I don’t recall how formal they were.

Thinking through all of this, I think the case for a PD is weak for most countries, and, even if it can be established, most of the policy interest is not at the level of collective action, but perceptions of the cost-benefit tradeoff of stimulus. In other words, unless one is in a world of uniformly small, highly open economies, I think aggressive Keynesianism can be justified one country at a time.

But I’m in the US, a non-small, relatively nonopen, and up to this point monetarily privileged player.

Record Heat, And Is Climate Control Legislation Dead?

Science Daily reports that May had the highest average global temperature on record with June quite likely to join it. Nevertheless, in his address to the nation about the BP oil spill, while President Obama called for the passage of clean energy legislation, he somehow neglected to add a call for the Senate to pass any sort of climate control legislation, whether of their own construction or some variation on the complicated cap-and-trade bill that Nancy Pelosi managed to barely get through the House of Representatives just over a year ago after a massive effort. It may be that this is due to the end of any sort of Republican support after Lindsey Graham jumped ship after Obama said we needed to pass immigration reform. Whatever the reason, I fear that this means that climate legislation is dead now, and probably for the foreseeable future, as I expect the Congress to become more hostile after this fall's election.

Mark Thoma at Economists View links to an essay by the ever-optimistic Robert Stavins, who runs through a variety of possible policies in the apparent wake of the failure to get the House bill through the Senate this year. In the end, he sides with some sort of market-based approach that "puts a price on carbon," whether a cap-and-trade or a carbon tax. However, in the face of the knee jerk opposition to any taxes by Republicans, he concludes that the best option to a "cap-and-trade bill in 2010" is one in 2011. I fear I agree, but I now fear that we are probably going to get nothing for the foreseeable future.

What is really annoying about this is that I think there was a window last fall or early winter, which got knocked out partly by the long drawn-out fight over health care, but also coincided at the last best moment when health care finally passed with the very snowy and cold winter in the crucial mid-Atlantic states, as well as the fallout from the wildly exaggerated and ultimately phoney "climategate" non-scandal about the emails from East Anglia, which were proven to be no big deal at all. But we had senators with their children making snowmen and houses on the Capitol lawn while the conservative talk machine spewed on and on about the scandal, since dismissed as such. So, now that we are experiencing record heat, funny that we see none of these people saying anything. They are too busy trying to get BP off the hook for the spill and trying to link Obama to Hitler for his efforts to get a compensation fund for the victims of the spill. Controlling global warming has gone by the boards off into the sunset of other political impossibilities.

V.I. Arnol'd, RIP

This is a bit delayed, but WaPo only had the obit today. Anyway, on June 3, Vladimir Igorevich Arnol'd died of peritonitis in Paris at age 72. He was arguably the greatest living nonlinear dynamics mathematician and also the greatest still living to have come out of the old Soviet Union. A protegee of the late Andrei Kolmogorov, he finally solved the 13th of the Hilbert unresolved math problems from 1900. It involved the stability of nonlinear dynamical systems, including planetary motion. He wrote on catastrophe theory, never buying into either the excessive hype about it during its fad, while then avoiding the excessive dissing of it that came later.

He was the recipient of the Crafoord Prize, the Shaw Prize, and the Wolf Prize. He would have received the most prestigious of all math prizes, the Fields Medal, in 1974, but was forbidden by the Soviet government. He had signed letters protesting the suppression of political dissidents, although he was not one beyond signing these letters. He was a man of principle as well as of profound intellect.

Planet BP on the Gulf Oil Spill and Keynes on Digging Holes

Chapter 16 of the General Theory argued:

If — for whatever reason — the rate of interest cannot fall as fast as the marginal efficiency of capital would fall with a rate of accumulation corresponding to what the community would choose to save at a rate of interest equal to the marginal efficiency of capital in conditions of full employment, then even a diversion of the desire to hold wealth towards assets, which will in fact yield no economic fruits whatever, will increase economic well-being. In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. “To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.

Benoit Faucon has some fun with Planet BP’s attempt to find the bright side of the Gulf Oil spill:

But in Planet BP — a BP online, in-house magazine — a “BP reporter” dispatched to Louisiana managed to paint an even rosier picture of the disaster. “There is no reason to hate BP,” one local seafood entrepreneur is quoted as saying, as the region relies on the oil industry for work. Indeed, the April 20 spill on the Deepwater Horizon is being reinvented in Planet BP as a strike of luck. “Much of the region’s [nonfishing boat] businesses — particularly the hotels — have been prospering because so many people have come here from BP and other oil emergency response teams,” another report says. Indeed, one tourist official in a local town makes it clear that “BP has always been a very great partner of ours here…We have always valued the business that BP sent us.”

OK – we are far below full employment but even Keynes recognized that employment creating activity with a positive marginal productivity were a better way to restore full employment than activities with either zero marginal productivity (digging holes) or ones with negative marginal productivity (polluting the Gulf of Mexico).

Cutting Retirement Benefits May Be a Foolish Way to Reduce Government Deficits

Dean Baker criticizes the Federal deficit hawks fixation on cutting Social Security benefits. Well done! The Federal deficit problem is more of a long-term issue while the states face short-term deficit problems given their typical restriction of annually balancing budgets. Mary Williams Walsh notes, however, that state governments are also proposing to reduce retirement benefits:

Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits … But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect.

Ms. Walsh notes that Colorado has tried to cut benefits for current workers and those already retired but the state is being sued over this breach of promise.

Stimulating a Return to Imbalances

We aren’t going to see these stimuli, but even if we did, the status quo ante was and remains untenable. We’re reminded of this by Richard Alford, c/o Naked Capitalism. He writes:

Once one recognizes that the US is contending with structural as well as cyclical problems, then it is clear that a move to sustainable trend growth requires something other than the standard countercyclical stimulus. In order to achieve balanced sustainable growth the US will have to increase savings (relative to income and consumption), increase investment relative to income, and increase the production of tradable goods versus nontradable goods. However current US policy has consisted of efforts to stimulate private consumption (decrease savings), increase public dis-saving, subsidize consumption of nontradable goods (housing) all coupled with perfunctory calls for exports to double.

Which is why

the US does not face a simple choice between lower fiscal deficits and idle resources on the one hand, and temporarily higher deficits and trend growth with full employment on the other.

The first step toward enlightenment is to see that the accounting balances are everywhere and always binding. As long as the US has a substantial current account deficit, over time either fiscal deficits explode, private deficits explode or the economy crashes. In the short run, the main danger is an economic crash, so maintaining stimulus is essential, but in the longer run there is no solution without a structural shift.

The second step is to see that the interlocking constraints facing the US (and other deficit countries) are primarily driven by shortfalls in competitiveness, not national savings behavior. This follows from empirical examination of the channels through which the different variables affect one another. In particular, differences in interest rates due to savings–investment balances have little to no effect on trade balances, as I showed a few years back. So the structural solutions for the US have to focus on policies that demonstrably increase exports and reduce imports.

The third step is to inquire into why it is that the US has systematically adopted policies that have eroded its trade position over time. This opens the door to political economy. A very rough sketch of my view can be found here; I hope I have the chance to develop it further at some point. For now, it is enough to say that the economic crisis has not yet brought about the political shifts we would need to see in order for a different, more sustainable path to open up.

Fannie and Freddie: The Times Misses the Point

You would think after all the ink that has been spilled over the mortgage meltdown that the Times would get the basic story right. But no. This morning’s piece on the “Cost of Seizing Fannie and Freddie” still peddles the theme of “lenders run amok”. These agencies, which always had implicit government backing, operated in the secondary market. They didn’t make the loans, they bought the loans. By retaking them and continuing to operate them at a loss (the article cites a CBO estimate that the cumulative cost may approach $400B), while sparing holders of agency bonds any losses themselves, the government is using them as a principal vehicle for its bailout of the financial sector.

The word bailout is important here. Readers need to know where and how their tax dollars are being used to protect wealth-holders against reductions in the value of their assets. It is interesting that the federal government spends $80 a month per house to cut grass in a subdivision outside of Phoenix (xeriscaping, anyone?), but really, this is third order.

Thoughts from 1975 Provoked by Veblen in 1908-09

I am sorting and packing at the moment, and I came across an essay I wrote as an undergraduate at the University of Wisconsin in 1975. (I had returned after several years of sometimes blissful hippiedom.) It’s in response to a pair of articles written by Veblen in the early years of the twentieth century denouncing marginalist economics. Here’s an excerpt:

“Certainly what is not justified is the movement from a descriptive to a normative role for price. Veblen argues persuasively that contracts are situated, that prices are sensible only as adjustments to situations, and that the forces that constitute the situation bias the results. By setting these adjustments up on a pedestal and calling it [sic] “optimality”, economists may unwittingly serve to buttress the constraints operating to define the original situation. Also, as Veblen never tired of pointing out, in no society are human beings only individuals; no theory that fails to accord a prominent place to collective and undifferentiated activity can claim to tell the whole story. In my opinion, this is particularly true of theories of demand.

“...Veblen’s accusation that neoclassical economics is reductionist has much going for it. Again, he was hampered in his effort to develop this criticism by his lack of mathematical training. Modern economics—and modern social science in general—has much to learn from developments in other fields that demonstrate that there is more to quantitative analysis than mere size and rate of growth. Concepts of pattern and sequencing in ecology, molecular biology and information theory, for example, indicate that many matters of “quality” can be understood in terms of quantity. And beyond the ability of mathematical methods to describe, qualitative changes still take place that any science must grapple with as best it can. A specific charge could be made, moreover, that marginal theory relies too heavily on a notion of incrementalism in descriptive methodology; particularly in a social science which concerns itself with people who look ahead and make decisions on the basis of patterned perceptions, the incremental bias may miss as much as it captures.

“The first casualty of a reductionist methodology is an adequate conception of change. This is because, while at any given moment things can be isolated for separate, quantitative analysis, they change as part of an interconnected whole which can only be perceived in terms of what these various things do with and to one another....In economics this becomes a special problem since part of this whole is not human economic behavior, but also the material world, whose “utilities” are regulated by very different sets of laws.”

I’m surprised by how much this essay, written for my first ever economics course, sets the tone for nearly all my thinking since then. I hope I’m more precise now, but in some ways I’m still right there.

Incidentally, my professor’s response at the end was: “Your paper is abstract and difficult to respond to.”

Krugman: Right Result, Wrong Reason

PK continues to fight the good fight for Keynesian common sense in the face of resurgent austerity. The austerity front, which brings together Tea Partiers and Tories, blue dogs and Bundesministerien, wants to snuff out last year’s stimulus and force the North Atlantic economy to sink or swim. It’s chances of sinking are frighteningly large. Krugman says we should keep applying fiscal CPR until economic growth is in full recovery and unemployment has dropped—and until the zero lower bound on interest rates no longer binds, and normal monetary policy becomes an option.

Yes but.

There is an enormous hole in Krugman’s argument. A chief worry of the austeritarians is that their country—Britain, Germany, even the US—will be the new Greece, abandoned by creditors and teetering on default. These fiscal deficits are unsustainable, they say, and debt-to-GDP ratios are drifting up into the danger zone. The risk is that financial markets will lose confidence in governments with so much red ink, leading to a spike in interest rates, the dumping of bonds, and national humiliation at best, meltdown at worst. Why wait for this moment, the argument goes, when you can prevent it by bringing fiscal deficits down now?

Krugman’s response is that the creditor flight threat is imaginary. Speaking of the new budget cuts and tax increases in Germany, he writes, “Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.” This has also been his pitch for the US, which also enjoys lowest-ever rates on its long-term bonds. The markets aren’t worried, so why should we be?

Does anyone else notice that this argument rests on the assumption that low interest rates today guarantee low rates tomorrow? Yes, the US, Germany and England can borrow long-term at firesale prices, but old debt keeps coming up for refinancing, and if market sentiment changes, the effects will be felt immediately. Do financial markets ever swing radically from favoring one asset or currency to panic buying of its substitute? Is there unpredictable herd behavior among investors? Do we have to ask?

The issue is not what markets “think” today, but how exposed we are to their gyrations in the coming months and years. This is the strongest argument of the austeritarians, and Krugman can’t see it. It is entirely possible that we could be in for a period of cascading panics, with money surging to one apparent safe haven, and then another, and then somewhere else, wrecking whole economies in the process. In other words, we have to worry not only about 1937, when premature austerity put an end to economic recovery in the US, but also 1931, when the failure of Vienna’s Kreditanstalt led to a period of devastating currency runs. Now, as then, there is no sufficient international lender of last resort, and any defense would have to be improvised on the fly. Back then, defense failed utterly.

The solution, however, is not fiscal tightening; Krugman is right about that. The starting point for any intelligent analysis has to be the basic accounting identity, that the sum of private sector deficits plus fiscal deficits equals the current account balance. Surplus countries that choose austerity are choosing some combination of decreasing private sector savings and increasing trade surpluses, most likely through declines in national income. They are making life even more difficult for their counterparties. Deficit countries, like ours truly, are in an even worse situation. Fiscal retrenchment means even greater private borrowing, with the only difference, in the short to medium run, coming from the effect of falling incomes on imports. We got into this situation because the private sector, especially financial institutions, were over-leveraged and badly invested; with deleveraging the debt burden was shifted onto governments that stepped into the breach. To withdraw the fiscal lifeline before private wealth-holders are prepared to lend would be catastrophic. We would have unavoidable crises, first in the deficit countries, then in the surplus regions exposed to them.

This is Scylla and Charybdis territory, to be sure. We got here by a long sequence of institutional failures and policy errors, and it will not be easy getting out. I remain convinced that the bailouts of 2008 were deeply mistaken, and that we are now paying the price. (At the time I instead favored the use of public money to create “good, new” financial institutions.) Moreover, no action was taken to address global imbalances, and without this it is difficult to see how growth can resume: the US will no longer borrow the vast sums needed to sustain global demand. (Recent labor action in China is a sign that bottom-up rebalancing may be gathering force—I hope so.) The Eurozone crisis is itself a dilemma of rebalancing on a regional scale.

In short, there is no obvious way out. Austerity is a sure-fire loser, but the risk of distended fiscal deficits in a low- or no-growth world is real. Time is running out to deal with the underlying causes.

Letter to a German Friend

I just had an insight, and maybe you can tell me if I am right or wrong. It's about Germany mainly, although other countries might qualify, and it comes from reading German academic and political commentary over the past few weeks.

It is common for some people (i.e. most people in your world) to think about the nation as if it were a firm. A firm provides income and security for its workforce by succeeding in competition. It must regularly increase its productivity, innovate and keep abreast of changes in the market. It must keep its costs under control. If costs rise too rapidly, and there is a risk of being priced out of the market, then strong measures may need to be taken. German unions as well as employers and everyone else recognize that competitive reality has to be taken into account.

The problem is that there is an enormous difference between the perspective of a firm and that of a society. A firm does not, and cannot, worry about the others who lose out in competition. If you gain market share and others are pushed aside, this means you are doing something right. You might be concerned for the workers and other stakeholders who are losing, but whatever you do for them, it would not include harming your own competitiveness.

Not so for a country. A country can organize itself to have a trade surplus through enhancing human resources, more productive allocation of capital and keeping wages and other costs down. Such a surplus, however, is necessarily matched by a deficit in trading partners. Deficit countries cannot shrink or dissolve as deficit companies can. Nor can they continue very long as deficit countries, unless they are the US and they export their financial instability to everyone else. But Greece, Spain, Ireland et al. cannot go on with these deficits. There is no solution for the deficit countries that does not imply a reduction in surplus for the surplus countries.

In other words, the "game" of international competition between countries, unlike between firms, cannot really be won. Any victory is only temporary, until its financial consequences become overwhelming. This is why no country ought to seek to outcompete the others. Raising productivity, innovating, and the rest is very good, of course, and should not be discouraged. But if a country is very successful at these things, it has a responsibility to the system as a whole to allow its costs to rise to the point that other countries are not crushed.

Here is a different way to say the same thing, from the other side of the ledger. Germans want to save. Good! But if they save quite a lot, and if their government borrows relatively little, then the only thing they can do with these savings is buy foreign debt. This means that the value of German accounts depends on the financial health of these foreign borrowers. But there we are again: we are seeing what happens to the chronic borrowers when their credit runs out.

In the end, what the surplus countries have to see is nothing more than the laws of accounting, that someone's surplus and savings is necessarily someone else's deficit. Firms do not have to worry about this, but societies do.

But I will agree to this: it is also obvious that there can be no solidarity across the Eurozone unless retirement ages are harmonized!

UPDATE: In a followup conversation, we agreed that the best course for a rich but thrifty country like Germany is to decrease its work hours still further. (I also think that a rich surplus country should consider making large transfers to very poor people in other regions. Just give some of it away. Why not?)

How is Turning Over Less Than Half of What You Owe a Shakedown?

BP and the Obama Administration came to an agreement that BP would put $20 billion in an escrow account as partial payment for the damages this Gulf oil spill caused – and certain Republicans have screamed “shakedown”. But given the following:

BP and the Republicans have reluctantly agreed to the proposition that BP should pay for all of the damages.

Initial estimates of the damages are around $40 billion.

These estimates were based on evaluation of the amount of oil leaking into the Gulf that have been subsequently shown to be far below reasonable estimates of the amount of oil leaking into the Gulf.

If we take the decline in BP equity value since the oil spill began as the market’s best guess of how much BP will ultimately pay, then the market’s price tag is closer to $100 billion.

Let’s say that you and I have a disagreement as to how much I owe you with you claiming the amount is $100 and me claiming the amount is only $40. If I choose to hand you a twenty dollar bill today with the agreement that we’d settle on the rest tomorrow, could I then scream to the police that you shook me down? Probably not – but that is what certain Republicans are effectively claiming.