A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Sunday, February 12, 2012

Transcript: 493 Greece, Austerity, Defeat

Today, the parliament of Greece ignored the outrage in the streets outside and voted overwhelmingly to accept another deep austerity package as a step toward avoiding a March default. We’ll spend most of the podcast on that. Then we have part two of idiot of the week, as we promised, with Martin Feldstein.
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First, the Troika of European Commission, ECB and IMF has expressed itself, and the parliament in Greece has finally acquiesced. The results for Greece are already grim. They will become more so. The Greeks have given up sovereignty over internal budget, fiscal and social policy. They have submitted to more of the madness of austerity.

Disbursements from the ESFS could total $170 billion and could forestall a default in March, the Troika promised … The draft


Budget implementation

For 2012, the annual general government primary deficit should not exceed EUR [2 063] million; and for 2013 and 2014 the primary surplus should be at least EUR [3 600] million and EUR [9 500] million, respectively.
That is, a shrinking deficit into surplus overnight. A recipe for failure..

The rest of the targets for privatization, selling state-owned enterprises, transferring assets immediately to a non-government agency. Reform the tax scheme, reorganize government administration, reduce public sector wages and pensions, all to specific, not general terms.

… here quarterly reports on staffing plans to reduce headcount, health care: increase co-pays, reduce coverage, abrogate collective bargaining agreements, energy, gas, and on and on.

Of course, it includes a new Business Friendly Greece program to reduce restrictions on business and investment not reduced elsewhere.

51 pages of micromanagement.

The Troika has all kinds of conditionality for releasing the funds. What if the economy continues in freefall and revenues come in under target? I don’t see any contingency.

No. There is no promise that economic outcomes will be different for the Greeks, that they will get new access to markets. If the Greek economy continues its freefall, set off by the business friendly financial crisis and the previous austerities demand of it at the Troika’s behest … Nothing.

The Troika is operating on behalf of the European banks. No doubt. True, bondholders which include the banks took a voluntary hit, but False that this is their only interest.

Lets get a short form of the situation from Gabriel Sterne of Exotix Holdings, who notes that this agreement is only halfway to the March deadline.


The Troika of the European Central Bank, the European Commission and the International Monetary Fund is making the Washington Consensus proud. The Washington Consensus is the extreme form of market capitalism imposed on Third World debtors over the past three decades. The name derives from the proximity of the headquarters of the IMF, World Bank and U.S. Treasury in DC.

Joseph Stiglitz described the Washington Consensus in these terms,

"These policies focus on minimizing the role of government, emphasizing privatization (selling off government enterprises to the private sector), trade and capital market liberalization (eliminating trade barriers and impediments to the free flow of capital), and deregulation (eliminating regulations on the conduct of business). Government had a role in maintaining macro-stability, but the attention was on price stability rather than on output stability, employment, or growth. There was a large set of dos and don'ts: do privatize everything, from factories to social security; don't have the government involved in promoting particular industries; do strengthen property rights; don't be corrupt. Minimizing government meant lowering taxes - but keeping budgets in balance."

Third World nations often had debt even more illegitimate than that of the Greeks. Much of it came by the offices of tyrannical rulers, who would borrow up to buy arms to suppress their own population. When those rulers were run out of town, they left the debt behind. There is no bankruptcy court for nations. Popular governments were on the hook.

In many other cases, Western development corporations came in with big projects – dams, power grids and so on – along with cost-benefit assessments that promised big things. The contractors got the big things. the countries got stuck with big bills for big white elephants.

Here came the IMF to bail them out. Yes, the creditors. Not the countries. IMF financing came with conditions which might remind you of the Greek terms. Structural Adjustment Policies, with the apt acronym SAP’s.

Private government operations
sell off public assets
structurally adjust labor markets
lower regulation
business friendly policies

Sometimes – too often – the IMF allowed capitalization of interest, which had the effect of ballooning debt over time, so that in some cases the original debt was a fraction of that owed. The Jubilee 2000 movement was the effort of the moral among us to remove this onerous and illegitimate debt, technical term “odious debt.” That effort opened some eyes, but made virtually no impact on the debt itself.

The pertinent point here is that the Washington Consensus, the IMF prescription, the SAP’s didn’t work, won’t work, can’t work, yet it is being trotted out in the current mess. There is no example of a successful recovery. But the point is not to recover the economy for the benefit of its population, the point is to make the lenders whole, no matter the circumstances of their lending. The madness of austerity to pay bad debt is an illustration of who is in charge, whose interests must be served.

Now let’s finish off idiot of the week, with Martin Feldstein, the two-part treatment.

We used the last podcast to introduce Mr. Feldstein and get a bit of his take on the European situation. We didn’t get very far into Mr. Feldstein’s qualifications for our award. Today we do.

Let’s go to taxation:


This is Reaganomics. The evidence is in on Reaganomics, supply side, trickle down. There is no evidence that lower tax rates at the top help the economy. The economy did better when rates were higher. Corporate tax rates are high in nominal terms, but low in effective terms, after they run the gauntlet of corporate-sponsored loopholes. Corporate income taxes account for barely ten percent of federal revenue. The U.S. is a preferred location for corporations and business precisely because of its low regulation and easily avoided tax regime. Simple Algebra shows us that higher tax rates on the rich, with their lower proclivity spend, if transferred to the poor or just spent on public goods would boost aggregate demand in the economy. Lastly: Whatever you say their tax rate is, you have to admit that during the current stagnation, corporate profits have boomed. That profitability of corporations has not shown up in hiring. Increasing profitability by lowering taxes would do nobody any good.

This alone earns Feldstein the coveted idiot of the week trophy. Having the choice between revising his opinion to fit the facts, Feldstein holds to his opinion and revises the facts.


Now this is the Fox News fact that x number of Americans don’t pay taxes. Find me one person who doesn’t pay taxes. Payroll taxes account for more than half of federal taxation. If you work one hour, you pay taxes. And if you make more than, what is it, $106,000, you stop paying payroll taxes, so your effective rate goes down the more you make. Add to this property, sales, excise taxes of every sort that are paid directly or indirectly. To say that some people don’t pay taxes, but only receive, is not true for the poor. One might parse out the benefits of the bailouts and see who and what dollar amount obtained the benefit of this hit to taxpayers. It is class warfare, pure and simple.


Well, it was Martin Feldstein’s National Bureau of Economic Research who said it was a recovery. The NBER’s business cycle dating committee did not wait for a real business cycle upturn, but took a couple of quarters of positive GDP produced by massive government deficits and called it a recovery. The real business cycle is still bouncing along the bottom.

Martin Feldstein, Idiot of the Week.


  1. When a report has 51 pages of micromanagement I wonder who has had a hand in writing it? The problem as I see it is that forced sales are basically asset stripping. Which might not be so bad but the assets could simply disappear offshore or all the rewards offshore. You only have to see how the UK governments sale and leaseback turned out. The government hoped that it would at least tax the rents to reduce the effective cost but the ownership of these properties were quickly transferred offshore and they are now sending their rents to tax taverns. This will be the case with Greece. So I can understand why they are having problems selling them. Also fire sales are a vultures paradise and do little for the host. So far all I see is cuts to income. What about rents or mortgages? These will become ever more unaffordable to the Greek populace or will they be encouraged to sell them to overseas landlords who demand even more flesh from the Greeks?

    I do think that under its current fiscal arrangements Greece should declare all its debts odious and let the CDS markets pay out. After all that is what the bondholders want. Without any debt burden it might actually be able to start afresh even if its banks are decimated. What will be needed in a new Greece will be lending controls and that will reduce the bubble prospects for property, which might not be a bad thing.

    Remaining within the Euro might actually help Greek businesses and with the exit threat removed the threats to the rest of the periphery will be reduced. The only price is that bank debts are going to have be written off, but that goes against everything that the Washington Consensus stands for.

  2. What's fascinating is that neoliberalism is the economics that dare not speak its name. It's practitioners try to call themselves Austrians or supply siders or praxeologists or freshwater economists or Hayekians or...

    Invisible Backhand

  3. How can you evaluate the evidence when economists can't measure income growth with any accuracy? There's a way to measure the impact of product innovation and improvement. First, you must see what is wrong with standard neoclassical consumer theory. This video shows how to get indifference curves to do everything that they're not supposed to do. Just ask what are quality and convenience. Done by a former PhD econ student http://www.youtube.com/watch?v=2c4mvGekYZY