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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.

Wednesday, February 1, 2012

Transcript: 492 The Idiocy of European Policy

Now. Idiot of the week. Today Martin Feldstein.

We choose our idiots not exclusively for their idiocy. If absence of contact with reality were the only criteria, we would have an embarrassment of riches. To illustrate this, on an upcoming podcast, if execution follows intention, we will have a Davos edition. We reduce the field considerably by including – sometimes – those who have something to say, but ignore or miss the point otherwise. And sometimes our selections have risen to the top because they are in positions of influence. Baffled Ben Bernanke has been featured here more than once.
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Today’s idiot is Martin Feldstein, who fits into all three categories. Something to say, position of influence, idiocy.

Now Professor of Economics at Harvard, Feldstein’s reputation is mostly associated with the NBER, National Bureau of Economic Research, a private organization which is the official determiner of recessions. He came out in 1982 for a couple of years to be Chairman of President Ronald Reagan's Council of Economic Advisers. Then returned to the NBER as president for a couple of decades.

In a recent Project Syndicate piece under the title:

How to create a depression,

Feldstein wrote:
European political leaders may be about to agree to a fiscal plan which, if implemented, could push Europe into a major depression. To understand why, it is useful to compare how European countries responded to downturns in demand before and after they adopted the euro.

Consider how France, for example, would have responded in the 1990’s to a substantial decline in demand for its exports. If there had been no government response, production and employment would have fallen. To prevent this, the Banque de France would have lowered interest rates. In addition, the fall in incomes would have automatically reduced tax revenue and increased various transfer payments. The government might have supplemented these “automatic stabilizers” with new spending or by lowering tax rates, further increasing the fiscal deficit.
In addition, the fall in export demand would have automatically caused the franc’s value to decline relative to other currencies, with lower interest rates producing a further decline. This combination of monetary, fiscal, and exchange-rate changes would have stimulated production and employment, preventing a significant rise in unemployment.

But when France adopted the euro, two of these channels of response were closed off. The franc could no longer decline relative to other Eurozone currencies. The interest rate in France – and in all other Eurozone countries – is now determined by the European Central Bank, based on demand conditions within the monetary union as a whole. So the only countercyclical policy available to France is fiscal: lower tax revenue and higher spending.
… blah, blah, blah

here … remembering this was written about a month ago.

The most frightening recent development is a formal complaint by the European Central Bank that the proposed rules are not tough enough. Jorge Asmussen, a key member of the ECB’s executive board, wrote to the negotiators that countries should be allowed to exceed the 0.5%-of-GDP limit for deficits only in times of “natural catastrophes and serious emergency situations” outside the control of governments.
If this language were adopted, it would eliminate automatic cyclical fiscal adjustments, which could easily lead to a downward spiral of demand and a serious depression. If, for example, conditions in the rest of the world caused a decline in demand for French exports, output and employment in France would fall. That would reduce tax revenue and increase transfer payments, easily pushing the fiscal deficit over 0.5% of GDP.

If France must remove that cyclical deficit, it would have to raise taxes and cut spending. That would reduce demand even more, causing a further fall in revenue and a further increase in transfers – and thus a bigger fiscal deficit and calls for further fiscal tightening. It is not clear what would end this downward spiral of fiscal tightening and falling activity.

If implemented, this proposal could produce very high unemployment rates and no route to recovery – in short, a depression. In practice, the policy might be violated, just as the old Stability and Growth Pact was abandoned when France and Germany defied its rules and faced no penalties.

Copyright: Project Syndicate, 2012.

And here on Bloomberg

Chancellor Merkel and President Sarkozy would have improved things if they had said from the start, "Greece is in a different position from Italy and Spain and others.  Greece can't make it.  There's no point in trying."  Instead, they said, "Well, Greece, Italy, they're all the same." As a result they've made it harder to get reasonable terms from the financial markets.

Not so idiotic, perhaps. Perhaps in the “something to say” category. Certainly well within the accepted view. What is missing? Ah, the banks, the investors, the private sector that led the world into the mess and now must be bailed out to complete the carnage.

The entirety of Feldstein’s argument has to do with making the investors whole. What is the great problem with Greece? The cataclysm that is about to unfold? Certainly not that the Greek economy and people can be spared some suffering. Certainly not that Greece is going to default. It has been a tradition in Greece to default, and has not particularly been remarked on up until now. But now the kind of market event, the bankruptcy court proceeding, the whole nine yards, cannot be contemplated.

Certainly it is because Greece is not so different from Italy and Spain, nor from Ireland and Portugal. The austerity that is biting at Greece, that was sold on the basis of establishing confidence, structural reforms, etc., etc, that were sure to lead to inevitable recovery, new investment and well-being, and instead delivered a meltdown in the economy, This is austerity demanded of Portugal, and now with similar non-results in bond spreads. Ireland did the ECB’s bidding and bailed out the banks that were not any part of the government. Ireland was the poster child of how to do it right by the private market competitiveness playbook. Now they’re sunk. Italy, Spain, etc. Similar. High debt, be it public or private, and a negative current account, meaning the negative flow is adding to the negative stock. Competitiveness cannot happen, as Feldstein notes, by way of currency adjustment, because there is only one currency. It has to come about by way of economic contraction via austerity by governments or austerity – aka structural adjustments – by the labor markets. Crunch goes demand. Crunch goes the economy. How is that different from Greece?

But no, not so idiotic. We include this part to bring up something more idiotic. A German proposal leaked to the Financial Times that quote

“The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out….”

This is according to a copy of the proposal obtained by the Financial Times (link online). Quoting from the German proposal:

(1) Absolute priority to debt service

Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access. De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.

(2) Transfer of national budgetary sovereignty

Budget consolidation has to be put under a strict steering and control system. Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.

The madness of austerity now formalized in the hands of the madmen of austerity. The interest of the people is clearly subservient to the interests of the banks. How foolish would it be to put your budget in the hands of another state? Or a quasi-state institution controlled by the banks.

George Soros had this to say about the situation:
Unfortunately it means a lost decade for the European Union.  Similar to what happened to Latin America in the 1980's.  And it actually could be more than a decade.  Because, similar to what happened to Japan after the collapse of their boom, in the late 1980s.  They still have not grown since then.  So you have a period of ... an extended period ... of stagnation facing Europe.  That I don't think Europe can survive politically.  That is why I am terribly concerned about it.

Because the euro ... the German insistence on austerity could destroy the European Union.  This is reality.  This is a harsh reality that we need to face.  I think if we faced it, we could alter it, because it is not written in stone.  In other words, the future is not predetermined.  We determine the future.  So it would be well within the possibilities of the authorities to change it. 

Unless the Germans actually see reason, and I think now have actually the beginning of a discussion that goes to the heart of the matter.  The Finance Minister says that structural reforms alone ought to do it.  It did it for Germany.  I think not only me, but the markets, the world at large, says that is not possibility in the current environment, where you have general deleveraging and deflationary pressures all over the world.

I think the euro will survive.  It will actually benefit from all the doubts that are now in people's minds.  It will keep the price the down.  And that may actually help the Eurozone export more and actually pass on some of the pain to the rest of the world.  So there is a commitment to the euro, and you really don't have the option right now to abandon it, because you cannot unscramble the omelet.  Things are so interconnected that if you broke up the euro, you wold have a meltdown of the financial system.

However, in the long term, it threatens to destroy the European Union.  So the political consequences are very dangerous.  And the funny thing that is going that is not actually noticed, but now you have re-nationalization of the financial system.  All the government bonds will end up in the banks of the countries which issue them, and THEN it will actually be possible to break up the euro.