A piece I wrote with Henry Farrell in Foreign Policy, reproduced with permission
How to Save the Euro — and the EU
Reading Keynes in Brussels
By Henry Farrell and John Quiggin
The European Union is in danger of compounding its ongoing economic crisis with a political crisis of its own making. Over the last year, crises of confidence have hit the 17 EU members that in the years since 1998 have given up their own currencies to adopt the euro. For the first decade of this century, markets behaved as though the debt of peripheral EU countries, such as Greece and Ireland, was as safe as that of core EU countries, such as Germany. But when bond investors realized that Greece had been cooking its books and that Ireland’s fiscal posture was unsustainable, they ran for the door. The EU has stopped the contagion from spreading — for now — by creating the European Financial Stability Facility, which can issue bonds and raise money to help eurozone states. Together with the International Monetary Fund, the European Financial Stability Facility has already lent Greece and Ireland enough money to cover their short-term needs.
But such bailouts are only stop-gap measures. Portugal and Spain, and to a lesser extent Belgium and Italy, remain vulnerable to pressure from bondholders. Portugal is likely to receive 50-100 billion euros over the next few months. But should Spain also need a bailout — which could cost as much as 600 billion euros — the 750 billion euro European Financial Stability Facility would soon be exhausted. In that event, the main euro creditors, primarily British, French, and German banks, might have to accept so-called haircuts, substantial cuts in the principals of their loans. (The banks’ tax-avoidance strategies might inflate this total, but the Bank for International Settlements has estimated that the exposure of British, French, and German banks to the group of vulnerable debtor states referred to as the PIGS — Portugal, Ireland, Greece, and Spain — amounted to more than $1 trillion in mid-2010.) Encouraged by Germany, some of the states in difficulty have sought to placate bond markets by making ruthless cuts in government spending. But as many economists have pointed out, these measures are hindering growth without satisfying bondholders that their money is safe; bondholders worry that these measures are not politically sustainable. In fact, they are likely to undermine Europe’s political union.
Nevertheless, Germany has been pressing European countries to institutionalize more stringent cuts in spending. In February, it, along with France, proposed that members of the eurozone introduce “debt brakes,” inflexible limits on deficit spending. Germany had already incorporated such a cap into its own constitution, one that severely restricts any government deficit spending, including the kind that might benefit the country’s long-term growth. In early March, the other 16 eurozone states agreed to introduce such debt brakes or some equivalent into their domestic laws and to make them as durable and binding as possible, for example, by incorporating them into their national constitutions.
But institutionalizing austerity will badly damage European economies in the short term — and the long-term consequences will be even worse. European politicians worry about the economic consequences if their attempts at fiscal stabilization fail. They should be far more worried about the political consequences. Even if these strict spending limits do calm bond markets somehow, they will destroy what little is left of the EU’s political legitimacy.
The eurozone states should be required to put surpluses aside during good years for the purpose of stimulating demand during bad ones.
BAD AS GOLD
The EU is now drifting toward a thinly disguised version of the gold standard, which wreaked economic havoc in the 1920s and led to a toxic political fallout. Under that system, European states had fixed exchange rates. During economic crises, they refused to increase government spending because of a failure to either understand or care that monetary disturbances and shocks to demand could lead to joblessness. The result was generalized misery. Governments responded to economic crises by allowing unemployment to go up and cutting back wages, leaving workers to bear the pain of adjustment. As Golden Fetters, Barry Eichengreen’s classic history of the period, shows, the gold standard began to collapse when workers in Europe gained the power to vote out of office the parties that supported austerity.
The measures that the eurozone states have recently decided to adopt will be even harsher, if they make the mistake of following Germany’s example. Germany’s debt brake, which at first Berlin implicitly proposed as a model for other European countries, turns austerity into a constitutional obligation. In theory, it provides some flexibility during hard economic times, but in practice it makes deficit spending as difficult as possible: only the vote of a supermajority of German legislators can relax it. And it rules out debt-financed investment, such as in infrastructure, even though that can spur long-term growth.
As they begin to adopt Germany’s model, or something along those lines, the other eurozone states will find it nearly impossible to use fiscal stimulus in times of crisis. And with monetary policy already in the hands of the dogmatically anti-inflationary European Central Bank, their only means of adjusting to crises will be to stand by as wages fall and unemployment soars. Ireland — with its collapsed tax revenues, massive cuts in government spending, shrinking wages, and skyrocketing unemployment — is the unhappy exemplar of rigid austerity measures in the new Europe.
This approach cannot be sustained for long. The EU has never had much popular legitimacy: many voters have gone along with it so far only out of the belief that their politicians knew best. Today, they are more suspicious. And if they come to think that further European integration is causing more economic hardship, their suspicion could harden into bitterness and perhaps even xenophobia. Ireland’s new finance minister, Michael Noonan, has told voters that the EU is a game rigged in Germany’s favor; editorials in major Irish newspapers warn of Germany’s return to racist imperialism. As economic shocks hit other EU countries, politicians in those states will also look for someone to blame.
If the EU is to survive, it will have to craft a solution to the eurozone crisis that is politically as well as economically sustainable. It will need to create long-term institutions that both minimize the risk of future economic crises and refrain from adopting politically unsustainable forms of austerity when crises do hit. They must offer the EU countries that are the worst hit a viable path to economic stability while reassuring Germany, the state currently driving economic debates within the union, that it will not be asked to bail out weaker states indefinitely.
The short-term solution is clear — even if the European Central Bank, which is still fighting the war against the inflation of the 1980s and 1990s, refuses to recognize it. The solution is a one-off combination of market purchases of bonds and other financial assets, temporarily higher inflation, and fiscal support with the issuance of a common European bond. Quantitative easing and higher inflation would help ease the pain of adjustment, and a European bond would allow the weaker eurozone states to raise money on international markets. All of this would shore up the euro long enough to allow for further-reaching reforms down the road. The major euro bondholders would have to bear some of the costs — as they should, since they lent excessively during the first years of this century — through either explicit haircuts (in effect a discount of their bonds’ value) or inflation. Germany might not enjoy experiencing temporarily higher inflation, but if this were a one-time cost, it could probably live with the results — as long as it was also reassured that the long-term gain would be stability in the eurozone.
IN THE BEST OF TIMES, FOR THE WORST OF TIMES
Instituting effective long-term reforms will be a harder sell. Germany adopted its own large-scale fiscal stimulus in 2009, but it returned to its traditional anti-Keynesian stance as soon as the danger of total systemic collapse had passed. Yet Keynesianism, at least properly understood, is the only way forward.
Contrary to the beliefs of nearly all anti-Keynesians — and, regrettably, some Keynesians, too — Keynesianism demands more, not less, fiscal rectitude in normal times than does the orthodox theory of balanced budgets that underpins the EU. John Maynard Keynes argued that surpluses should be accumulated during good years so that they could be spent to stimulate demand during bad ones. This lesson was well understood during the golden age of Keynesian social democracy, after World War II, when, aided by moderate inflation, the governments of the countries in the Organization for Economic Cooperation and Development greatly reduced their ratios of public debt to GDP. This approach should not be confused with the opportunistic support for large budget deficits evident, for example, among advocates of supply-side economics. If anything, “hard” Keynesianism suggests that the problem with the macroeconomic rules governing the euro is not that they are too tough and too detailed but that they are not tough or detailed enough. States in the eurozone should not be allowed to run moderate budget deficits in boom years, the Keynesian argument goes; instead, they should be compelled to run budget surpluses. The surpluses could then be saved in rainy-day funds or used to pay down government debt or, if the country had reached a satisfactory debt-to-GDP ratio, spent as a fiscal stimulus in the event of a crisis. Unlike the kind of budget management advocated by the German government, this approach does not seek to eliminate or minimize governments’ leeway to conduct fiscal policy. It gives governments up-front the means to manage demand whenever they might need to.
Resorting to hard Keynesianism to deal with the euro crisis would require making far-reaching changes to the rules and practices of the EU’s economic and monetary union. It would mean both toughening the requirements of the Stability and Growth Pact, which governs the euro, and strengthening the enforcement of these rules. As they stand, the Stability and Growth Pact’s bylaws require the eurozone states to maintain budget deficits under three percent of GDP and debt-to-GDP ratios under 60 percent. The system does not provide enough flexibility during downturns: even German politicians ignored these requirements a few years ago, when Germany was suffering from a recession — much as they prefer not to remember this today.
To be more effective, the system needs to be stricter. The Stability and Growth Pact should be strengthened so that it requires countries to put aside surpluses during auspicious years. Since governments are persistently tempted to squander surpluses, a new supervisory institution should be introduced at the EU level. It should be granted access to detailed budget-planning and other economic information from the eurozone states and should be empowered to sanction misbehaving states. Such a reform could be integrated into other proposals under consideration today, such as the “European semester system,” which would give the European Council the responsibility to assess member states’ budgetary policies. A new European college of budgetary supervisors, with one supervisor from each member state, could assess the budget-planning processes of the member states and provide short-term flexibility in times of real crisis. Its staff would come from the ministries of finance of the eurozone states. When states faced hard economic times, the college could decide, with a simple majority, to relax fiscal strictures on a six-month basis.
The Stability and Growth Pact, a semi-formal protocol of dubious legal standing, should also be properly incorporated into the EU’s basic treaties. That would allow the European Court of Justice to adjudicate disputes between EU bodies and member states and help with the pact’s enforcement. These arrangements would prevent national governments from unjustified deficit spending while giving them flexibility in times of real need.
Such an active use of fiscal policy requires the coordination of fiscal and monetary policies. This, in turn, means that the European Central Bank can no longer be totally independent, as it has been since the implementation of the euro. As it stands, the European Central Bank is possessive about its powers. For example, it has resisted oversight by the European Parliament even though it has begun to take on an increasingly important political role through its support for the European banking system. It has assiduously avoided mingling monetary policy and fiscal policy, focusing instead on targeting inflation. But it nonetheless failed to prevent asset price booms, and these could only have been prevented with much more direct institutional control over unsound financial innovations. As the interaction between governments and central banks is unavoidable and the role of the European Central Bank is increasingly political, it would be better to properly define the relations of authority among these bodies. The European Central Bank must be more willing to adjust its policies so that they do not undercut those of elected national governments. Even if this were not necessary economically, it would be necessary politically. Handing the power to destroy national economies to unelected technocrats is simply not politically sustainable.
Creating an active fiscal policy regime of this kind would reduce the volatility of interest rates, the result of an excessive reliance on monetary policy. Manipulating interest rates helped stabilize inflation during “the great moderation,” the era of relative economic calm between the late 1980s and the late years of the first decade of this century. But in the long term, it contributed to the growth of the asset price bubbles that almost destroyed the entire system in the global financial crisis. To be most effective, these reforms would have to go together with the creation of a limited fiscal union that would balance out the asymmetric effects of economic shocks by allowing limited fiscal transfers between member states. Managing surpluses as hard Keynesianism recommends would go some way toward providing the eurozone states with an important buffer against crises. But in hard times, imperfect monetary unions, such as the eurozone, require temporary transfers to the countries most hurt from the countries that are less affected. This is not to argue that the EU should become a “transfer union,” with the extensive fiscal transfers of a full-fledged federal system, as the German government fears. But the eurozone should allow for more short-term fiscal transfers to deal with asymmetric shocks. A common bond mechanism, for example, would help states in difficulty raise money on international markets or allow resources that are, say, earmarked for agriculture to be redirected to an emergency fund.
ROOM WITH A VIEW
Hard Keynesianism would not solve all of the EU’s economic and political problems. But it would steer the union away from the disaster toward which it is now sleepwalking. A new set of rules based on this approach could form the basis of a solution that is politically viable for both Germany and its European partners most suffering from the crisis. With only limited fiscal transfers allowed, Germany could be further assured that it would not have to continually bail out its profligate partners. Such an approach would maximize the fiscal room that states in distress need in order to deal with economic shocks while ensuring the eurozone’s long-term fiscal sustainability. In the short term, hard Keynesianism, like enforced austerity, would impose real adjustment costs on the eurozone’s weaker economies; there is no cost-free path to fiscal balance. But if the costs were shared with bondholders and were alleviated by a one-off loosening of monetary policy, they could be politically acceptable.
By concentrating on its economic problems but ignoring their political consequences, the EU is setting itself up for failure. The case for austerity does not make sense. And if the EU fails to deal with the political fallout of its own institutional weaknesses, it is going to collapse. No political body can force voters to repeatedly shoulder the costs of adjustment on their own and expect to remain legitimate. During the gold standard, nation-states tried this and failed — and they had considerably more authority than the EU has today. Hard Keynesianism offers a means to combine fiscal discipline with flexibility in order to cushion the political costs of adjustment in times of economic stress. EU leaders must institute it in a hurry.
26 thoughts on “Hard Keynesianism in the European Union”
The approach recommended by Farrell and Quiggin is supported by any attentive reading of 20th C history. Do the politicians making Euro policy not attend to history? Do they not attend to ALL the issues and debates in economics and political economy? To be so narrowly focused and so out of touch as to advocate austerity in the current crisis… it defies belief that they can be so ill educated, so foolish and so influenced by simplistic monetarism. Or has corporate capitalism suborned all the western democracies?
Hang on a minute. How fast can a bondholder fly from country to country selling down as his tailored coattails never touch the tarmac ?
Therein the problem – lack of capital controls.
Can this argument on hard Keynesianism be extended to reckless government encouragement of private debt, especially housing (eg first home vendors boost, capital gains tax exemption, deposit guarantees)? Governments fool the populace and themselves by pointing to low government debt in good times, ignoring balance sheet damage they encourage. (stae and local government debt, and net sale of public and private assets to foreigners is also a concern)
A good piece and very timely since there is a movement to amend constitutions.
I will note, however, that the EU situation (like the world situation) cannot be understood in isolation from culture and labor law. Germany today has a real unemployment rate roughly 1/3 of the USA and 1/2 that of Ireland. (Living in the USA I am quite aware of the bookkeeping flim-flam played here. Official figures are not credible.) In addition, Germany has a low under-employment rate in the face of much the same conditions. There are factors of history, resources, shipping location, etc. that factor in, but I argue these are far less significant than required to explain it.
It is no accident in this picture that Germany has the strongest labor unions of Europe, nor that Germany’s labor unions are the best educated. Nor is it an accident that German culture is less individualistic, more oriented toward the larger society than others. This is quite similar to Japan, which has the strongest unions and labor protections on the planet. Those features of Japan have allowed the Japanese economy to weather seemingly endless stagflation-deflation complete with regular yearly salary cut events. Also similarly to Germany, Japan is highly educated and culturally not focused primarily on the individual. Both societies also place a high value on engineering and science education.
These matters are features of “social capital.” Social capital manifests itself in stability of political institutions, resilience of societies and economies, and consequently, in the end, these features manifest themselves in the strength of bonds and other financial instruments.
Keynes was a great light in economics. But he too left this out. Economists have implicitly and explicitly invoked the principle of the invisible hand and treat all cultural, political, social and legal systems as if the were equal. They are simply not equal, period. Until this is taken into account and directly addressed in financial markets and economic planning, the kinds of issues happening in the EU today will continue to blindside investors and create economic havoc.
Some of the unwillingness to look at cultural values is well-intentioned. The world has suffered much from misplaced cultural chauvinism that has led to war and oppression. But an objective look at cultures does not require chauvinism as a foundation. It would, instead, lead to a clearer understanding of the underpinnings of finance.
Many years ago I studied labor law and unions interactions with manufacturing, looking closely at Japan. I did it as an automation project engineer in self-defense because I was a young man in a responsible position being assaulted by hordes of con-men who claimed to know things they hadn’t a clue about. It was obvious from their collective contradictions that they couldn’t all be right. It was obvious to me then that the real story of labor law and unions interacting with production and profitability was very different from what the Ford management wanted to believe. Unions and labor protections are one of those anti-intuitive matters for managers. I think our inability to see it is a legacy of primitive primate politics of dominance. That baboon level dominance instinct first led us to create economic systems built on slavery. The same instinct opposes strengthening in the decision power of workers today.
It is obvious that the way union strength, intertwined with culture, stabilize and organize economies – particularly in bad times – is anathema to the Neanderthals of policy running Western nations today.
Thus, it is understandable why economists dare not tread on these matters of labor law and culture. It is political dynamite. But it needs to be done. It explains why the PIGS are dragging things down. It explains why books needed to be cooked in the first place.
Ahem. The internet? Do you think bonds are sold as hard paper pieces carried around by people?
Good post. I think it is under-appreciated, or in most cases completely unrecognised, that solid sensible unions, and strong and sensible labour laws, can protect bad managers from themselves. And in that way, what some characterise as dual evils, can make an important contribution to productivity.
Unfortunately, due to multiple failings in human nature, and even where human nature is not the problem, a lack of management knowledge, bad management practices, in an unfettered labour market, become almost ubiquitous. The conflict that results rarely solves the problems created. And even where it resolves problems, does so in a most inefficient and regrettable manner. I would conjecture that on-costs from the same sized dispute, are relatively greater now, than they were fifty years ago. Because supply chains and inter-relations between business have become more complex and less resilient, although more efficient, with innovations like just-in-time.
Moreover, there is more to life than having a workforce satisfy some crude criterion of productivity. The objective ought to be to have the economy supply the workforce with good decent jobs and, if not fulfilling, at least tolerable, jobs, rather than have the workforce supply the economy with unhappy and reluctant applicants for whatever positions an unfettered economy deems to offer.
Brian I was speaking metaphorically.
Thanks to Brian for his post.
The solution is to build large numbers of Spitfires and bomb Germany. It worked before, it can work again!
More seriously, there is obviously a clear contrast here between Quiggin’s “Hard Keynesianism” and the Chartalist/MMT perspective, which holds (broadly speaking, if I understand correctly) that unless net exports are large enough to cover private sector net saving, then the government must run persistent “moderate deficits” all the time in order for the base money supply to grow in line with economic growth. Of course, given that EU countries are fiscally speaking more like state governments than national ones, the two POV might be compatible for the EU if the EU as a whole had a “federal budget” that ran deficits to pay for its member-state surpluses.
People who actually understnd Keynesianism
Surely it just requires governments to exercise fiscal restraint. They are free to do that right now.
In terms of the problems of the Irish government I think you are negligent in not pointing out that their debt problems are primaily due to their decision to guarantee the debts of private banks. A move I believe you supported.
The solution for the PIGS in Europe is default, default and then some more default. And at the end of all that defaulting people will hopefully understand that there is no risk free rate of return and lending to governments is a bad idea. Such a lending drought would ensure a whole stack of fiscal discipline on the part of governments.
The ECB should remain independent and focused purely on keeping inflation low. If this can be sustained then on the other side of the crisis we should start to see the emergence of more lean and fiscally disciplined governments. If you then want to claim a victory for “Hard Keynesianism” I don’t much care.
I am not convinced the framing of the current difficulties within the EU as a polemical debate about ‘austerity’ vs ‘spending’ (monetarism vs Keynesianism) is helpful for ‘saving the Euro – and the EU’.
Keynes’ policy recommendations regarding deficit spending were revolutionary, relative to the economic mind-set of the 19th and early 20th century. But this is not the crucial point in 2011. With the benefit of hindsight, Keynes’ policy recommendation was appropriate (can be understood) for post-WWII Europe because of the monumental destruction of physical assets during the war. Economic growth, as measured by GDP growth, could be taken as a sensible indicator for the speed of reconstruction (“Wiederaufbau”) of the physical capital, both infrastructure and production plants. Only an ideological fool could not see the pent-up demand for the output (consumer goods, housing, schools, new industrial goods). The problem was how to finance the reconstruction. This is, where, IMHO, Keynes was brilliant in saying in so many words that net debt (deficit spending) – or money creation – is the closure to the solution concept. And it worked. One should not forget that there was something like ‘seed money’ (using the terminology of project finance) called the Marshall Plan.
This is not the situation in the EU today. GDP growth per se is as likely to be an indicator of greater harm to ‘an economy’ as not (eg AGW). Income transfers from one local economy of the EU to another one is not necessarily a solution either (eg preferential tax treatment for Ireland resulted in a boom and bust). Still, the unequal income distribution is a problem. It is a problem not only across local economies eg (Germany vs Ireland) within the EU but also within the local economies. It is the same problem which has been discussed on this thread with respect to the USA. The distribution of income within the so-called ‘rich’ countries has become more skewed – the rich have become richer and more people have become poor.
I would not interpret Germany’s stance regarding Greece and Ireland as a stance in favour of ‘austerity’, marked by ‘reduced spending’. There is a distinction between reduced government spending and reduced deficit spending. Germany or France, as represented by their political heads, cannot demand from Greece or Ireland to increase tax rates on its relatively rich population to get revenue to spend more. All they can do is to protect their own relatively poor from being exploited by the relatively rich in other countries. It is the local population in these countries which need to put pressure on their local governments to change the taxation system. One should also not forget that the first German Minister of Economics, Ludwig Erhard, was an economist and his ‘sound bite’ at the time is still relevant today. It is: “Wohlstand fuer Alle” (welfare for everybody). (There was also a Danish king – no offence intended when I have to admit that I can’t remember his name – who used the same ‘sound-bite’ after Denmark defaulted against Germany and the economic recovery of Denmark was his aim.) The deep importance of this dictum for the workings of a market economy comes out very nicely in the existence of equilibrium (solution concept) proofs of all general equilibrium models I’ve come across. Unfortunately, it does not come out in micro-economic texts typically used in undergraduate economics courses and in particular not in business courses.
The current financial problems in the EU as well as in the USA are categorically different from those faced in post-WWII Europe. The current ‘quantitative easing’ in the USA is not to create fiat money for new projects but to convert privately generated $ that have already been spent into public debt. Each of the financially stressed economies in the EU have idiosyncratic problems but none of them is totally isolated from the problem in the USA.
It was a relief to me to hear Professor Stieglitz promoting tax increases for the ‘rich’ in the USA and, if my memory serves me right, President Obama has used these words too. Keynesian deficit spending was (past tense by now) a short term emergency measure to the GFC. The system has to be fixed.
I don’t think that expanding the money base to allow for growth is a clear contrast, it’s just a technical adjustment that can fit into the picture. The big problem is coming to grips with a common currency that is used by a set of states with different policy settings. As we have seen this can produce wild swings. The solutions would be to either ditch the common currency – so states’ currencies reflects their real value (more closely) – or to require individual states to align their policies, in a way that is politically palatable to the smaller states. This will be a massive feat in itself, but if not the current disasters scenes will repeat. The next problem which is, to put it mildly, The Big Ask, is getting a bunch of rabble-rousing politicians and self-interested plutocrats agree on evidence-based, equitable economic policy.
Yes. A simultaneous and coordinated soaking of the rich, throughout the West, particularly the mega-wealthy, has much to recommend it, but seemingly next to no prospect of happening.
There is a concentration on the problems of the EU, the Euro and the Euro zone. But is the relatively greater concern about Europe in comparison with the US really rational? The Euro zone countries can, to a great extent, be considered equivalent to US State governments due to the shared Euro as their currency. In the US, according to reports, 46 of the States are in financial trouble, as are at least 100 major cities. There is no healthy US State equivalent of Germany. Indeed, California is one of the states in the greatest trouble. At the top, true, the Euro zone has no comparable federal government but the US federal government is hardly in a position to be a saviour. China seems to have lost its appetite for supporting US borrowing. And seems to have switched to some extent to supporting the Euro (though the extent seems limited).
Maybe the tradition of considering the US dollar as the safe haven has blinded many to their comparatively perilous state? In addressing their problems, the Euro zone has the problem of consensus building and achieving coordination between the several independent governments. But the same problems seems to beset the US, that is, finding agreement and coordination within their unusual form of government.
The second half of this year may be an interesting time.
Ernestine, it isn’t Monetarists V Keynesians but Classicals V Keynesians and the Keynesians have blasted the classicals out of the park.
The major question is why anyone of a classical persuasion would ever poke their head anywhere considering the evidence is so much against their ideology.
Milton Friedman agreed stimulatory and contractionary policies are needed at times.
I do believe the authors addressed that in their paper. Did you not read on how much more fiscal discipline is actually needed under Keynesianism in good times?
Jeepers Creepers, to be frank, personally I don’t care much about schools of thought in economics and even less about the labels attached to various schools of thought. I leave the debates as to who is ‘classical’, who ‘neo-classical’ , who Monetarist and who Keynesian to the experts in history of economic thought. In the meantime, life goes on.
Jeepers – I’m not sure which of my points you are addressing. Can you be a bit more specific.
Surely it just requires governments to exercise fiscal restraint.
how come the links do not work?
If you have too many links it wont work JC. Two max from memory.
You know way way back in the 1950s there was an ugly little inflationary spike due to a particular war and mass gambling on wool prices. Neither the US government had any problem with slamming a price cap on wool, and the Australian government had no problem with exercising a healthy dose of fiscal and monetary constraint over a couple of years (two max).
End result …it didnt damn well last long. Now we have all these woossy people rambling on about governments not getting involved in markets. My question is could they have done the same damn thing in the 1970s instead of moaning on for ages and not knowing what to do when there is a crisis. No, they used the 1970s inflation as an excuse to criticise hard Keynesianism (any Keynesianism even) when they should have been practising it and ever since its been a case of “oh lets stay out of intervention and lets just not do anything and see what happens”. Lets just let the market accrue all monies to fraudsters and concentrated power. In the modern world economic policy is lazy. Just bone lazy and just uninvolved. They wouldnt know a crisis building and they wouldnt have a clue what to do because they have become obsessed with the crazy idea that markets self heal.
So tragic it really isnt funny at all.
Ok Ive made three posts – all innocuous and all were moderated. I dont get it.
I had but one link the words via HTMl are there but the link isn’t.
I like the economic arguments proposed, but cannot help but wonder about the implicit political analysis embedded in the article. Some of my concerns relate to fundamental epistemological issues which are too many and complex to go into in this post, so I will restrict my comments to a focus on the propositions from Quiggin and Farrell for politico-economic reforms in the EU.
As I understand it, they are arguing for amendments to the European treaties to incorporate more detailed and stricter supervision of member state economic management by financial technocrats in accordance with ‘Hard Keynesian’ principles (accruing surpluses in booms, enabling deficit management in busts). The argument is based on a view that, basically, this will generate better economic and social outcomes, and result in the kind of stability and economic growth that will engender legitimacy for the governance institutions of the EU.
I am all for the wholesale replacement of flat earth, failed neo-classical economic policy with empirically tested, dynamic and flexible policies based on broadly Keynesian principles – which has been capably argued for by Quiggin in many excellent publications. However, I could not but help think I had heard similarly structured policy prescriptions before, most of which were deeply problematic.
The first problem arises when Quiggin and Farrell comment that the problem with the existing system is insufficient flexibility, then almost straight away state that the system needs to be ‘stricter.’ The problem here is not reconciling flexibility and strictness in an intellectual sense, which can be done with some care. Rather, the kind of political institutions we are talking about are notoriously bad at operating on the basis of such careful reconciliation.
We see this problem writ small in many organisations in which narrow performance metrics cut across more nuanced ideas of qualitative performance. Even while some senior level people (rarely from finance or technical roles) articulate well reasoned and multi-layered notions of what good performance is, the inexorably simple, clear and unambiguous nature of ‘measurables’, feeding up through metrically based performance management systems, function to destroy nuance and create ‘unintended consequences.’ These sorts of consequences are the bane of good public policy.
The lack of flexibility rightly bemoaned by Quiggin and Farrell does relate back to the deficiencies of neo-liberal or neo-classical ideology, however it is also linked to a significant difficulty in modern polities with policy instruments being able to function with accepted levels of both accountability and discretion. This difficulty is heightened in the context of a supranational quasi-state such as the European Community.
Looking in more detail at their proposals, a college of budgetary supervisors, staffed by unelected finance ministry technocrats, and effectively supervising European national budgets simply cannot be reconciled with an aim to improve the EU’s legitimacy. This is not only because I am unconvinced by proposals to fix a legitimacy problem stemming from unelected technocrats enforcing destructive economic policies by replacing them with … unelected technocrats enforcing better economic policies.
The sad fact is, we are likely to see stricter budgetary supervision a lot sooner than we are likely to see reliably Keynesian bureaucrats administering it. Based on current epistemic consensus, budgetary supervisors would be (continuing to) enforce neo-classical rather than Keynesian orthodoxy. Of course, it is arguably an oxymoron to talk about Keynesian orthodoxy, given Keynesianism at its best usually expresses caution about orthodoxy, but these kinds of institutional arrangements are the sort that will create orthodoxy even if it is undesirable (how else would finance ministry representatives enforcing budgetary supervision interpret ‘stricter’?)
As for the European Court of Justice providing oversight, Fritz Scharpf (probably the most prominent political scientist expert on EU legitimacy) pointed out in a publication last year it has been posing increasingly large problems for EU legitimacy itself.
The problem with Quiggin and Farrell’s proposals is not their economic arguments, it is the political structures and processes by which they propose to apply them. In this it is hard to distinguish their approach from the standard neo-liberal nostrum: no one but economists can be trusted to make the crucial political decisions about economies. I do not think such propositions provide a viable political strategy capable of addressing the entangled mess of political, social, environmental and economic problems faced by Europe (and the rest of us).
Sandy, brilliant comments. You have really highlighted part of the problem in effecting change here with these few comments you made really standing out..
1. “Looking in more detail at their proposals, a college of budgetary supervisors, staffed by unelected finance ministry technocrats, and effectively supervising European national budgets simply cannot be reconciled with an aim to improve the EU’s legitimacy.”
2. “I am unconvinced by proposals to fix a legitimacy problem stemming from unelected technocrats enforcing destructive economic policies by replacing them with … unelected technocrats enforcing better economic policies.”
The sad fact is, we are likely to see stricter budgetary supervision a lot sooner than we are likely to see reliably Keynesian bureaucrats administering it. Based on current epistemic consensus, budgetary supervisors would be (continuing to) enforce neo-classical rather than Keynesian orthodoxy.”
You have expressed a huge part of the problem (the core?). The reality is we have three decades of flat earth, failed neoclassical policies, but we also have three decades of flat earth neoclassically trained economists working away throughout our existing policy implementing institutions worldwide. They simply dont know any better. Can they change?. Are they capable of change? Im doubtful. It explains our alarm and extreme cognitive dissonance when we continue to see the language of neoclassical prescriptions and policies continuing post GFC, post the public recognition of now quite a number of very well known neoclassical economists that all is not well with the method.
I suspect the change really needs to start with the new generations of economists and it really needs to start with the textbooks and in the schools and that is sad, because it may take too long.
I wish it were so. But alas it isn’t the case.