17 thoughts on “Another sandpit

  1. Greece should default. The EU should not “bail them out”. (Actually being in the EU is one of the reasons why Greece is in the mess it is.) Greece should exit the EU and Euro and return to its own fiat currency, the drachma. Greece should not implement austerity measures, rather it should use budget deficits to restart its economy.

  2. @TerjeP
    Because it gives more ammunition to central banks up against the zero lower bound of nominal interest rates. Also, workers are more willing to accept necessary declines in real wages that way.

  3. Seriously though TerjeP, how do you expect Greece to return to something like full employment if Greeks are being paid German wages? It seems clear to me Greece will have to accepta pay cut. This can either be quick and painless, as with currency depreciation, or slow and awful, as with forced wage declines.

  4. Greece should be broken up into saleable lots and sold to the highest bidders. Bidding ought to be confined to existing EU members and maybe Turkey. As Germany would probably end up buying all lots for a song, the imposition of Teutonic discipline would probably quickly solve all their problems. They may even learn to love speaking German.

  5. Sam – a depreciation hits all parties equally. Some workers don’t need a wage cut depending on the sector or skill. Government needs to default but private debts don’t require devaluation (nor private credits). And it’s odd that you should argue that pay cuts create jobs when social democrats generally refuse to acknowlege this point when it comes to wage regulations. In any case there are other adjustment mechanisms. Public sector wages can be cut by fiat. Private sector wages will be adjusted via negotiation or job liquidation. Introducing inflation into the mix just ruin incentives. And given that the poor keep more of their wealth in cash form they are the ones most harmed by inflation.

    As for the zero bound on interest rates this isn’t going to be a problem for Greece so long as it is part of the euro.

  6. @TerjeP
    If some workers don’t need a real wage cut and they’re paid in currency that depreciates, they can have a wage rise. No problem there.

    Pay cuts don’t work in a depressed closed economy of course (because aggregate demand is reduced). In an open economy however, across-the-board pay cuts boost net exports. Social democrats (Keynesians) certainly acknowledge this. Since most of Greece’s trading partners are other European countries, depreciation would be ideal.

    Yes pay cuts can be achieved in other ways, but with much more resistance. It’s generally a lot more painful and requires higher unemployment.

  7. What of the fact that depreciation punishes lenders and savers? Or the fact that this impacts the poor more than most. And in an open economy such as Greece there is no case for lower wages unless regulations in Greece adds more costs than regulations in other eurozone countries. What of the fact that depreciation removes much of the political incentive for meaningful microeconomic reform. I’ll concede that there are arguments both ways but on balance I think Greece should default and stay within the euro.

  8. 1) Economics is not a morality play. Too bad for lenders and savers. It’s overall the least bad way to improve the economy
    2) Why does it impact the poor most? I would think least.
    3)How else do you explain the much greater unemployment in Greece?

  9. @TerjeP

    It is a total fallacy that pay cuts create jobs. If workers’ pay is cut then workers have less money to buy the products that other workers make. This causes a contraction in the whole economy, unemployment rises and eventually the economy spirals down into a depression. Conversely, if wages are healthy, consumer spending is healthy and employment rises.

    “There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.” – Henry Ford.

    Ford (as a capitalist-industrialist) understood that workers needed good wages to buy (among other things) the cars rolling off his assembly line.

  10. Ford paid a premium because he initially could afford to, and paying a premium makes for a happier and more productive work force. He could do that initially because his factory was so much more efficient than his competitors and their was plenty of demand for his cars. None of these advantages lasted.

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