Words and wartime austerity

Words matter. You can't have an intelligent discussion about fiscal policy if you use loaded and misleading words to describe fiscal policy.

Cancelling or postponing a government investment project might be a wise decision. Or it might be a foolish decision. But it is not "austerity".

Implementing or preponing a government investment project might be a wise decision. Or it might be a foolish decision. But it is not "profligacy".

Real economists talk about "tightening" or "loosening" fiscal policy. They don't talk about "austerity" or "profligacy". Not when they are talking among themselves. Or they shouldn't. They don't even talk about "fiscal stimulus", which is another loaded question-begging word.

"Austerity" and "profligacy" are perfectly good words to describe the consumption decisions of a household. But they are bad words to describe the consumption and investment and taxation decisions of a government. Because public finance is not like household finance.

Economists are supposed to understand the difference. So they shouldn't use words that obfuscate the difference.

There is one important exception, where economists should talk about "austerity". And it's an exception that proves the rule.

It would be perfectly correct for economists to say that the UK government in the Second World War had a policy of "austerity". Because the purpose of that policy was to drive down household consumption as low as it could reasonably go. So it would free up as many resources as possible for the war. Yet at the same time the government ran very large deficits. Fiscal policy was extremely "loose". "Austerity" does not mean "tight fiscal policy".

(They implemented austerity by a mixture of: rationing consumer goods; persuading people to save by buying war bonds; and directly controlling the supply-side, so that firms that used to produce consumer goods were told they had to produce weapons instead.)

Comments

[K]

Assume we are at the ZLB and the expectations channel basically doesn't work (I'm good with that to a first approximation). Then austerity is any fiscal policy that keeps the economy below capacity by any amount not justified by intertemporally excessive inflation. Or something like that.

[Benoit Essiambre]

I dunno, I'm ok with the term austerity if it is used on sub sectors of the economy. This would include government or the private sector or even households. Not all sectors at the same time however! For those who support economy wide deleveraging and don't support aggressive enough monetary easing making their economic worldview an arithmetic impossibility, the correct term I believe would be economic "insanity".

In fact, doing the substitution in the news makes articles seem much more accurate:

"Merkel is popular in Germany for her firm position during the euro zone crisis. But she is loathed in parts of Europe for her insisting on painful insanity measures in countries such as Greece, Spain and Italy in exchange for rescue packages."

"Even countries that have stuck rigidly to insanity measures have not been given much hope for a rapid recovery."

"Francois Hollande has led a push back against the crippling insanity imposed on Greece and others."

[Nick Rowe]

K: why not just say what particular types of fiscal policy you think would bring the economy to capacity without excessive inflation? That would be useful, because we can discuss whether we think you are right or wrong. Calling any different fiscal policy "austerity" doesn't add anything to the discussion. For all we know, you might think that slashing the deficit would bring the economy to capacity. Or you might think that expenditure cuts would help, but tax increases would make things worse.

[K]

Nick,

"For all we know, you might think that slashing the deficit would bring the economy to capacity."

For all you know, I might think that raising the short rate would bring the economy back to capacity (some people believe that).

As far as which fiscal policy is more important, there are obviously different multipliers, just like there are different effects of the different kinds of monetary policy (short rate, forward guidance, targeted asset purchases, QE, etc).  

In many ways fiscal and monetary policy are quite symmetrical. Both have spot policies of different kinds, and in both cases spot policy has implications for the expectation for future policy (e.g. Ricardian equivalence; lower spot rates mean higher forward rates, etc). And in both cases there are groups of people who disagree even on the impact of changes in spot policy. I don't see that it's any worse to describe "fiscal policy" as austere than it is to describe "monetary policy" as too tight.

[Nick Rowe]

K: I agree up to your last sentence. Talking about fiscal or monetary policy being loose or tight isn't very precise. But "austerity" is worse than imprecise. It draws a very misleading analogy with a household's consumption.

Benoit: sure, "insanity" works in those sentences. But can you imagine a constructive debate on the question: "Fiscal insanity: pro or con?"? Well, I want a sane fiscal policy. But that's just motherhood.

[Gizzard]

Cancelling a govt investment project, one which has been running for a while, takes income away from those who have been a part of that project, often their ONLY source of income. In an environment like now those people will not find work in private sector, as it is shrinking jobs as well. So yes it IS austerity! It IS driving down consumption of THOSE particular households.... and that is usually the goal. Usually the choice is made to cut those things which "seem" excessive

I agree that postponing a planned project is different. No one is already receiving and spending based on that income. However its mostly wordplay to say that fiscal tightening is NOT austerity. Austerity has been getting bad play lately and its proponents are trying like hell to run away from it.

[Frank Restly]

Nick,

Without going into the legal implications of public versus private finance, you are going to be banging you head against a wall. You seem to be implying that austerity / profligacy implies a limitation on a private individual / company where that limitation does not exist in the public sector. But you really don't delve into those implications other than to say that a government backed by political will can override market forces in both the production and consumption of goods.

[Lord]

The Fed has been talking about tapering. Would you call that tightening or loosening at a lower rate? What rate should be considered neutral? Is tightening and loosening relative to this neutral rate or relative to the current rate, whatever that may be? Language carries a lot of ambiguity.

[K]

Nick,

"It draws a very misleading analogy with a household's consumption."

The people who are implementing "austerity" policies are doing so based exactly on their misconception that the government *is* like a household and deficits must be slashed by cutting spending. They are trying as hard as they can to be "austere" exactly in the sense of financially troubled household. They *think* of themselves as Austerians.

Here's Michael Kinsley: "I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be."

And here again: "People get depressed and commit suicide. They drink and ruin their livers. They don’t buy their prescription drugs or see the doctor when they should in order to save money. They lose their jobs, come home, and murder their spouses. And austerians fairly explicitly favor bad times...So austerity does kill in this sense...But only in this sense. Austerians believe, sincerely, that their path is the quicker one to prosperity in the longer run."

And there is no doubt that the austerity experience is entirely severe for beneficiaries of government spending, whether or not the confidence fairy arrives, and that those consequences are entirely intentional. Austerians like Kinsley are *proud* of the label. They are making omelet and cracking eggs; dishing out the bitter medicine. So if the boot fits...

[Determinant]

Very Serious People?

[Nick Rowe]

Gizzard: "However its mostly wordplay to say that fiscal tightening is NOT austerity."

Tom Hickey is an MMT economist who will mostly disagree with me on fiscal policy. But he agrees with me on this post. Tom and I could have an intelligent argument about fiscal policy precisely because we both understand there are important differences between household finance and public finance, and we would both avoid misleading words like "austerity".

"Austerity has been getting bad play lately and its proponents are trying like hell to run away from it."

This reminds me of that famous line "But I don't know anyone who voted for Ronald Reagan". Those proponents have already won, in many countries. Look at actual fiscal policy.

K: Yep. Which is why it's counterproductive, as well as misleading, to use "austerity" to talk about fiscal tightening.

[K]

Nick,

I think I just got my mind untwisted. *Because* the Austerians are perfectly happy with - even proud of - the label it is bad rhetorical practice for their opponents to embrace the use of the word. It supports the household metaphor and only further encourages the sado-economists. While Benoit Essiambre may be right that austerity is a good synonym for insanity under current circumstances, it's useless if in the eyes of the Austerians it's a synonym for virtue.

But I'm not so sure. If proven to be a failure, fiscal retrenchment resulting in a massive scale of human suffering is revealed as nothing but extreme cruelty. If the tide is finally turning, and the Austerians are on the defensive, then using a label which intrinsically captures their sadistic streak may be a good political rhetorical device.

[K]

Nick,

One more thought... While I think I understand your objection to the use of the word "austerity" to describe fiscal retrenchment, do you have the same objection to the use of the word "Austerian?" Is there a better way to describe the kind of perverse Calvinist logic exemplified by Kinsley above?

[Yancey Ward]

It is posts like this, and the associated comments, that lead me to believe that, eventually, economists will be swinging from nooses on lamp posts.

[Determinant]

"I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be."

That is in no way, shape or form Calvinism. If pressed, I would say it's actually really, really bad Arminianism (Wesleyan Methodism), concern about loss of salvation leads to an inclination for greater suffering now.

[K]

Determinant,

Sorry! I should have known better than to throw around superficial religious stereotypes with you around. Obviously I meant Wesleyan Methodism.

[K]

I jus realized that the phone I'm typing this on keeps auto-correcting Austerian to Austrian. Subtle difference but I meant Austerian I everything above.

[Fixed them for you NR.]

[Determinant]

I am on an Internet Crusade to skewer mis-aimed references to Calvinism ;) It has turned into a catch-all for "philosophy/belief system I don't like because I hate its assumptions and/or conclusions".

It goes back to Church of England stereotypes of the High Church/Low Church parties.

[Jacques René Giguère]

Determinant: you're not alone on a similar crusade.. In Québec,a lot of people talk about our ancestors being Jansenists. Of course we weren't. We were Jesuitic to the core...

[Determinant]

Of course! After the Counter-Reformation, there were two kinds of Roman Catholics: Jesuits and those who listened to the Jesuits. Of course we must not forget the Sulpicians and the Recollect Franciscans! Nor the Ursulines. The only man permitted in their Convent in Quebec City is the Governor General (when in residence at Quebec) as the lawful heir of Louis XV.

[Phil Koop]

When the likes of e.g. Krugman or DeLong write about "austerity", they are describing a political, not an economic phenomenon. The whole point is that they are accusing their opponents of committing a fallacy of composition, likening the economy of a large national or supra-national area to that of a household. When one of their targets - say Cameron, or Meltzer - speaks of austerity, they seem in fact to be committing said fallacy of composition. So this whole post seems to be some amalgam of missing the point and scoring an own goal. Who cares what "real" economists say when they speak among themselves? What has that got to do with anything?

[Nick Rowe]

Phil: The "own goal" has been scored by those who have used the word "austerity" as a name for the position they oppose. I wrote this post because someone asked me, quite unironically, what my position was on "austerity". By that he meant, what was my position on running deficits in a recession. Or read Gizzard's comment above, where he says that cutting government investment projects is austerity, because it reduces the consumption of those households employed in those investment projects. This just invites the reply: "You mean the government has to keep on spending money it can't afford just for make-work projects?"

The "Austerians" have won, because even their opponents have adopted their language. "Austerity" now simply means "let's have balanced budgets, even in a recession". See K's comment above.

[Nick Rowe]

K: "One more thought... While I think I understand your objection to the use of the word "austerity" to describe fiscal retrenchment, do you have the same objection to the use of the word "Austerian?" Is there a better way to describe the kind of perverse Calvinist logic exemplified by Kinsley above?"

I think I would object to the word "Austerian" too. I would prefer: "the nutters who think that because central banks have screwed up and let NGDP fall below trend therefore we all have sinned and must punish ourselves". Or if Determinant can come up with something catchier and theological?

BTW, my own post on "How can we spot a boom?" was my version. There is something irrational in the belief that because we are worse off now than in the past, that past must have been an unsustainable illusion for which we are now paying the price. Economists who complain about "Austerians" should instead try to figure out how we can spot a boom, and think about Milton Friedman's plucking model.

In the right circumstances, Austerity is a good thing. And in the right (often very different) circumstances fiscal surpluses are a good thing too. We don't want to discredit these ideas.

[Nick Rowe]

Great news! Typepad didn't put my last comment in the spam filter! That's the first comment in ages I didn't have to fish out of spam!

Edit: I spoke too soon. This one went into spam too.

Determinant: Hmmm, "Flagellants" is promising. But I think my NGDP thing is more precise.

[Determinant]

Flagellants (as caricatured by Monty Python and the famous board-knocking) were a real sect, and disclaimed as heretical and crazy by everyone.

Fiscal Flagellants, perhaps? Except they're never Auto Fiscal Flagellants as they always want to cut other people's benefits, not their own.

[Determinant]

Though the Flagellants were never satisfied until the blood flowed....

http://en.wikipedia.org/wiki/Flagellant

[Antrumf]

The household-government analogy really is liked and believed by a lot of non-economists. So I'm hoping a knowledgeable person can tell me if I'm thinking about this correctly. I would think the problems with the analogy are:

1) Governments can borrow money a lot more easily than individuals, and a healthy government's debt is mostly "risk-free".
2) More fundamentally, if a household is in financial trouble and reduces its spending, it has virtually no effect on others. If the government slashes spending, it will affect the income of others, may put people out of work, and may reduce the income of the government through lower taxes. There are serious spill-over effects.

Is that right? Is it primarily a matter of magnitudes, where government spending has much more substantive feedback effects? Or am I missing something else completely?

[Gizzard]

Ahhh now we see Nick falling back into the improper analogy of govt vs household spending decisions. When you ask;

""You mean the government has to keep on spending money it can't afford just for make-work projects?" what do you mean by afford? That they do not have the dollars to keep laying out? This is an austerians argument! We have to tighten our belts, it is better for us. You hint that the other position is wasteful and profligate. Just paying people to do nothing! What productive work, productive to the same standard you hold govt workers to, comes out of university econ departments? I suggest that 90% of education spending is "make work" as well. You dont produce anything that the rest of us need to consume and live. You dont add to the productive capacity of our economy AT ALL! But Im not calling for an end to universities or a severe tightening because the "make work" we have for you and Sumner provides others with customers who have incomes and want to buy canoes and scotch and send their kids to camps. Your make work salary is a source of income for many other small and large businessmen......... thats how it works! Or how it can work if people get out of their bubbles and stop looking at what it is the OTHER GUY is doing for his salary, and in times of trouble point fingers at them and say "Cut his pay, he's not doing anything we dont need him!!"

[Nick Rowe]

Gizzard: "Ahhh now we see Nick falling back into the improper analogy of govt vs household spending decisions."

Nope. Why do you think I put those words in quotation marks? To make it clear that those words were the *hypothetical* words of a person who made the improper analogy between govt vs household spending decisions, and how that person would respond to your argument.

Antrumf: You are on the right track.

I think these are the most important differences:

1. For the individual household, its spending has no effect on its income, except that investment spending may increase future income, and consumption spending may reduce future income net of interest. But for a country as a whole, spending on newly-produced goods is the very same thing as income from the sale of newly-produced goods.

2. Governments can print money and finance some of their expenditure that way. Not all governments can do this, of course. And there's a limit to how much spending can be financed by printing in the long run, without increasing inflation to too high a level.

3. Individual households can only earn income by producing stuff that others want to buy, while governments can tax.

4. A household normally decides its budget in its own interest, while a democratic government should decide its budget in the interests of all households.

5. Governments are big enough that their decisions affect macro variables, and it should take that into account (sort of like a monopolist), while a household is usually too small to matter.

6. Governments are infinitely-lived (well, they don't have a finite expiry date).

Maybe more I can't remember right now.

[Antrumf]

Thanks Nick. Analogies have to allow differences, but there's always a point beyond which comparisons are fruitless. Your list has convinced me.

[K]

Nick,

While I understand the argument you are trying to make, I don't agree that the own goal is on behalf of the anti-austerians. Like I said above, if austerity fails to produce any long term benefits it will be totally discredited, perceived as utterly pointless and sadistic auto-flagellation. If anything, this will turn out to be a victory for MMT perma-stimulus types, the embrace of the term by the Austerians themselves only heightening the ultimate ridicule (the own goal). If anything, I'd say Krugman has used the language game ("VSP", "confidence fairy", "Austerian", etc) extremely effectively, and is now brutally hammering it home.

Antrumf,

I'd say the critical bit is Nick's #4. The problem is that there exists a competitive disequilbrium in which the rational decisions of debt-burdened self-optimizing households drive the macroeconomy into a debt-deflation collapse if the nominal short rate is floored at some level. There is only *one* actor who can be expected not to act in its own financial self-interest which is the government. Therefore only government can save us from macro positive feedback disequilbrium. The other parts are also interesting, but do not account for the *reason* why any of this is required.

[ianlee]

Nick - another excellent analysis. However, as you said words count - and I would add, not just in economics but in policy and politics.

I suggest there are two different understandings of austerity in the agora (as distinct from, as you put it, real economists). The first understanding characterizes reductions in government expenditures - which you characterized as fiscal tightening (?) - as austerity.

The second "meaning" is restructuring as advocated repeatedly by the IMF Country Reports for Greece, France et al, which includes trade liberalization, reduction in protectionism, privatization, deregulation (where the goal is to protect the inefficient rather than the consumer - think supply mgmt), liberalized and more flexible labour markets, liberalized product markets, efficient tax system relying more heavily on consumption taxes rather than corporate income taxes (see 2010 OECD, Tax reform and economic growth).

Those individuals and groups opposed to restructuring policies supported by "neo liberals" - have started to characterize (i.e. rebrand) ""restructuring"" as "austerity", because they recognize that austerity has become increasingly loaded, controversial and unpopular and their real goal is to block restructuring policies. However, it is not politically saleable to state they want to continue to be protected so that they can exploit citizens and consumers in the economy (think supply mgmt.). Instead, those opposed rebrand restructuring as austerity in order to kill support for restructuring policies.

To push it one step further, it could be argued that a failure to restructure relatively closed economies e.g. Greece, led to declining competitiveness vis a vis e.g. Germany - AFTER these weaker economies joined the Euro as they could no longer rebalance declining competitiveness through currency depreciation. The deteriorating economies then caused govt deficits to increase in the Eurozone in Greece et al as the automatic stabilizers kicked in i.e. unemployment and demands for other social services increased because - due to - declining competitiveness and increasing unemployment.

Thus, the demands for "austerity" or fiscal tightening were merely a response to the symptom of increasing deficits caused by the underlying disease - of declining competitiveness due to protected markets, rigid labour markets, rigid product markets, restrictions on foreign competition, protected bloated SOEs (e.g. Greek railroad).

Thus, it seems we are getting our knickers in a knot over semantic distractions of "austerity" versus fiscal tightening - falling into the rebranding trap and vocabulary of those opposed to restructuring policies - when the real issue is the failure of some economies to restructure per the excellent IMF country reports of the past 5 years for e.g. Greece, Spain, Italy, Portugal, France.

Restated, and to make Determinant delirious with joy, lets ban all reference to or practice of "austerity" but focus like a laser beam (Bill Clinton) on restructuring those poorly performing economies which are performing poorly not because of deficits but due to poor fiscal policies (in the broadest sense). Then, for example, in my ideal world, Greece - like Detroit - could be placed under trusteeship of one of European Chancellor Merkel's trusted advisors to ensure that the restructuring policies are actually executed and implemented.

Ian

PS and to play Devil's Advocate that governments are not like households, then why did Finance Minister Martin engage in massive fiscal tightening i.e. 50,000 layoffs of federal public servants after Wall Street bond traders told him Canada was about to hit the wall in 1995?

And are subnational govts - provincial and state level govts and municipalities exempt from the household analogy? Yes subnational govts can tax - to a point as Detroit found out with mass exodus of tax payers as Detroit shrunk from about 2 million to about .7 million (taxpayer "austerity" ?) - but they cannot print.

[Nick Rowe]

K: Perma-stimulus types are always out there, but I'm not sure MMTers fit the bill.

For sensible Keynesians, a victory for the perma-stimulus types would be about as bad as victory for the flagellants. But suppose the opposite happens. Suppose monetary policy keeps AD growing despite fiscal tightening. What then? That doesn't mean that it isn't good to sometimes run deficits, or that the flagellants were right.

Ian: thanks!

If re-structuring gets called "austerity", that's an even more stretched analogy!

I'm not sure if the Wall Street bond traders were right in 1995, but if they were right, the danger would have been the risk of "fiscal dominance". That means it would have been impossible for the Bank of Canada to hit its inflation target while at the same time printing enough money to pay the government's bills.

[Determinant]

Restated, and to make Determinant delirious with joy, lets ban all reference to or practice of "austerity" but focus like a laser beam (Bill Clinton) on restructuring those poorly performing economies which are performing poorly not because of deficits but due to poor fiscal policies (in the broadest sense).

I am indifferent to your use of Austerity. I suggested "Fiscal Flagellation" but perhaps that's not catchy enough. Though the scars that happen if it does catch....

When it comes to economic policy change, it is not at all clear who benefits. The price of Labour market "liberalization" is in my view borne by workers who pay the price with increased uncertainty and exploitative contracts by employers. Which really isn't liberalization at all.

You probably wouldn't accept "Class Exploitation" so how about "Benefits Transformation"?

[anon]

ianlee, it is a myth that nominal devaluation can rebalance "declining competitiveness" - you are mixing two unrelated issues. Devaluation is a demand-side policy, whereas the factors you point to as damaging these economies are on the supply side. They need both nominal easing and structural reforms.

[nottrampis]

what about a simple definition for present conditions.
Austerity is when the public sector detracts from economic activity!!

[W. Peden]

nottrampis,

"Public sector" is very broad. Would that include growth-reducing regulations?

[antrumf]

Nick: I'm interested in your opinion again: do you agree with Krugman's proposal (and Blanchard's suggestion to open the debate) for a 4% inflation target? I know you want NGDPLT, but if we're stuck with inflation targeting, does 4% beat 2%?

[antrumf]

Also, on your list of six important differences between household and government budgets, the first is:

"For the individual household, its spending has no effect on its income, except that investment spending may increase future income, and consumption spending may reduce future income net of interest. But for a country as a whole, spending on newly-produced goods is the very same thing as income from the sale of newly-produced goods."

I was thinking about this. I accept what you say, but you're talking about a whole country. It's not the case for a government that spending on newly-produced goods is the same thing as income from the sale of these goods. So what is the key difference here? Is it just that governments engage in spending on such a larger scale than households that they should take into account the fact that one person's spending is another person's income, and that a government has to consider how its actions will affect the whole economy?

[ianlee]

Determinant - re your concern for economic policy change falling on the worker, I was channeling my inner Stephen Gordon (BTW see his excellent series on productivity in Macleans which will be copied and provided to all my students this fall).

Restated, all consumption and all govt policies is for and falls on the worker.

But even more to the point, see Stephen's just excellent deconstruction: "Our Stockholm Syndrome about supply management
March 5, 2013 (which opened with a superb quote from Adam Smith).

For the third part of the trilogy of my response to you, see Gordon, "A message for the NDP: profits are people, too", April 10, 2013

Restated, restructuring benefits workers, as former liberal Chancellor Gerhard Schroeder argued last week in a speech urging the French Govt to adopt his reforms from his time in office.

To Anon, I think I agree with you. The countries of the EU south have long needed restructuring to open up their schlerotic economies. for example, Greece and Portugal experienced one of the lowest GDP per capita in Europe for a very long time - but their lack of competitiveness was masked by their currencies which steadily depreciated over time. This inadvertently reveals why the best thing that Greece or Portugal could do would be to exit the EZ, watch their currency plummet by 50% or more and overnight regain large numbers of tourism that left them for Turkey and elsewhere.

(The continuing posts by Nick and Stephen reveal why neither can be allowed to retire as each is an essential public good)

[Nick Rowe]

nottrampis: We could just use the word "bad" instead!

antrumf: Yep. It's when you add 1 together with some of the others, like 4 and 5, that you get the impact.

Given that inflation-targeting central banks hit the ZLB, that does suggest that maybe 4% would be better than 2%, if we stick to an inflation target. But NGDPLT would be better, because it could keep us off the ZLB without as high inflation on average. Here's my old post on that subject.

[Patrick]

I think ianlee and determinant are talking past each other.

Not all restructuring is made equal. Of the cases listed by ianlee, it's probably worth noting that the IMF seems to be backing off it's position on Greece. Arguably France seems to me to have made a political, some might say democratic, choice that they prefer things the way they are (BTW isn't French private sector productivity pretty good, structure not withstanding). Of course, there are winners and losers either way. If you believe the statement that 'my spending is your income, and vice versa', then of course changing distribution of income matters rather a lot, and to more than just those immediately affected. And if your restructuring is pulling the rug out from under low or middle income households who don't tend to have much (if anything) to fall back on, it's shouldn't be hard to understand why those people might object. So I wouldn't be so glib about asserting tat restructuring is unambiguously, always and everywhere a Good Thing (TM).

[Determinant]

What Patrick said.

[Bob Smith]

"Arguably France seems to me to have made a political, some might say democratic, choice that they prefer things the way they are (BTW isn't French private sector productivity pretty good, structure not withstanding)."

One could say "democratic", but only if one wanted to use France as an illustration of the classic arguments against democracy, namely the risk of mob rule and that state power might be used to advance the interest of certain group over those of others (the elderly, public sector workers, the "insiders") at the expense of others (the young, immigrants, the "outsiders"). The fact that France can't take back the "earned advantages" of its privileged groups (railway workers retiring at 50? Really?) without provoking mass protests and rioting in the streets is not a proud statement of the state of French democracy.

France could be the poster-child for the classical liberal concern about the corrosive effect of big government on civic virtue. Instead of being an intrument of the common good, government becomes a tool to extract funds from the broader public on behalf of whichever group can rouse up a large enough mob and threaten to shut down Paris.

And yes, I believe that French workers generally, are quite productive - which is not unrelated to the low participation rate, the high long-term unemployment rate and the high youth unemployment rate. High per-worker productivity is the predictable result when you price the young and the unskilled out of the job market. Whether public sector workers are particularly productive, I couldn't say, but I note that French state-owned companies, while often quite competitive on the world stage, don't turn a profit for their owners (i.e., the public) suggesting that wages are too high.

[ianlee]

Patrick and Determinant

The IMF is now backing off its demand for austerity ie fiscal tightening - NOT restructuring.

From Eric Reguly in G & M last week:

The IMF admits it underestimated the damage that austerity would inflict on Greece, offering key evidence in the global debate about cutbacks versus stimulus.

The group should have insisted on cutting Greece’s crippling debt earlier in the crisis that spread rapidly across Europe over the past several years, the IMF says in an assessment that includes its own miscalculations.

Further on, Reguly notes:

Some high-profile Greek officials were critical of austerity measures even as they were forced to support them as a condition of the bailout aid. In an interview with The Globe and Mail in February, George Provopoulos, Governor of the Bank of Greece, said, “Fiscal consolidation meant more taxes and less spending, and that means you depress economic activity. Structural reforms are the only way to counteract.”

Earlier this year, Greek Finance Minister Yannis Stournaras asked the IMF, led by Christine Lagarde, to explain why its forecasts for Greek growth and unemployment were consistently wrong. The IMF placed a lot of the blame on Greece itself. At one point, it said publicly that “the structural transformation of Greece’s economy continues to proceed at a slow pace (outside of the labour market), and this is making Greece’s adjustment more costly.”

*******************************************
The IMF is now more supportive of Determinant's position - and mine - but I go much much further and argue IF the policy objective is fiscal consolidation, then policy should focus on restructuring to open up labour and product markets to encourage flexibility and mobility, more FDI, more competition (PLEASE ALLOW Verizon and ATT into Canada - and United & South West airlines), more free trade agreements, more pipelines west, east, north and south.

Or as that great closet capitalist Chairman Mao used to say in the Little Red Book, let a "thousand flowers bloom".

[Determinant]

"Fiscal consolidation meant more taxes and less spending, and that means you depress economic activity. Structural reforms are the only way to counteract."

Nope. That is confusing a supply-side issue with a demand-side issue. The real answer is to not to choke the demand side. See Paul Krugman on this. Adding more more supply in the presence of excess supply is not going to do any good.

"Restated, all consumption and all govt policies is for and falls on the worker."

This utterly fallacious assertion is due to the assumption of a pure supply/demand framework without power inequalities, and the application of a simplistic macro analysis to that. Add in power inequalities and the analysis changes dramatically.

With airlines, about which I am not protectionist, I don't expect much change simply because the airline industry is on net not profitable or barely profitable. No sooner will those entrants come in they will realize there isn't much money to be had and will then leave. Railways has the same experience with passenger business before 1950. Passengers are a high-cost, low margin business, period.

more pipelines west, east, north and south.

Dear me, an economist not considering a price? What??? The public has been clear that they do not support pipelines where those pipelines are clearly detrimental to the environment. They are not willing to bear the environmental cost. Why are we annoyed when the price signal works?

[ianlee]

Determinant - the logic of restructuring to create a more open competitive economy is grounded in about 300 years of economics - so I will leave that

But re pipelines - which the latest US research states is approx. 3000 times safer than rail transport - below are some recent poll numbers

From April 22, 2013 Huffington report on the Nanos poll on Keystone Pipeline:

According to research carried out by pollster Nik Nanos for the Woodrow Wilson International Center for Scholars, 74 per cent of Americans back the $5.3-billion project, compared to 68 per cent of Canadians.

“The research indicates that although both Americans and Canadians believe that reducing greenhouse gases is important, energy security, particularly in the U.S., is driving views on energy issues,” Nanos said, as quoted at Bloomberg News.

Gaining energy independence from Middle Eastern oil sources “trumps reducing greenhouse gases as a policy priority,” Nanos said

***********************

Re West to east pipeline:

Last month, Abacus Data asked 1,832 people this question:

TransCanada Corp. considering developing an oil pipeline that would bring western oil to eastern Canadian refineries, and perhaps allow for crude exports from the deep-water port of Saint John. Currently all oil refined in Eastern Canada is imported from other countries. The pipeline -- much of it to be converted from an existing gas pipeline -- could carry between 500,000 and one million barrels a day of oil.

Based on this information, do you support or oppose the proposal to build a cross-Canada pipeline?

The survey results, released Monday, suggest that 78 per cent of those surveyed, and who had an opinion about the pipeline, either strongly or somewhat support the idea.

*****************************
Re Gateway, Premier Clark is hard at work to ensure her 5 conditions are met before the BC Govt will approve the Gateway while the Liberal Govt never opposed the expansion of the southern pipe - which the NDP Govt in waiting did - only to learn on election day they are still the NDP in waiting.

Indeed, it is conceivable that the pipeline(s) will be built before the NDP are elected as govt in BC (or Canada).

Res ipsa loquitor

[Determinant]

If you remember my past posts, you will remember I have supported an east-west pipeline before. I still support it. I do not support Northern Gateway, though the BC Government's approval is not legally necessary for that project. Northern Gateway is either an Interprovincial Work under 92(10)(b) of the BNA Act, which places it outside of provincial jurisdiction, or the Federal Government can use its Declaratory Power under 92(10)(c) to remove the pipeline from provincial jurisdiction. Whether it wants to or not is a political question.

The whatever "logic" of restructuring you appeal to ignores results we have known about since the 1930's. We know that Say's Law is false in a monetary economy and that general disequilibrium can and does exist.

[Bob Smith]

"The whatever "logic" of restructuring you appeal to ignores results we have known about since the 1930's."

Except that conflates "fiscal tightening" with "restructuring" when the two are conceptually different. You can restructure with an expansive fiscal policy, and you can have fiscal tightening without restructuring. In practice, true, there's often overlap between the two concepts, because countries whose economies badly need restructuring often (a) don't do it until their economy implodes and (b) use fiscal policy to mitigate the impact of not restructuring (subsidies, public employment, etc.) until their economy implodes (and they can't borrow anymore), leaving them faced with the need to restructure at a time when they're also faced with fiscal restraints. But the fact that badly-run economies tend to have both structural and fiscal problems doesn't take away from the fact that the two are separate concepts.

That highlights Nick's original point about the significance of language. Those countries (think France) which still have some fiscal flexibility to cushion the impact of restructuring (i.e., they can still borrow from the market at a reasonable cost) should do so while they still can (heck, they should have done so a decade ago), and use public funds to try to cushion the blow. But they won't if "restructuring" is conflated with "fiscal tightening" under the catch-all of "austerity". (Well, they likely won't anyhow - the current generation of Europeans seem hell-bent on liquidating their societies - but they're even less likely to if we don't use the right words in public discourse).

[Patrick]

Bob: yeah, France ain't perfect and I wouldn't want their problems (esp. youth un/underemployment). The point I was trying to make was that people can legitimately choose to do suboptimal policy and the sky doesn't fall. France, despite it's problems, is not so bad.

ianlee: how do you separate fiscal austerity from restructuring when the public sector and state owned enterprises make-up a big chunk of the economy? Seems to me the two end-up looking pretty much the same: insufficient AD and all the fun that entails. To paraphrase Keynes, economists set themselves too useless a task if all they can do is prescribe misery as a cure to misery. And presumably markets can take care of the private sector. If the Greek/Portuguese/Canadian private sector is less productive than somebody else, who cares? Surely we don't want paternalistic Government intervention to make people do things that prices won't make them do.

[Bob Smith]

"The point I was trying to make was that people can legitimately choose to do suboptimal policy and the sky doesn't fall. France, despite it's problems, is not so bad"

Yet.

"How do you separate fiscal austerity from restructuring when the public sector and state owned enterprises make-up a big chunk of the economy?"

Lay off civil servants, and take them money that you used to spend on civil servant salaries on providing transitional income/training/ early retirement, etc. Privatize state-owned industry (if you can find anyone to buy them) and use the public funds currently used to subsidize money-losing businesses to aid the transition for people who lose their job. Or maybe use that money to transfer to people who perhaps have greater need (i.e., why are civil servants special? Would accross the board wage cuts for civil servants and equal transfers to the unemployed result in a decrease or increase in AD? Not obvious). That's the thing, if the argument is that we need to spend the money to prevent AD from collapsing, fine, keep G the same, but spend the money in a way that transitions to reform, not in a way that preserves the status quo.

The real difficulty with restructuring is not dealing with the public sector (because you can always spend the money you would otherwise have spent on employing civil servants on laying them off without affecting their incomes -indeed possibly improving their welfare if they don't like working), rather it's dealing with deregulation. Since regulations often props up the incomes of protected groups at no cost to the fisc (albeit at considerable cost to the public at large), it's hard for the fisc to compensate the losers. In theory the winners can compensate the losers, but the fisc can't without taxing the winners, and in practice the winners (who vastly outnumber the losers) doesn't want to be taxed (if only because their "gains", while real, are not apparent).

" Surely we don't want paternalistic Government intervention to make people do things that prices won't make them do.

Agreed, but if people don't respond to prices as a result of government intervention (i.e., protected industries, barriers to entry, wage and price regulation, etc.), that is something we should want to address.

Or, at least, if that isn't something we want to address, we should be open about the trade-off we're making. Nothing is more infuriating than watching French youth protest - rightly - about youth unemployment, while also protesting against attempts to reform French labour policies, as if the former isn't a direct result of the latter. But you can hardly blame them, their leaders and elders have been less than forthright about the implications of their policy choices.

[ianlee]

Bob - you are unpacking and analyzing far more eloquently what I stated less elegantly.

The two issues - fiscal tightening and restructuring - are analytically and conceptually distinct.

My "contribution" was to suggest that some critics (opposition parties in Greece, Portugal, Italy and some unions in Canada) are - I argued - deliberately concatenating the two concepts by "rebranding" restructuring as "austerity" in order to discredit and undermine support for restructuring policies in order to maintain rents received due to protectionist policies.

It is important to separate the two. Yes "austerity" or fiscal tightening has a negative multiplier larger than anticipated per Mark Zandi and IMF and OECD. And yes, it was pushed too hard in Europe per Krugman et al.

But that does not invalidate the need for restructuring g policies. Indeed, it makes restructuring policies more urgent than ever.

[Patrick]

"That's the thing, if the argument is that we need to spend the money to prevent AD from collapsing, fine, keep G the same, but spend the money in a way that transitions to reform, not in a way that preserves the status quo."

You hit on it: but what if the restructuring erodes AD anyway? Restructuring fixes the supply side, but if there is a glut, it's not going to help AD. And I see no reason why supply side restructuring in a depression should boost AD. In fact, I can see it making your worse off by increasing productivity and making even more workers redundant. It probably makes you better off after you exit the depression, but that just bring us back to Keynes and economists setting themselves too useless a task.

FWIW, I think Greece and maybe a few other are already dead, so I don't claim to have any better ideas other than the obvious options of a) return to drachma b) German taxpayers paying Greek unemployment. Neither of which seems very likely. Next stop, the stone age.

[anon]

"And I see no reason why supply side restructuring in a depression should boost AD."

Investment subsidies tend to boost AD, especially in an economy which has a pegged currency or is in a currency area. To the extent that structural reform incents investment and makes it easier, it's just like an investment subsidy. Lower unit labor costs would also tend to attract capital and thus boost AD. The problem is that _if_ the ECB has control of Eurozone AD as a whole, this ends up being a beggar-thy-neighbor effect - you can only redistribute AD among regions, but can't really create more demand. (As it happens, this doesn't currently matter very much, because Eurozone AD is so badly unbalanced to begin with.) On the contrary, _if_ the ECB's monetary policy instruments are constrained by institutional factors (say, they really don't like going to negative interest rates), then these kinds of policies can help.

[Determinant]

To the extent that structural reform incents investment and makes it easier, it's just like an investment subsidy. Lower unit labor costs would also tend to attract capital and thus boost AD.

It is unclear whether the increase in AD due to investment exceeds the fall in AD due to falling wages and para-wage income like insurance benefits, unless the fall is due to a decrease in income or payroll taxes.

But the point is however that it is the weakness of AD that needs to be solved first to cure the investment problem; in a glut with excess production capacity, expanding AD by investment in additional productive capacity is a foolhardy exercise. What is needed is more *consumptive* capacity. The private sector is excellent at producing supply when presented with additional demand, it is the demand that is absent, not the ability to produce additional supply.

First and foremost we need to fix AD, then we can look to supply constraints.

But that does not invalidate the need for restructuring g policies. Indeed, it makes restructuring policies more urgent than ever.

Nick has posted a number of entries demonstrating that Say's Law is false in a monetary economy. As supply does not create it own demand in a monetary economy, where are you getting the additional demand from?

[Bob Smith]

"My "contribution" was to suggest that some critics (opposition parties in Greece, Portugal, Italy and some unions in Canada) are - I argued - deliberately concatenating the two concepts by "rebranding" restructuring as "austerity" in order to discredit and undermine support for restructuring policies in order to maintain rents received due to protectionist policies"

And I think that's an important contribution, because the rebranding of "restructuring" as "austerity" allows those groups to disguise what is otherwise purely naked self-interest (protecting their own rents) as concern for the common good. Those groups are too often allowed to advance their own interest on the grounds of public good without being subject to the sort of critical scrutiny that their claims merit.

"And I see no reason why supply side restructuring in a depression should boost AD."

Agreed (at least not in the short-run), but it doesn't follow that it'll supress it either. Ideally, you would implementing restructing, while using fiscal policy (or monetary policy, as in the US or Great Britain of the 1930s - Greece's willingness to die on the hill of the Euro, while impressive, is seriously misguided) to expand AD.

" It probably makes you better off after you exit the depression"

Two points. First, that assumes that a country like Greece will be "exiting" their depression any time soon. But the reality is that Greece doesn't have any freedom of action on either monetary or fiscal policy. The former has been delegated to the ECB and no one in their right mind will lend them money to fund the latter(at least not at anything less the usurious interest), so I think you're right that neither of those options are likely to happen in the immediate future (and I think you're right that Greece is not alone in the list of "dead" countries - I suspect large swathes of Europe are living on borrowed time). In that light, Greece's only strategy is essentially the 19th century response to a recession - have wages plummet (more so than they already have) so that they return to competitiveness. That's true regardless of whether you restructure inefficient sectors of your economy or not - restructuring to improve productivity just gets the process over with faster and returns you to competitiveness at a higher wage rate.

That might not be a compelling argument if we believe that this is just a short recession and growth will rapidly return (where a reasonable argument could be made that it would be less painful to let things pick up a bit before making those changes). On the other hand, if the alternative is a Japan-style 20-year recession with no end in sight, better to make those structural changes sooner rather than stumble along for a few decades and still have to make those changes later. We're on, what, year 5 of the current down-turn? In fact, Japan I think is the example that we should be looking to - it's spent 20 years engaging in every sort of fiscal or monetary stimulus imaginable (in the process running up otherwise unimaginable levels of government debt) without having seriously addressed its underlying structural problems.

Second, and I'll admit this is a somewhat unsavoury argument but no less true because of that, once you exit the depression, the political impetus to deal with structural inefficiencies disappears (which is why, as Ian notes, opponents of restructuring are very keen to conflate it with fiscal tightening, becuase they believe that once the good times return (if they return) there won't be the same appetite for reform) at least until the next crisis. While it's admitedly opportunistic to use an economic crisis to break the rent-seeking of entrenched interest groups, if not now, when? I have no doubt, for example, that but for the current crisis, the Greek government would never have been able to start to crackdown on the rampant tax evasion that went on in that country. That crackdown surely supressed Greek AD (being a defacto tax increase for people who can no longer bribe the local tax collector), but does anyone suggest that it wasn't self-evidently the right policy to pursue? (Curiously, the many opponents of "austerity" don't seem too bothered by it when it comes in the form of taxing the "rich")

[anon]

"Second, and I'll admit this is a somewhat unsavoury argument but no less true because of that, once you exit the depression, the political impetus to deal with structural inefficiencies disappears"

The best environment to deal with structural inefficiencies is a stable macroeconomic environment, where pretty much anyone can see that there's no scope for AD expansion, so the supply side is king. See e.g. Canada and the US in the 1990s. It is very hard politically to argue for market-based reforms when the economy is so dysfunctional due to a deep lack of AD. This was very clear in the Eurozone peripheral countries, and France as well if the election of Mr. Hollande is any indicator.

[ianlee]

Anon - you and Determinant seem to disagree that restructuring will affect AD.

You should read former Chancellor Gerhard Schroder's speech last week. Schroder was the (liberal) Chancellor that restructured Germany that transformed it into the powerhouse it is today - notwithstanding weak AD in southern EU.

It was summarized in Financial Times, "France should copy Germany’s reforms to thrive": http://www.ft.com/intl/cms/s/0/7254f576-cdca-11e2-a13e-00144feab7de.html#axzz2WYjgOfAy

The core argument was summarized by Schroder: "Today, many European countries, especially France, face similar challenges to the ones Germany did a decade ago. Structural reforms are necessary because of excessive debt, as well as demographic developments and international competition".

"Staying ahead in competitiveness on a worldwide scale must be the priority for France and for Europe. From our experience with Agenda 2010, we learnt that it takes a few years for the effects to work through to producing visible success".

The full speech with his arguments more fully developed is at: http://www.omfif.org/downloads/OMFIF-GBF%20Schroder%20Gala%20Dinner.pdf

[Bob Smith]

"The best environment to deal with structural inefficiencies is a stable macroeconomic environment, where pretty much anyone can see that there's no scope for AD expansion, so the supply side is king."

Is that true? Considering the experiences of Canada in the 1990s, the UK in the 1980s, Germany following unification or Greece over the last 5 years, that's far from obvious. If anything periods of economic dysfunction are when it's easier to implement unpopular structural reform because political leaders can credibly claim that there is no alternative to those reforms. France's problem is that it hasn't bottomed out. Yet.

[Determinant]

Noah Smith and Paul Krugman both have relevant posts rebutting the idea that "you can't waste a good crisis".

[Bob Smith]

"Noah Smith and Paul Krugman both have relevant posts rebutting the idea that "you can't waste a good crisis"."

Links, or it didn't happen.

In any event, Marx wrote a great book on the merits of exploiting a crisis to implement radical economic reform, so if I'm wrong, at least I'm in good company. (Naomi Klein thought she was all clever when she wrote the "Shock Doctrine", oblivious to the fact that she was attributing to us damned Neo-Liberals the standard operating procedures of Marxists and the radical left for over a century and a half. And if you're referring to the Krugman article I think you are, he's equally oblivious to that fact and he hardly rebutts the idea that you can't waste a good crisis, he merely suggests that you should).