Austerity policies based on flawed research?

Scofflaw

Cody Pomeray wrote: »

Woah there horse, who said it was the basis for austerity?

Nobody as far as I can see.

I think it's reasonable to suppose Rehn referred to it in his defence of austerity.

It would be idiotic to say this paper invented the principle of fiscal austerity. Some credit please.

Er...thread title...? "Austerity policies based on flawed research"?

cordially,
Scofflaw

Cody Pomeray

20 cent wrote the thread title,

clearly should have said "defence of austerity politics partially based on flawed research terms and conditions apply"

maybe he meant the bailouts specifically.

either way leave me out of that thanks!

Scofflaw

Cody Pomeray wrote: »

20 cent wrote the thread title,

clearly should have said "defence of austerity politics partially based on flawed research terms and conditions apply"

maybe he meant the bailouts specifically.

either way leave me out of that thanks!

Or perhaps, more simply "paper quoted in support of existing austerity policies suffers from methodological flaws", which is factually accurate.It's not accurate, though, to say that people aren't claiming that this undermines the whole austerity policy framework, because people certainly are doing so, and that's what makes this into a story.

However, as you say, it's not your thread title, and I apologise for tarring you with that brush!

cordially,
Scofflaw

Cody Pomeray

Scofflaw wrote: »

It's not accurate, though, to say that people aren't claiming that this undermines the whole austerity policy framework, because people certainly are doing so, and that's what makes this into a story.

It can undermine "the austerity framework" depending on what you mean by the austerity framework.

If we are taking Rehn's comments, for example, on the "widely acknowledged, based on serious research" interplay between GDP growth and >90% public debt/ GDP, then yes, that is undermined.

20Cent

Ok maybe the thread title could have been more specific lets not get caught up in semantics. Maybe "Current austerity policies" would be better. Anyway:

George Osborne 2010
“Perhaps the most significant contribution to our understanding of the origins of the crisis has been made by professor Ken Rogoff, former chief economist at the IMF, and his co-author, Carmen Reinhart.” The chancellor then quoted the finding from their paper: “The latest research suggests that once debt reaches more than about 90% of GDP, the risks of a large negative impact on long-term growth become highly significant.”


G20 gathers for debate on debt, monetary stimulus
http://www.reuters.com/article/2013/04/19/us-g-idUSBRE93I05Z20130419
In a 2010 study frequently cited by policymakers, Harvard professors Kenneth Rogoff and Carmen Reinhart found that on average, economies contract when the debt-to-GDP ratio surpasses 90 percent - a level G20 officials were discussing.

However, the study's results were disputed by researchers at the University of Massachusetts at Amherst, who said growth for countries with those ratios was actually 2.2 percent.

Even the IMF are saying that austerity isn't working and then UK is downgraded by Fitches:
George Osborne told by IMF chief: rethink your austerity plan
http://www.guardian.co.uk/politics/2013/apr/18/george-osborne-imf-austerity

Looks like even the G20 know:
http://www.guardian.co.uk/world/2012/jun/19/g20-leaders-growth-financial-integration
Leaders of the G20 economies are preparing to endorse a communique pledging further action on growth, increased resources for the International Monetary Fund and fresh commitments by the European Union to do more to integrate to solve its problems.

The old saying is that all the wrong things are done before the right thing. Looks a bit like that at the moment. Hopefully clear heads will reject this path that is making the crisis worse and change it.

sock puppet

20Cent wrote: »

450 papers citing the paper that used wrong figures still significant. Others have not reached similar conclusions independently, thats the problem no one has been able to replicate the results. If its a comparative study then its wrong. Only one paper refutes it because they only released the raw data recently. Influential paper is wrong, one thats quoted by the German minister of finance. which he said he strongly believed in.

Unless you've read each of the 450 papers (or read a paper which examines each of those 450 papers) then you cannot possibly comment on their contents. You have no idea in what context the paper has been cited in.

Cody Pomeray

sock puppet wrote: »

You have no idea in what context the paper has been cited in.

I think 20 cent's point is that it has been influential. Looking at his link, it's being generous to assert that few of the citations were contradictory or incompatible with R&R....

Are people really being so catty about this?

So a paper found findings contrary to an allegedly established fact. Is it too much to ask that we accept the truth with a degree of objectivity... dignity even?

Boskowski

Dob74 wrote: »

Unemployment in the US 7.7% UK 7.8%.
Looks like the stimulus worked to me.

The Piigs need to play hard ball. Lying down and expecting creditor country policy doesn't work.
Kicking the can down the street wont get us out of the depression we are in.

Playing hardball?
This is laughable really.
In Irelands case it would read like.
You give us billions so that we can keep paying our welfare receivers and public servants much more than you pay yours. But its not working. We need more. Give us more or else. Or else what?

20Cent

sock puppet wrote: »

Unless you've read each of the 450 papers (or read a paper which examines each of those 450 papers) then you cannot possibly comment on their contents. You have no idea in what context the paper has been cited in.

If the raw data is incorrect than anything that uses it to make assumptions is also incorrect. Agree, disagree whatever all wrong.

20Cent

Large debt slows growth this seems like an obvious point to make but what if slow growth also causes increasing debt? If thats the case then we are chasing our tail down a spiral.

Looking at what is happening at the G20 looks like this is sinking. Keep cutting money out of an economy is going to increase its debt. Article from the Irish Times:

Rehn promises less austerity as economic outlook worsens
http://www.irishtimes.com/business/economy/europe/rehn-promises-less-austerity-as-economic-outlook-worsens-1.1365707
The euro zone will slow its budgetary belt-tightening to help reinvigorate economic growth, EU Economic and Monetary Affairs Commissioner Olli Rehn has said.
Mr Rehn's comments are being viewed by some as an admission that fiscal adjustments linked to the troika programmes in Europe are having a greater-than-expected impact on growth.


US treasury secretary Jack Lew said this week that a rush towards fiscal austerity in Europe had worsened the economic situation in some countries, and there was a need to assess the impact of budget cuts on growth and employment.

What do people want to happen. Frankly I want the rational path followed rather that the ideological one.

SupaNova2

KyussBishop wrote: »

In an economy with idle labour (unemployment) and idle industry/resources, using created money to put the two together, increases GDP and increases the 'economic pie' overall.

Be very careful using GDP as part of your analysis, go and look at the typical criticisms of GDP, and you will see increases in GDP do not always equate to increases in the economic pie.

If you've got the resources at hand (with labour being the most important of them), and you put created money to use with that, then you increase economic activity.

This is where profit and loss are vital in directing economic activity. If you put labour to work producing products A, B and C with resources X Y and Z only to make a loss, you have wasted resources that could have been better used elsewhere.

and you think government in such a situation should run a profit (i.e. take more money out of the economy than they put in), when they have no need to due to money creation; that's a whole lot of vague nonsense

It's not nonsense, profit and loss accounting is an essential guide in determining whether you are making good use of resources and labour. If the government directs some money towards a project and that project turns a profit, it is a good indicator the project was worthwhile, if it produced catastrophic losses, it likely was a waste of resources.

And if the government on aggregate is taking in much more than it spends it can lower taxes or give tax refunds.

Where, using money creation, private banks add money to the economy through loans, government can add money using public spending (limited by inflation targets, thus debunking the lazy hyperinflation nonsense); where private banks take money out of the economy through debt repayments + interest, government can take money out through taxes (but without the inherent unsustainability of banks debt-based money).

I agree that loaning money into existence is unsustainable, in that is in large part responsible for booms and bust. Even still when banks extend credit they do it with P&L in mind, and at least when they bear their own risks it is a reasonable system, a system of free government money ignoring P&L would be horrific. Many communist regimes have tried this with dire results.

sock puppet

Cody Pomeray wrote: »

I think 20 cent's point is that it has been influential. Looking at his link, it's being generous to assert that few of the citations were contradictory or incompatible with R&R....

Are people really being so catty about this?

So a paper found findings contrary to an allegedly established fact. Is it too much to ask that we accept the truth with a degree of objectivity... dignity even?

20Cent is unfairly questioning the work of 450+ academics.

20Cent wrote: »

If the raw data is incorrect than anything that uses it to make assumptions is also incorrect. Agree, disagree whatever all wrong.

Who said they're using the raw data to make assumptions? If I say
"the analyses suggest that high debt levels do not lower growth rates, contrary to results of previous studies (Reinhart & Rogoff, 2009)" - that's a citation. You could have a similar citation if someone reached the same conclusion as Reinhart and Rogoff with different data.

KyussBishop

SupaNova2 wrote: »

Be very using GDP as part of your analysis, go and look at the typical criticisms of GDP, and you will see increases in GDP do not always equate to increases in the economic pie.

You'll need to make that argument yourself, not make an unclear reference to an argument. It seems to be nitpicking, and think I could see it leading to a straw-man, where the kind of economic activity I support gets assumed (incorrectly), and then used as part of a general 'private spending good', 'public spending bad' argument.

SupaNova2 wrote: »

This is where profit and loss are vital in directing economic activity. If you put labour to work producing products A, B and C with resources X Y and Z only to make a loss, you have wasted resources that could have been better used elsewhere.

Governments do not make a 'loss' when they fund themselves through money creation.
A private business, funded by debt-based money, will become insolvent (unable to repay debts) if it makes a consistent loss, but government in this case does not use debt-based money.

A government, funded by money that is not debt based, can spend that money on whatever they like without having to attach debt to it (the money can be taken out of the economy by means other than debt, such as taxes, and the rate/timing of this can be adjusted based on inflation targets).


It's the difference between debt-based money (that created by private banks) and money which is not debt based (that created by government).

Repeating the easiest side-by-side description:
Where (using money creation) private banks put money into the economy through loans, government would put money into the economy through public spending; where private banks take money back out of the economy through debt repayments + interest, government would take it back out using taxes (at their discretion, typically tied to inflation targets).

SupaNova2 wrote: »

It's not nonsense, profit and loss accounting is an essential guide in determining whether you are making good use of resources and labour. If the government directs some money towards a project and that project turns a profit, it is a good indicator the project was worthwhile, if it produced catastrophic losses, it likely was a waste of resources.

And if the government on aggregate is taking in much more than it spends it can lower taxes or give tax refunds.

This is in part true for debt-based money (that created by private banks, with loans), but is not true for created money that government spends into the economy (which does not have an attached debt); as explained above.

SupaNova2 wrote: »

I agree that loaning money into existence is unsustainable, in that is in large part responsible for booms and bust. Even still when banks extend credit they do it with P&L in mind, and at least when they bear their own risks it is a reasonable system, a system of free government money ignoring P&L would be horrific. Many communist regimes have tried this with dire results.

You are applying P&L (profit and loss) arguments, which only apply to debt-based money (since the need to repay the debt is what causes the requirement for profit), when government would not be using debt-based money.
Since the P&L argument doesn't apply, what remains is you say government non-debt-based money is bad (for undisclosed reasons; not stating why) and communist; there isn't an argument here.


The mechanics of money creation (both public and private) are pretty simple:
Money (created either by private banks or by government) is put in to the economy, and then money gets taken out of the economy (with the rate, timing and total balance all being variable); there is nothing special about this.

Government is perfectly capable of putting money in, and taking money out of the economy, at exactly the same rate and amount as private banking would, if they liked; if government did this though, somehow this is supposed to be 'bad', and when private banks do it, somehow it is 'good'.

It is entirely a political/ideological argument, not an economic one (the economic in/out mechanics are easy to see); if you want to make a political anti-government argument, that would need to be made clear, not presented (incorrectly) as an argument over economics.

Dob74

Boskowski wrote: »

Playing hardball?
This is laughable really.
In Irelands case it would read like.
You give us billions so that we can keep paying our welfare receivers and public servants much more than you pay yours. But its not working. We need more. Give us more or else. Or else what?

The 60 Billion handed over to the banks to save German and French banks.
We could just scrap by with the defiecit the way it is but the banks sunk us.
Austerity is causing deflation and we are in a debt spiral. We will not be able to climb out of the neo-liberal free market debt the Ahern governments created.
Time to face the fact that we are bankrupt. Thanks to our banks.

hmmm

Dob74 wrote: »

The 60 Billion handed over to the banks to save German and French banks.

Nope, disproven.

We could just scrap by with the defiecit the way it is

Nope, even if we had never bailed out the banks we'd still have had a massive deficit, caused by the collapse in revenues following the end of the property bubble.

Time to face the fact that we are bankrupt. Thanks to our banks.

Nope, we're on target to get our deficit under control.

Boskowski

Dob74 wrote: »

The 60 Billion handed over to the banks to save German and French banks.
We could just scrap by with the defiecit the way it is but the banks sunk us.
Austerity is causing deflation and we are in a debt spiral. We will not be able to climb out of the neo-liberal free market debt the Ahern governments created.
Time to face the fact that we are bankrupt. Thanks to our banks.

Of course it is way easier to believe what you want to believe, but a lot of what you say has been proven wrong over and over again.

For example the German and French banks thing.
I'm not saying German or French or any other foreign banks are blameless but for starters banks aren't really German or French or anything these days. The world of finance is a global network of corporates who all own a bit of each other fluctuating all the time.
When things go downhill a game of musical chairs starts and Ireland came out without a chair and for the most part that problem was of their own making.

There is no Austerity. As someone else pointed out the bailout that bridges the deficit is in fact the stimulus everybody is crying out for. If you don't believe just picture what the country would look like without that money.

People are saying the EU, Germany, whatever imposes austerity. They are not, in fact they keep Ireland afloat and all they get in return is being vilified.

I wonder what the people's opinion would be like if the roles were reversed. I'd bet my arse it would be cries for 'let the feckers sink'.

oscarBravo

Boskowski wrote: »

I wonder what the people's opinion would be like if the roles were reversed. I'd bet my arse it would be cries for 'let the feckers sink'.

You don't need to wonder. Just read any thread about our foreign aid budget.

djpbarry

KyussBishop wrote: »

There would be a limit, but stimulus will first of all raise GDP, which will then by itself lower the debt-to-GDP ratio (helping sustainability as it goes), and start increasing tax intake, until full employment is reached...

But that's a baseless assumption on your part - I'm not at all convinced that full employment can be achieved, in a sustainable manner, without racking up unsustainable debt/GDP levels across the Eurozone.

KyussBishop wrote: »

It is entirely a political/ideological argument, not an economic one (the economic in/out mechanics are easy to see); if you want to make a political anti-government argument, that would need to be made clear, not presented (incorrectly) as an argument over economics.

Perfectly valid economic arguments have been made against your proposal on this thread and others, but you dismiss the posters making said arguments because, according to you, they're not engaging in "honest" discussion/debate.

KyussBishop

djpbarry wrote: »

But that's a baseless assumption on your part - I'm not at all convinced that full employment can be achieved, in a sustainable manner, without racking up unsustainable debt/GDP levels across the Eurozone.

If this (the EU-wide debt funded spending) hits debt-limits before full employment, then yes, that would limit it against full employment; you still get the benefit of the increased economic activity regardless, which speeds the recovery.

djpbarry wrote: »

Perfectly valid economic arguments have been made against your proposal on this thread and others, but you dismiss the posters making said arguments because, according to you, they're not engaging in "honest" discussion/debate.

There's a complete lack of an actual argument here, just an appeal to (undisclosed) arguments previously made; if the arguments against were so solid, repeat them here to try and debunk my position.

On this topic, it is notable how a lot of posters (but not all) avoid engaging in actual argument on the topic, but instead try to beat-down discussion with condescension and reams of fallacious (and often consciously fallacious i.e. dishonest) argument; most of that typically revolves around re-asserting the same debunked hyperinflation myths, again and again and again (despite the disclaimer of 'limited by inflation targets' spending, which totally debunks that), where it becomes a matter of trying to shut down discussion, by repeating the same point in the most condescending manner possible.


When someone is engaging in dishonest argument, pointing that out isn't dismissing them, particularly when their entire line of argument seems to revolve around approaching debate in the most obtuse and nitpicking way possible, with the intent of ignoring actual arguments presented to them, for the purpose of trying to 'win' a debate based on rhetoric or condescension, without respect to truth or logic.

More often than not, that is done with (what seems) the specific intent to try and personalize the debate, or derail discussion; intentionally using a level of argument the poster knows is dishonest, to achieve that.

20Cent

Reinhart and Rogoff's errors have made the front page of the Indo.

Barroso admits austerity is not working
http://www.independent.ie/business/irish/barroso-admits-austerity-is-not-working-29214126.html

spank_inferno

20Cent wrote: »

Barroso admits austerity is not working
http://www.independent.ie/business/irish/barroso-admits-austerity-is-not-working-29214126.html

What he said:

"While I think this policy (austerity) is fundamentally right, I think it has reached its limits."


We'll never know of course, Ireland is still running a 12 billion annual deficit.
So we have yet to try our hand at austerity.

SupaNova2

20Cent wrote: »

Barroso admits austerity is not working
http://www.independent.ie/business/irish/barroso-admits-austerity-is-not-working-29214126.html

It'd be nice if you actually read the article and what he actually said.

20Cent

SupaNova2 wrote: »

It'd be nice if you actually read the article and what he actually said.

Why are you saying that?

Scofflaw

20Cent wrote: »

Why are you saying that?

Because of what Barroso actually says:

In a speech in Brussels, Jose Manuel Barroso said the EU should place a greater emphasis on policies that stimulate growth and less on so-called austerity measures, such as cutting government spending.

"While I think this policy (austerity) is fundamentally right, I think it has reached its limits," the commission president said.

"A policy to be successful not only has to be properly designed, it has to have a minimum of political and social support."

But austerity is working in Ireland, he said, adding: "It is a painful programme, but it is working."

I appreciate that the Indo titled it as per your post, but their title is complete nonsense given what he actually said. "Barroso admits austerity is working in Ireland" would be more accurate.

cordially,
Scofflaw

20Cent

Scofflaw wrote: »

Because your summary "Barroso admits austerity isn't working" is a very large misrepresentation of what he says, while the presentation of that misrepresentation immediately following the line about R&R making the front page implies that Barroso has been forced into the "admission" he hasn't made by the flaws in R&R.

This is open and shut factual misrepresentation, not a matter of opinion, and very close to warranting an infraction or ban.

moderately,
Scofflaw

Not a summary its the headline of the article.
Almost all other newspapers are reporting it as similar. These are journalists used to interpreting what he says this is a close to an admission as there will be. The R&R story was also reported on the front page story, its one significant part in the backlash against the austerity measures which have been shown to be counter productive.

The IMF have said it, the ECB have implied it, even the bondholders are saying it now.

Bill Gross, the manager of the world’s largest bond fund Pimco.
"The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not,” Gross said. “You’ve got to spend money.”

Scofflaw

20Cent wrote: »

Not a summary its the headline of the article.
Almost all other newspapers are reporting it as similar. These are journalists used to interpreting what he says this is a close to an admission as there will be. The R&R story was also reported on the front page story, its one significant part in the backlash against the austerity measures which have been shown to be counter productive.

The IMF have said it, the ECB have implied it, even the bondholders are saying it now.

Bill Gross, the manager of the world’s largest bond fund Pimco.
"The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not,” Gross said. “You’ve got to spend money.”

I had in fact already amended my post to reflect the fact that it was their title rather than yours - but that doesn't make the title any less a complete contradiction of what he actually says.

They say "Barroso admits austerity isn't working" - Barroso actually says "austerity is working in Ireland". You cannot derive the former from the latter.

The press do not have superhuman powers of discrimination, that make their pronouncements authoritative even where they contradict the facts. On the contrary, they simply tend to write to their own agendas, and the facts are secondary. In this case they have provided a headline which visibly contradicts the facts as quoted in the article, and the headline is therefore of no value.

cordially,
Scofflaw

20Cent

Scofflaw wrote: »

I had in fact already amended my post to reflect the fact that it was their title rather than yours - but that doesn't make the title any less a complete contradiction of what he actually says.

They say "Barroso admits austerity isn't working" - Barroso actually says "austerity is working in Ireland". You cannot derive the former from the latter.

The press do not have superhuman powers of discrimination, that make their pronouncements authoritative even where they contradict the facts. On the contrary, they simply tend to write to their own agendas, and the facts are secondary. In this case they have provided a headline which visibly contradicts the facts as quoted in the article, and the headline is therefore of no value.

cordially,
Scofflaw

The facts are that the arguments for austerity have taken a body blow this week. R&R is just a part of it, a graduate student tore it apart.

Pretty much all the stakeholders are saying this now. Barroso is subtle and hardly going to admit his policy for the last few years is wrong. The journalists have to interpret what he is saying. All the indications are that a new approach is required involving quantile easing and a stimulus. This is what the G20 are discussing, the IMF, the US treasury etc are saying.

The fact is that austerity is not working in the worst hit countries Ireland, Greece, Italy, Portugal and Spain.
http://www.rte.ie/news/2013/0214/367699-austerity-study-impact/

The push for more austerity is ideologically driven rather than a rational one based on facts. Seems like a shift in policy is on the horizon but its a pity it took so long to come about.

Geuze

If by austerity you mean "reducing the fiscal deficit to a sustainable amount" - then it is working, and we have to continue with it until the fiscal deficit falls to reasonable levels.

I don't think that statement can be disputed. No matter what ideology you follow, it is not possible for the Irl Govt to continue to borrow 10bn approx per annum indefinitely.

To stop doing this means "the Govt will continue to borrow approx 10bn per annum and continue to accumulate larger and larger public debt, which is storing up problems for the future".

Geuze

However, what may be possible is the following:

Continue to reduce the fiscal deficit with a mix of tax increases and spending cuts which are growth-friendly, or at least less harmful to economic growth, and which may contain some fiscal stimulus, e.g. some sort of capital expenditure boost


For example: more tax increases aimed at pensioners, less aimed at families, so that consumer spending takes less of a hit

Scofflaw

20Cent wrote: »

The facts are that the arguments for austerity have taken a body blow this week. R&R is just a part of it, a graduate student tore it apart.

Pretty much all the stakeholders are saying this now. Barroso is subtle and hardly going to admit his policy for the last few years is wrong. The journalists have to interpret what he is saying. All the indications are that a new approach is required involving quantile easing and a stimulus. This is what the G20 are discussing, the IMF, the US treasury etc are saying.

The fact is that austerity is not working in the worst hit countries Ireland, Greece, Italy, Portugal and Spain.
http://www.rte.ie/news/2013/0214/367699-austerity-study-impact/

The push for more austerity is ideologically driven rather than a rational one based on facts. Seems like a shift in policy is on the horizon but its a pity it took so long to come about.

"Barroso is subtle"? This is just special pleading to get around the problem that he's not saying what's claimed for him.

We might be seeing a shift in policy, but it's not coming about because the opposition to it are presenting better facts - they too are ideologically driven, and present things like the outcome of the collapse of the construction sector as if they were the effects of the resulting policies of austerity, primarily in defence of a variety of inflated entitlements.

regards,
Scofflaw

hatrickpatrick

Let's suppose for a second that we devalued the Euro in a major way.
Who would benefit versus who would lose? Just curious. From where I'm standing, a plummeting euro equals increased exports from struggling nations, equals good news for EVERYONE. Why in God's name has this not happened yet? Who's holding it back?

SupaNova2

hatrickpatrick wrote: »

From where I'm standing, a plummeting euro equals increased exports from struggling nations, equals good news for EVERYONE. Why in God's name has this not happened yet? Who's holding it back?

If it was as simple as devalue = everyone wins I'm sure it would happen.

Scofflaw

hatrickpatrick wrote: »

Let's suppose for a second that we devalued the Euro in a major way.
Who would benefit versus who would lose? Just curious. From where I'm standing, a plummeting euro equals increased exports from struggling nations, equals good news for EVERYONE. Why in God's name has this not happened yet? Who's holding it back?

Variously, a plummeting euro doesn't change much either for eurozone-internal trade or for countries whose primary problem is not an export slump (and I can't think of many countries where that's a major contributing factor in their crisis), while impacting standards of living in respect of non-eurozone imports. Like inflation, it's a stealth way of cutting wages and profits, but it's completely untargeted. It also gives yet another reason for non-eurozone money to flee the eurozone, and not just the banks.

As per the Economist:

THE opening paragraph of Bloomberg's news story on Venezuela's currency move is a classic example of what devaluation actually means.

"Venezuelans lined up to purchase airline tickets and TVs this weekend in a bid to protect themselves from price increases after ailing President Hugo Chavez devalued the bolivar for a fifth time in nine years."

The official rate is falling from 4.3 to the dollar to 6.3; a 32% devaluation. Foreign goods will cost more. In other words, a devaluation is a decline in the country's standard of living. Traditionally, it is a tool used by a desperate government with a poor economic policy. Venezuela, despite its oil wealth, has a 22% inflation rate, even before the latest move. Sometimes countries get trapped in a dismal cycle in which high inflation causes the country's exports to be uncompetitive, prompting a devaluation that only leads to more inflation and so on.

Competitiveness is usually only restored by a decline in real wages. This can be achieved by having nominal wages fall while the exchange rate is unchanged (call it plan A), or by having wages fail to adjust to the inflationary effects of a devaluation (plan . Either way, we come back to a standard of living decline.

Devaluation is a very blunt instrument, rife with unintended consequences, which is why it's not really been used since the ability to do it was removed from the politicians by the creation of independent central banks. Politicians do prefer it, because it achieves a wage cut across the economy without all the difficult negotiations the government is currently undergoing - central banks prefer the difficult negotiations and targeted wage cuts, because they're more precise and have fewer unintended consequences, and they don't have to do the negotiating or pay the cost in lost votes.

Essentially, devaluation is the current policy, but done "internally" by the difficult process of negotiated wage cuts and adaptive price falls in the private sector as opposed to "externally" by an exchange rate change. In both cases sectoral interests and oligopolies will resist wage cuts - in internal devaluation, they do so explicitly by opposing wage cuts, in external devaluations they do so by seeking wage rises. So if we were doing an external devaluation, we'd currently have the public sector seeking - and threatening action over - 'cost of living increases'. In both cases they're seeking to maintain the same standard of living.

cordially,
Scofflaw

SupaNova2

That's a good summary, add that devaluation can help anyone with debt at the expense of those that have savings. From the ECB themselves:

Price stability prevents the arbitrary distribution of wealth and income associated, for instance, with the erosion of the real value of nominal claims (savings in the form of bank deposits, government bonds, nominal wages) resulting from inflation. Large erosions of real wealth and income due to high inflation can be a source of social unrest and political instability. To sum up, by maintaining price stability, central banks help broader economic goals to be achieved, thus contributing to general political stability.

As money maintains its value over time, it can be held for longer periods. This is particularly useful because it allows the act of sale to be separated from the act of purchase. In this case, money fulfils the important function of a store of value.

Uncertainty about the rate of inflation may also lead firms to make wrong employment decisions. To illustrate this, let us suppose that in an environment of high inflation, a firm misinterprets the increase in the market price of its goods by, say, 5 %, as a relative price decrease as it is not aware that the inflation rate has recently fallen from, say, 6 % to 4 %. The firm might then decide to invest less and lay off workers in order to reduce its production capacities, as it would otherwise expect to make a loss given the perceived decrease in the relative price of its goods. However, this decision would ultimately turn out to be wrong, as the nominal wages of employees due to lower inflation may increase by less than that assumed by the firm. Economists would describe this as a “misallocation” of resources. In essence, it implies that resources (capital, labour, etc.) have been wasted, as some employees would have been made redundant because of instabilities in price developments.

… reduce distortionary effects of tax systems and social security systems …Fourth, tax and welfare systems can create incentives which distort economic behaviour. In many cases, these distortions are exacerbated by inflation or deflation, as fiscal systems do not normally allow for the indexation of tax rates and social security contributions to the inflation rate. For instance, salary increases that are meant to compensate workers for inflationary developments could result in employees being subject to a higher tax rate, a phenomenon that is known as “cold progression”. Price stability reduces these distortionary effects associated with the impact of inflationary or deflationary developments on taxation and social systems.

… increase the benefits of holding cash … Fifth, inflation can be interpreted as a hidden tax on holding cash. In other words, people who hold cash (or deposits which are not remunerated at market rates) experience a decline in their real money balances and thus in their real financial wealth when the price level rises, just as if part of their money had been taxed away. So, the higher the expected rate of inflation (and therefore the higher nominal interest rates – see Box 3.2), the lower the demand by households for cash holdings (Box 3.4 shows why higher nominal interest rates imply a reduction in the demand for (non-remunerated) money). This happens even if inflation is not uncertain, i.e. if it is fully expected. Consequently, if people hold a lower amount of cash, they must make more frequent visits to the bank to withdraw money. These inconveniences and costs caused by reduced cash holdings are often metaphorically described as the “shoe-leather costs” of inflation, because walking to the bank causes one’s shoes to wear out more quickly. More generally, reduced cash holdings can be said to generate higher transaction costs.

… prevent the arbitrary distribution of wealth and income … Sixth, maintaining price stability prevents the considerable economic, social and political problems related to the arbitrary redistribution of wealth and income witnessed during times of inflation and deflation. This holds true in particular if changes in the price level are difficult to anticipate, and for groups in society who have problems protecting their nominal claims against inflation. For instance, if there is an unexpected increase in inflation, everyone with nominal claims, for example in the form of longer-term wage contracts, bank deposits or government bonds, experiences losses in the real value of these claims. Wealth is then transferred in an arbitrary manner from lenders (or savers) to borrowers because the money in which a loan is ultimately repaid buys fewer goods than was expected when the loan was made. Should there be unexpected deflation, people who hold nominal claims may stand to gain as the real value of their claims (e. g. wages, deposits) increases. However, in times of deflation, borrowers or debtors are often unable to pay back their debt and may even go bankrupt. This could damage society as a whole, and in particular those people who hold claims on, and those who work for, firms that have gone bankrupt.

… contribute to financial stability Seventh, sudden revaluations of assets due to unexpected changes in inflation can undermine the soundness of a bank’s balance sheet. For instance, let us assume that a bank provides long-term fixed interest loans which are financed by short-term time deposits. If there is an unexpected shift to high inflation, this will imply a fall in the real value of assets. Following this, the bank may face solvency problems that could cause adverse “chain effects”. If monetary policy maintains price stability, inflationary or deflationary shocks to the real value of nominal assets are avoided and financial stability is therefore also enhanced.

Scofflaw

SupaNova2 wrote: »

That's a good summary, add that devaluation can help anyone with debt at the expense of those that have savings.

And that's probably the major reason why it's currently a popular idea.

cordially,
Scofflaw

hatrickpatrick

Given that those struggling with debt seem to vastly outnumber those with massive savings, would it not be fairer to pursue policies which favour the former?

And also Scofflaw the big issue in terms of why I argue moremformdrect devaluation than indirect grouch taxes etc is that te former isn't as obvious a way of reducing people's wealth and therefore won't impact on confidence as much as direct austerity does.

Since economics is an exercise in mass psychology is the approach which does less harm to consumer confidence not logically almost always the better option?

SupaNova2

The ECB states some solid reasons for not having varying rates of inflation. Having a consistent rate at least gives economic actors better ability to plan, for the ECB to turn around and make a sharp devaluation as opposed to constant inflation targeting, makes for more random distribution of wealth, rewarding those who took on too much debt to invest in over-ambitious business plans or a MacMansion as opposed to those who took more sound economic decisions.

SupaNova2

hatrickpatrick wrote: »

Given that those struggling with debt seem to vastly outnumber those with massive savings,would it not be fairer to pursue policies which favour the former?

Jimmy took out a huge mortgage to buy a second home in Leitrim during the bubble, Timmy took out a loan and invested in a software company producing games for mobile phones. Jimmy is struggling with debt, Timmy has seen great growth. Devaluation takes the real value of Timmy's nominal claims to ease the burden of Jimmy's debt. Even if there are more Jimmy's than Timmy's, devaluation takes purchasing power away from those that are better at allocating scarce resources.

hatrickpatrick

^ If the economy is comprised of far more Jimmys than Timmys, the economy as a whole benefits from easing their troubles a bit. Timmys will suffer as well if the entire economy tanks due to generally battered confidence, so surely it's a question of which is the lesser of two evils?

EDIT: Just to give this a personal touch, I'm definitely more of a Timmy myself and I have a lot of savings, certainly a lot more than most college-age people I know do. I'm very careful with my money and have been since I was a kid, in fact I still have most of my old birthday money and so on.

While devaluation would hurt me a little, in the bigger picture I'm hurt far more if the economy is still in the toilet when I finish college and find there are no jobs. In the same way I'm hurt by a generally bad economy if it means my college fees go up, taxes go up etc.

So it genuinely is a question of the lesser of two evils, and right now it seems to me that growth should be the absolute top priority. If my savings will take a hit in the short term in order to achieve that, well so be it.

Tim Robbins

20Cent wrote: »

Time to end the charade, these austerity polices are making things worse rather than improving the economies of the countries involved.

Austerity is not meant to generate growth it is meant to cut deficit.

And what's your solution? Devalue - can't. Print more money - ask the Germans. Debt forgiveness - how can you do that when you have the highly paid public sector and generous welfare state.

Austerity does work. Deficit is going down.

KyussBishop

hatrickpatrick wrote: »

Let's suppose for a second that we devalued the Euro in a major way.
Who would benefit versus who would lose? Just curious. From where I'm standing, a plummeting euro equals increased exports from struggling nations, equals good news for EVERYONE. Why in God's name has this not happened yet? Who's holding it back?

It means an increased cost of imports including oil, thus knock-on inflation through that (which may be offset however, by the change in trade balance).

Closing the output gap (i.e. solving unemployment) is the more important goal, and that can be done with a job guarantee until the private sector is ready to soak up the workers.

If this is funded through money creation, and the exchange rate is let float, it may result in some temporary incidental devaluation, which would inherently be factored in to limited spending based on inflation targets, and which is corrected as GDP increases and as other countries catch up with the EU's increased economic activity.


It's important to note that devaluation is not inflation, and vice versa (even if one may lead to the other, it is not 1:1, it depend on imports); devaluation is all about international trade, and the percentage devaluation does not inherently change the currencies buying power by the same amount.

Internal devaluation (different to above) also makes debts harder to pay off, by killing peoples income and making debt grow as a proportion of income.

SupaNova2

hatrickpatrick wrote: »

^ If the economy is comprised of far more Jimmys than Timmys, the economy as a whole benefits from easing their troubles a bit. Timmys will suffer as well if the entire economy tanks due to generally battered confidence, so surely it's a question of which is the lesser of two evils?

There are many more complexities. When the euro is a widely held reserve in part because the ECB has chosen to strictly limit its depreciation, deciding to sharply devalue would reduce demand to hold euros as a reserve. There is a relatively quiet game of currency wars in the background that is continuously being played. The unfair strength of the dollar due to its privilege as reserve has allowed the US to export more than it imports for decades. The ROW doesn't want to support such a system indefinitely.

Larbre34

A very good piece

http://www.irishtimes.com/news/world/europe/letter-from-europe-austerity-is-fast-becoming-a-dirty-word-1.1371799

Cody Pomeray

spank_inferno wrote: »

So we have yet to try our hand at austerity.

Most people intend "auterity" to mean a process of fiscal tightening, as opposed to imediately cutting the entire debt of a country overnight. Which I'm sure some fringe elements with a fleeting interest in economics will always continue to promote. Thankfully without success.

Ireland has tried austerity, by most people's definition. Ireland's improving reputation and attractiveness as a place to do business can probably be attributed in large part to such austerity. In that sense, Ireland is an exception.

Interesting interview with Christine Lagarde on Hard Talk this morning. Should be on youtube soon if anyone missed it; some very interesting fodder for thought on those who still promote austerity as a remedy for the Eurozone.

spank_inferno

Larbre34 wrote: »

A very good piece

http://www.irishtimes.com/news/world/europe/letter-from-europe-austerity-is-fast-becoming-a-dirty-word-1.1371799

What is the alternative?

Borrow?
Is that not what got Europe into its current mess?

If "Austerity" is now a dirty word in europe, that is probably more to do with those with their nose in the trough having a little less to go around.

spank_inferno

Cody Pomeray wrote: »

Most people intend "auterity" to mean a process of fiscal tightening, as opposed to imediately cutting the entire debt of a country overnight. Which I'm sure some fringe elements with a fleeting interest in economics will always continue to promote. Thankfully without success.

Ireland has tried austerity, by most people's definition. Ireland's improving reputation and attractiveness as a place to do business can probably be attributed in large part to such austerity. In that sense, Ireland is an exception.

Interesting interview with Christine Lagarde on Hard Talk this morning. Should be on youtube soon if anyone missed it; some very interesting fodder for thought on those who still promote austerity as a remedy for the Eurozone.

Again, what is the alternative?

Governments have to, at some point get their spending under control.

Cody Pomeray

spank_inferno wrote: »

Again, what is the alternative?

Governments have to, at some point get their spending under control.

It is acknowledged that public debt ratios are too high. I doubt there is a single literate person in human civilization who denies this.

I'm not suggesting that there is no need for fiscal austerity in the Eurozone. What I said is two-fold.

(1) That Ireland has been embarking on a path of fiscal austerity, which is working for Ireland because it enjoys a price competitive economy. Therefore, under most people's understanding of the term "austerity", i.e. fiscal tightening, what you are saying - about Ireland yet having to try austerity - is grossly incorrect.


(2) That austerity alone is not working for the Eurozone, which has a less competitive economy, with high fiscal multipliers, not least in the periphery. Austerity is not a dirty word, but its pace can be slowed and its effectiveness and palatability can be improved by twinning it with a pan European stimulus package - The Hollandaise.

Larbre34

spank_inferno wrote: »

Again, what is the alternative?

Governments have to, at some point get their spending under control.

Not by ending borrowing they don't.

Governments borrow, have always borrowed, always will borrow. Its how that money is invested to invigorate activity and get a return thats the issue. If you dial it down too much you kill potential in an economy for a decade.

Certainly Ireland has a structural deficit, but if you strip out the forced borrowing to prop up failed private institutions, the state itself is in a sustainable position.

Inflating away debt will always be how exchequers grow. In the western hemisphere the crunch on credit in this case came about because of a reckless pyramid of private lending and a lax supervision of diligence and capital requirements.

Its not Governments spending as such that needs controlling, its the policy of throwing exchequer lifebelts to failed private enterprise that should end.

K-9

Larbre34 wrote: »

Not by ending borrowing they don't.

Governments borrow, have always borrowed, always will borrow. Its how that money is invested to invigorate activity and get a return thats the issue. If you dial it down too much you kill potential in an economy for a decade.

Certainly Ireland has a structural deficit, but if you strip out the forced borrowing to prop up failed private institutions, the state itself is in a sustainable position.

Inflating away debt will always be how exchequers grow. In the western hemisphere the crunch on credit in this case came about because of a reckless pyramid of private lending and a lax supervision of diligence and capital requirements.

Its not Governments spending as such that needs controlling, its the policy of throwing exchequer lifebelts to failed private enterprise that should end.

Most of our borrowing is made up of debt to finance structural deficits and refinance old debt that we had for years, I don't think any of the Troika money has gone towards banks for example.

I also think people think no austerity would mean no more cuts to Social Welfare, Public Sector pay and services. Tax revenues barely cover welfare and pay, never mind running services like hospitals, schools and Garda stations, and that's before mentioning interest on the debt. The economy hasn't been sustainable at all with or without mind bank costs.

KyussBishop

Catching up on some RSS links from the last week; here is a great article from David Graeber on this (which I regret only seeing now):
http://www.guardian.co.uk/commentisfree/2013/apr/21/no-need-for-economic-sadomasochism

Also proposes an interesting additional policy for tackling the crisis in Europe, which was specifically proposed in Ireland, though was rejected offhand by Noonan.