Tuesday, March 10, 2015

Mark Blyth on the Creditor's Paradise

There's a lot to like in this talk by Mark Blyth, reposted in Jacobin. I will certainly be quoting him in the future on the euro system as a "creditor's paradise." But I can't help noting that the piece repeats exactly the two bits of conventional wisdom that I've been criticizing in my recent posts here on Europe. [1]

First, the uncritical adoption of the orthodox view that if Greece defaults on its debts to the euro system, it will have to leave the single currency.  Admittedly it's just a line in passing. But I really wish that Blyth would not write "default or 'Grexit'," as if they were synonyms. Given that the assumption that they have to go together is one of the strongest weapons on the side of orthodoxy, opponents of austerity should at least pause a moment and ask if they necessarily do.

Second, this:
Austerity as economic policy simply doesn’t work. ... European reforms ... simply ask everyone to become “more competitive” — and who could be against that? Until one remembers that being competitive against each other’s main trading partners in the same currency union generates a “moving average” problem of continental proportions. 
It is statistically absurd to all become more competitive. It’s like everyone trying to be above average. It sounds like a good idea until we think about the intelligence of the children in a classroom. By definition, someone has to be the “not bright” one, even in a class of geniuses.
In comments to my last post, a couple people doubted if critics of austerity really say it's impossible for all the countries in the euro to become more competitive. If you were one of the doubters, here you go: Mark Blyth says exactly that. Notice the slippage in the referent of "everyone," from all countries in the euro system, to all countries in the world. Contra Blyth, since the eurozone is not a closed trading system, it is not inherently absurd to suggest that everyone in it can become more competitive. If competitiveness is measured by the trade balance, it's not only not absurd, it's an accomplished fact.

Obviously -- but I guess it isn't obvious -- I don't personally think that the shift toward trade surpluses throughout the eurozone represents any kind of improvement in the human condition. But it does directly falsify the claim Blyth is making here. And this is a problem if the stance we are trying to criticize austerity from is a neutral technocratic one, in which disagreements are about means rather than ends.

Austerity is part of the program of reinforcing and extending the logic of the market in political and social life. Personally I find that program repugnant. But on its own terms, austerity can work just fine.

[1] One of my posts was also cross-posted at Jacobin. Everybody should read Jacobin.


  1. Congratulations!

    This is a good point -- e.g. we can argue against an undertaking because we don't think it will succeed or because we disagree with the goals. The short term goals of improving the balance sheets of EU nations are a smokescreen to the long term goals, which is "competitiveness". The EU can certainly fail to export its way out of the crisis yet succeed in becoming more "competitive" -- it's interesting that the focus is on competition rather than reform.

    I haven't heard a more positive program for Europe -- e.g. what do you see as the long term future of nations that want to maintain high social spending and high wages when they are directly in competition with much lower labor costs internationally in an age of extremely low cost shipping and unregulated capital flows? Trade barriers? Capital Controls? How do you see this playing out other than a general pressure to lower wages globally?

    I think part of the reason why there is not a big discussion of the goals is because I don't see a coherent vision on the left for Europe just as there is none for the U.S.

    1. Yes, good questions, and I'm afraid you are right about the lack of a positive alternative program.

      As it happens, I just had my International Economics class read a couple essays on exactly this set of questions -- Keynes' National Self-Sufficiency, and Rodrik's How Far Will International Economic Integration Go? 50 years apart but they make the same argument, that in a world of free trade and especially free financial flows, there is not much room for economic policy at the national level. (And neither of them think floating currencies affect this much, I think correctly.) They draw opposite conclusions tho -- Keynes that we should roll back integration, Rodrik that politics needs to be global. I think that's the right way to frame question.

      Keynes also makes an interesting argument (which Krugman has sort of made also) that while it might seem like technological change makes dis-integrating impossible, in some ways it actually makes it easier, because natural endowments matter less and less.

      What's for sure true is that if you are going to have any meaningful policy space at the national level, most countries are going to need capital controls. And it doesn't seem like they should even be that controversial, since the only economic rationale for big portfolio flows is that they allow large current account imbalances to be financed. Which presumably is not something we want much of anymore.

      What's funny tho -- from what I can tell -- is how little political support there is on the European left for any kind of rolling back of integration. It's really striking in any kind of discussion between American radicals and people from left parties in Spain, Greece or wherever. The Americans always say, "why not just leave the euro," but for the Europeans that's out of the question.

    2. It's hard to get explain but there's an almost religious idea of Europe, especially along the periphery. Countries like Ireland and Spain have had long standing national inferiority complexes wrt our more culturally and economically advanced neighbours. Being fully integrated into Europe is seen as both a salvation and validation

  2. I think that the problem is not just one of "moving average".
    There are two ways nations can compete one against the other:
    1) Two nations can compete on the price of the final products, for example Germany tries to sel VWs to italians and Italy tries to sell FIATs to germans, by lowering the price of cars, each trying to increase their market share; this is the kind of competition that is usually assumed.
    2) But another way is that nations can try to increase the profitability of investiment by lowering the wage share, for example Italy could lower taxes on investiment and constrain wage growth in order to lure VW to open factories in Italy instead than in Germany.
    The linked article explains german competitivity largely by (2), i.e. because of outsourcing of factories in eastern Europe while mantaining control on the high added value of the productive chain and a lower wage share (not a lower price of final products).

    I also think that the dominant form of competition today is (2).

    This means that there isn't just a problem of relative competitiveness as would be for the first kind of competition, but also a problem of an absolute fall in the wage share: for example today we can have a competitive equilibriun where everyone has a wage share of 70%, tomorrow one with a wage share of 50% etc.

    But, if the wage share falls everywhere, will also prices of final goods fall in the end (deflation)? Or will "capitalists" just consume a lot? is there another option?

    In my opinion there is another option: final consumption can be boosted by a general increase of debt.
    For example, suppose that the wage share is 70%; I'll assume that workers use all their wages on consumption goods.
    However capitalist will use 10 for private consumption, 10 for net real investiment, and 10 by buying government bond.
    The 10 used for real investiment go again into wages, and the government uses the money from the bonds to hire e.g. teachers, who also use their wages for consumption. Thus all 100% of production is finally consumed; however 10% of this consumption is debt fueled; also if for some reason there aren't good real investiment choice another 10% of consumption is fueled by "bubble investiment".

    If the general wage share falls, government is forced to increase its borrowing to bridge the gap, and also it is more likely that there won't be enough good real investiment options, so consumption becomes "bubble dependent".
    Thus a fall in the wage share can lead to a secular stagnation (or rather to an apparent secular stagnation as it isn't driven by "technology" but just by distribution).

    As capital can move freely across nations, the "debt consumption" and the "bubble consumption" can happen in places different from the nation that first lowers the wage share, so that each nation has an incentive to increase competitiveness by lowering the wage share and pushing bubbles and debt on others, but as every nation act this way the whole system becomes more bubble dependent and debt dependent.

    I beleve that this is happening in the world today, and in particular in Europe. From this point of view, even if the whole EU manages to stay a net exporter for long, this wouldn't be enough to solve the problem of rising debt levels and bubbles, as the EU would still be much debt dependent and bubble dependent.

    1. You are certainly right that forcing down the wage share is a major part of the content of "competitiveness". In fact the ECB seems to be using the "Non-Accelerating Wage Rate of Unemployment" now instead of the NAIRU.

      However, I don't agree with the conclusions you draw from this. First, you are too dismissive of the prospects for higher consumption out of profit income. Keep in mind that this includes also the consumption out of wages of the non-productive workers employed by the capitalist class, including -- at least arguably -- most of the financial sector. I think empirically this is the main source of increased demand, at least in the US.

      Second, you are wrong to think that consumption greater than income necessarily implies rising debt. it can also imply falling assets. And in fact, the working class in the rich countries has a great deal of wealth than can be expropriated via a shortfall of wages relative to consumption norms. Similarly, net exports can be financed by eventual claims not only on the formal assets of debtor countries, but more importantly by claiming a part of their sovereignty. This is what happened to international debtors (Egypt, Turkey, etc.) in the 19th century and seems to be what is happening in Greece and elsewhere now.

      Third, you assume that a rise in debt is necessarily a bubble and unsustainable. But in an environment of low interest rates, economic units can run primary deficits forever and their debt-income ratios will still converge to a finite level. So "debt dependence" is not necessarily a problem.

    2. This comment has been removed by the author.

    3. All your three points are true, but I still think that something along the lines of what I said is happening, so I'll try to make my point in another way:

      Suppose that there is a closed system where, for some reason, it is impossible to produce additional capital goods.
      In this situation, if neither capitalists nor workers get into debt, total profits necessariusly are equal to total consumption of the capitalists.
      However, if either capitalists, workers or a third party (e.g. government) increase its debts, total profits can be higer than capitalist consumption.

      Importantly, there is no "excess consumption" here, because the system is closed and people cannot consume stuff that isn't produced.
      What is in excess is profits.
      This however would lead to an increasing (gross debt)/gdp ratio, unless debt is eroded by growth or inflation.

      The world is a closed system and, as far as I know, the (gross debt)/gdp ratio is in fact increasing, so I think that something like this is happening.
      In the world, it isn't impossible to produce new capital goods, so this increase in capital goods can increase capitalist profit above capitalist consumption, but I assume that there are material limits to the amount of additional capital that can be purposefully produced.

      On your three points:
      1) true, but all is needed is that capitalists on the aggregate in the world consume less than total profits, not necessariously a lot less (my example was excessive). In most countries wealth inequality is increasing, so this seems likely to me. Note that it isn't necessarious that are the workers or governments that increase their debt levels, it could be capitalists/businesses too.
      2) True, but I just don't think that this is what is happening. This wouldn't cause the (gross debt)/gdp ratio to increase at the world level.
      3) True, but I think that this kind of system is more fragile - it is easier in this kind of system to have actual bubbles and/or debt crises. Also I suspect that "debt dependance" is a normal condition in a capitalist system, but that presently this debt dependance became excessive, and I blame the low wage shares for this.

    4. I'll bang my drum a little more!

      Here there is a McKinsey report (via Michael Pettis) that shows that debt levels are growing everywhere in the world:


      The only explanation I have for this continuous increase in debt levels, both in exporting and importing countries, both public and private, is that much of the demand for final consumption goods today is "debt dependent" (by wich, I stress again, I don't mean that there is excess consumption, that at the world level is impossible, but that there are excess profits or, to put it in another way, that the price of consumption goods is too high relative to wages).

      Another explanation could be a sudden drop in inflation, but I think that the increase in debt level is just too big to be explained this way.

    5. I would say that
      1) You can't add financial and non-financial debt as that is double counting. Only look at non-financial debt. That seriously undermines the credibility of the study.
      2) One man's debt is another man's asset. If you believe that there is too much debt per se, you need to explain in relation to what.

      3) Remember that the economy is growing, so looking at levels of debt over time is another bad idea (at this point, the study looks pretty trashy). Consolidating debt levels in nations with different interest rates and income growth rates into one big numerical soup is dumb. The debt of a state owned enterprise in China is a completely different beast, both legally and operationally than something like an auto loan in the U.S. Why on earth would you want to add them together and what type of insight would this give with no mention of underlying cashflows or other balance sheet items.

      As a simple matter, U.S. households are in fact de-leveraging significantly in terms of their own balance sheets, but the number of households is growing and household income is growing, so total debt may be increasing, however total debt is a meaningless number in isolation.

      U.S. Government debt has been increasing in order to accomodate household de-leveraging. That is a good thing and increases financial stability. Government liabilities are equity for the private sector and serve to reduce private leverage ratios.

    6. I agree with everything windyanabasis says. In addition, it's important to remember that there is not a tight link between changes in debt and spending on newly-produced goods, either at the level of the individual unit or in the aggregate.

    7. I would partly disagree on factoring out financial sector debt. Deposits are liabilities of banks, but don't count as debt, so some of the increase in financial sector debt is due to changes in the structure of financial markets. But most of it is an indicator of increasing levels of leverage within the financial sector.

      Also, though the debt of an SOE is obviously different from a consumer loan, it's not significantly different from the debt of private corporations.

    8. Here, I don't understand the reasoning about banks. The relevant point is that the financial sector holds claims against the non-financial sector (on its asset side) that correspond to debts already counted when looking at non-financial debt. E.g. a household takes out a mortgage loan from the bank. If the bank keeps a deposit against that loan and does not sell debt, fine -- no debt to count. If the bank borrows to fund the loan, then it is double counting the loan to add the borrowing of the bank to the borrowing of the household, because this arrangement is equivalent to the household selling the bond directly and the bank facilitating this arrangement.

      For the SOE, the point is that SOE debt is socialized in China because this is a political arrangement, not an economic arrangement. SOEs don't have trouble rolling over loans at preferable rates, even negative real rates, nor do they have trouble suspending payments regardless of how bankrupt they are under less corrupt accounting regimes. SOE debt is like equity.

      Whereas an American household does need to repay its debts or face a real restriction in consumption and future credit.

      I don't want to get pedantic here. The big picture is that U.S. households have in fact been de-leveraging. I don't know whether this is true for Chinese households (doubtful), but you cannot tell from the analysis cited in the study.

    9. My answers:
      "One man's debt is another man's asset. If you believe that there is too much debt per se, you need to explain in relation to what." [windyanabasys]
      I don't think that there is "too much debt", I think that we are in a situation where we cannot have enough aggregate demand without a continuous increase in debt, what is usually called "secular stagnation". I believe that this is caused by distributional issues (an excessively low wage share) and not by technology changes.
      Since one man's debt is another man's asset, we could also say that the world economy only goes on as long as financial wealth continually increases (M-C-M').
      In this sense, "too much" (or rather increasing) debt (or wealth) means relative to the size of the economy. This, in my 19th century LTV mindset, means relative to the total value of all consumption goods per year (that in an LTV model is equal to the total labor value of the economy). I take GDP as a reasonable proxy for the total of consumption goods produced and consumed in a year. Yes, it is quite nutty, I know; in a less nutty way we could say that GDP represents the "size" of the economy, and debt/wealth increases or decreases as a percentage of GDP.

      "Remember that the economy is growing, so looking at levels of debt over time is another bad idea" [windyanabasys]
      I read the study as meaning that debt is increasing as a percentage of GDP (as reported in the table named "exibit 2"), not relative to itself (as reported in other tables, that is in fact quite meaningless). For example if the study says that X's debt increased by 20%, I assume it means that at first it was 120% of GDP of period one, then became 140% of GDP of period two. In this sense the fact that GDP increased in the meanwhile is irrelevant as it is already factored in when we calculate debt as a percentage of GDP.

      "U.S. Government debt has been increasing in order to accomodate household de-leveraging. That is a good thing and increases financial stability." [windyanabasys]
      I totally agree, in fact I think that austerity is a very stoopid idea. I don't mean that governments should try to shrink debt as the McKinsey study says, this would just cause a big recession. In fact I think that the increase in debt is a symptom of a problem (too low wage share), and not the cause of the problem.

      "Why on earth would you want to add them [various types of debt] together" [windyanabasys]
      Because I believe that the increase in gross debt is fuelling aggregate demand.

      "it's important to remember that there is not a tight link between changes in debt and spending on newly-produced goods, either at the level of the individual unit or in the aggregate." [JW Mason]
      Dang! This sorta trashes all of my theory. However I think that spending on consumption goods is somehow fixed, and debt is the dependent variable? Otherwise we would have underconsumption crises every two weeks.

      "I would partly disagree on factoring out financial sector debt." [john c. halasz and windyanabasys's subsequent answer]
      I admit that this is a bit complex for my little brain, however I think that even if we exclude financial debt as double counting the picture doesn't change that much, and that financial debt could still increase fragility of the system.

  3. I'm an amateur who has been reading economics blogs for a while now and find this discussion fascinating.

    I guess what I don't get is how the Germans see the failure of the ECB to hit its 2 percent target. It's just not a priority for them just Eurozone unemployment isn't a priority?

    They won't do fiscal spending because of the stabilty pact and debt ratios. They're only increase demand comes through increase exports and "competitiveness" and maybe a minimal amount via wage gains in Germany where unions are negotiating increases which are more than inflation. As far as monetary policy goes, the latest QE is minimal as well, possibly easing the anti-demand of austerity.

    The Germans economic policy makers are lot like Republicans except instead of exports being the source of all growth and employment, tax cuts for the rich are.

    Thinking about the German social democrats, Obama himself isn't much different. He ignores monetary policy and does tolken efforts at infrastructure spending but puts big emphasis on exports and education. It's a way to avoid discussing macro demand management.

    Part of what happened with austerity in the U.S. and Europe is "hysteresis." The output gap is closed over the years as people drop out of the work force. Potential GDP growth is ground down as resources are wasted.

    I still don't get how the IMF can consider Spain's new NAIRU to be 18 percent or whatever.

  4. The Eurozone can run a trade surplus in the short run, but in the medium to long run it is hard to see how it can continue to run large surpluses. The EZ is the world's largest economic entity, it needs a large counterpart to provide demand for these surpluses.

    Having a trade deficit means foreigners have larger and larger ownership claims on your county, so countries running surpluses either have a debt and balance of payments of crisis, or they have a political crisis aimed at reducing foreign ownership of domestic assets. So it is hard to imagine that small rich countries like Switzerland, Norway, Denmark supporting this for any long period of time, they will quickly be overwhelmed by the size of the EZ.

    There are two strategies the EU could pursue alone or in combination.
    1. Neo Colonialism, where the EU exports capital to developing nations, and they buy EU exports. This would come with financial support from Europe in case of BOP crisis (if the developing nations were obedient.

    2. Or the EU could hope that the US fully embraces it's role as a Kindleburgian Hedgemon. Since the US can issue liabilities in its own currency, a BOP crisis is less likely. But providing demand for the EU and likely much of Asia is going to mean very loose monetary and domestic policy and the likelihood of bubbles.

    Japan over the past 30 years shows that large imbalances can persist for a long time. But the Eurozone is just too big, hard to see how they will keep up a surplus for more than 10 years.

    1. the Eurozone is just too big, hard to see how they will keep up a surplus for more than 10 years.

      I'm curious, how did you arrive at the figure 10 years?

    2. Just the average length of a debt cycle more or less.

      The limiting factor would be other countries willingness to provide demand for Europe. So probably shorter if they relied on fragile Emerging Countries, longer if they get the the US or other large developed countries to bear the burden.

      The US has run a CA deficiet for a the past 30 years, so this is't the limiting factor. But I don't think we have any reason to believe that US authorities can prevent another 2007 style boom and bust, which is only made more likely by cheap euro credit.