The Ideology of Creditor Countries, Starting with Germany

What are Germans supposed to make of this widely-reported analysis by USB?

Even if a stronger country like Germany were to leave [the Euro], UBS still thinks it is going to set every German back by about EUR6,000 to EUR8,000 in the first year and then around EUR3,500 to EUR4,500 per person in every year thereafter. A stronger euro-zone country wouldn't face sovereign default but it is still vulnerable to corporate default, recapitalization of the banking system and a collapse of international trade.

By contrast, each German would only have to cough up EUR1,000 just once to bail out Greece, Ireland and Portugal entirely, according to UBS's analysis.

If it were just a matter of self-interest, German politicians would be falling all over each other, promising to bail out the indebted European peripherals.  But this would contradict the fundamental world view shared by nearly every voter: saving is good and borrowing is bad.  The indebted countries borrowed too much, enjoying their decade of fun, and it would be immoral to ask the upright, productive citizens of the wealthier north to foot the bill.  Wouldn’t this just encourage even worse behavior in the future?

Put morality aside for a moment.  The economically rational solution is to wipe out the debt overhang as rapidly as possible, spreading the costs on the basis of ability to pay and the maintenance of political cohesion.  The peripherals, and especially their wheeler-dealer classes, would take a hit, and so would banks and investors in the north.  Taxpayers in the wealthier countries would have to dig into their pockets to recapitalize (and possibly take possession of) financial institutions unable to cope with big writedowns.  All of this would be done quickly, with the understanding that, once growth resumes, it will take only a few years to make everyone better off again.  After the mess has been cleaned up attention can be given to new rules, above all transparency, that will make it less likely that the worst credit excesses of the past decade will be repeated.

So much for rationality.  It is ideology that bellows the loudest, against the paralysis of a fragmented political system in Europe that makes it difficult to agree on any plan that entails big-stakes cost-sharing.

I can understand why Keynes is an epithet in German political discourse.  If you ask, people will say he was too tolerant of inflation, although Skidelsky’s biography makes it clear that Keynes could be an inflation hawk when hawks were needed in the aviary.  No, Keynes’ real sin, and his most radical element, is that he saw the credit relationship in morally neutral terms.  For him, lending and borrowing was not about vice, virtue or any other theological category.  It was simply a means, sometimes well-undertaken, sometimes not, for shifting resources to better uses, meeting human needs and promoting the development of economic life.  From The Economic Consequences of the Peace to the Bancor plan, Keynes called for a balanced, burden-sharing approach to credit crises: lenders and borrowers alike should adjust to cast off the effects of a bust and make possible a return to growth.  The wealth of the creditors may give them more clout, but there is no reasonable basis for the argument that those who borrowed foolishly must be squeezed to the limit, while those who lent foolishly should be made whole.

(In fairness, German political leaders, from Merkel and Schäuble on down, have made it clear that banks holding the sovereign debt of peripherals should take a hit—but their demands on the indebted countries make it clear that the balance of hittedness should fall mainly on the south.)

Keynes would not be surprised by the UBS numbers.  He would be horrified that his grandchildren (or their grandchildren), who should be enjoying a higher standard of living than any he had known, were still in the grips of atavistic economic doctrines.

Did the “Good Obama” Step Forward in the Jobs Speech?

So one would think after reading the opinions of party elders canvassed by the New York Times this morning.  It’s as though he has Harry Truman perched on one shoulder and Jimmy Carter on the other, and it was the Truman side that drafted his latest speech.

If only he keeps listening to the Truman avatar and eschews the other, wimpy one, say the elders, he has a chance to get reelected.

But recall this vaunted jobs program: it is too small by a factor four or five to close the demand gap, it relies more on tax cuts than spending, and it falls far short of stopping the loss of state and local public jobs.  Even its strongest supporters admit that it would be too little, too late to reverse the Great Recession if the Republicans allowed it to pass. Obama’s fighting side is apparently pretty soft too.

The silver lining in all of this is that Jimmy Carter has turned out to be a fantastic ex-president.

Political Economy and Financialization

This post is an attempt to explain in a little more detail what I have been saying (for instance, here and here) about the political economy of the Great Recession and its perverse response.  Of course, that would suggest an article or even a book, but who has time for that?  So a blog post will have to do.


Here is a synopsis of the argument: in a world dominated by “real” capital—ownership tied to capital in place, managed by organizations in place—political power is exercised through pressure exerted by firms and industries on behalf of their particular interests.  In the world we now live in, financial capital—assets organized into diversified portfolios—presses for the highest possible returns to investors based on the freedom to invest in anything, anywhere.  These differences are ideological, reflected in different conceptions of how economies work and should be run, and political, yielding different policy outcomes.  This is offered as a sweeping generalization, since we have not seen a wholesale shift from one configuration to the other in any country (OK, maybe Iceland for a few years), but it seems correct as a first approximation.

Let’s work inductively from a single example, health care reform in the US.  From a political-economic perspective, both Clinton and Obama worked from the same premise, that reform could be achieved by peeling off large segments of the business community from support for private health insurers, pharmaceuticals and providers.  The logic is straightforward: health care is a net cost for every employer outside the health sector, and their own self-interest should lead them to support programs that cut these costs and transfer more of them to the public sector.  On this basis the lions should lie down with the lambs Wal-Mart should join forces with Andy Stern and the SEIU, and the intense lobbying of the health care sector should be neutralized by everyone else.

But it didn’t work that way.  For sure, many businesses put out press releases endorsing the broad outlines of the Clinton-Obama proposals, but the balance of power remained decisively anti-reform.  In particular, the public option, that foot in the door for single-payer, didn’t have a chance, even though it would have been a significant force for cost reduction.  How can this be?

My answer would be that Mitt Romney is right, corporations are people too.  That is, the top tier of ownership and control is vested in individuals who act in their self interest and in accordance with their intellectual perspective—usually related.  General Electric, for instance, may benefit as a corporate entity from lower health care costs, but those who own and run it are not tied to that firm, or its current facilities, markets or organizational hierarchies, for life.  At the highest levels, individuals see their economic interest as that of maximizing the value of their personal portfolios.  They want to earn as much as they can in the present, but they especially want high rates of return on their investments.  If they have taken a position in the health sector, its distended profitability is a personal plus.  (In fact, since GE, like most other corporations, sits on a large pile of cash, it should consider investments in health insurers and providers as an intelligent hedge.)

I don’t want to make the mechanistic claim that rich folks were just looking out for their health profits in the debate over health care.  Far more, I suspect, they were motivated by principle.  They truly believe that unfettered market forces, directing capital to its most profitable uses, drive the engine of growth.  Government impingement on that freedom, or worse, government-run alternatives to privately-financed enterprises, cannot serve the common good.  It is a coincidence that, in this view, personal wealth maximization coincides with good public policy.

A richer model would recognize that both “old” and “new” political-economic configurations are at work.  Certainly the heavy expenditures of the health sector to defend its profits made a difference.  For me, however, the key question is why there wasn’t a sufficient countervailing effort from other sectors, when the evidence is clear that exorbitant health costs are crushing the economy.  The answer I propose is that, in the broader context of financialization, dueling lobbyists is not the right way to frame the politics.

A second example, even more poignant, is financial reform itself.  It could not be clearer that what benefits the financial sector now threatens the livelihood of everyone else, but the political foundation for reigning it in does not exist.  I leave to readers to flesh out the story—why the CEO’s of nonfinancial firms, for instance, are not beating the drums for deconcentration and tight regulation.

To repeat: this is description at a very general level.  I don’t think the political economy of any modern country, much less the global system, is monolithic.  Ideology is not a simple reflection of self-interest, and collective political behavior is a function of political organization and not just an arithmetic summing of individual beliefs.  Above all, I am making quite a few empirical claims that ought to be backed up by careful observation and testing.

Like I said, this is just a blog post.